Barclays' new tax principles look like a licence to avoid tax

Barclays has recently announced the closure of its Structured Capital Markets division, the 'tax avoidance factory' that helped the bank - and many, many others - avoid tax 'on an industrial scale," as various reports have described it. (See this, for instance.) Barclays was pretty embarrassed about this venture:

"The company was so alarmed when the Guardian revealed the true nature of its business that it woke a judge in the middle of the night to try to gag the paper and its website."

Just yesterday news emerged that the U.S. Tax Court had struck down a $200m tax avoidance scheme known as STARS, peddled jointly by KPMG and Barclays to banks around the U.S., which was wholly, utterly bogus. The Tax Court referred directly to the subversion of democracy in this case by Barclays (and let's not forget KPMG):

"Congress did not intend to provide foreign tax credits for trans­actions such as Stars."

(As an aside this should, among other things, serve as a reminder to those newspaper writers who routinely assert in tax avoidance schemes that 'what company x did was perfectly legal.' No it usually wasn't: tax avoidance involves a foray into the grey area between the legal and the illegal, and you only find out which side once there's been a court decision. The U.S. tax court found this one to be illegal. Newspaper writers should have the courage more often to write, instead, 'what company x did has not been proven illegal' - which is a different thing.)

Now, via Richard Murphy's Tax Research, we see Barclays has announced a new set of tax principles. It says:

Tax planning, for clients and on our own account, must

1) Support genuine commercial activity.
2) Comply with generally accepted custom and practice, in addition to the law and the UK Code of Practice on Taxation for Banks
3) Be of a type that the tax authorities would expect
4) Only take place with customers and clients sophisticated enough to assess its risks
5) Be consistent with, and seen to be consistent with, our purposes and values.

Viewed from the very top veneer of this looks very reasonable.  But the moment one starts to think about it, it seems clear that while the unit may be axed, the dark old Barclays spirit remains strong. Take number 1, for instance: that tax planning must support genuine commercial activity. Richard Brooks, a former UK tax inspector and author of the forthcoming book "The Great Tax Robbery," said this recently:

"You could write "no shifting profits into shell companies" into every tax statute in the world (plenty already have it) and it wouldn't achieve much.  The point is they don't have to use shell companies.  They can easily ensure there is some real activity.  You put your intangibles in a Dutch company with 20 employees, call them brand managers and claim it's commercially sensible to do all this centrally.  Ditto financial capital in Luxembourg.  Certainly not shells but still earning vastly disproportionate profits.

In fact this is the big tax avoidance game at the moment. . You act against the "aggressive" stuff while completely backing off anything with a veneer of commerciality (and in the UK's case throwing tax breaks at it).  The campaigners get a result and governments can claim to have done something but situation gets worse."

Barclays' point 1 here would work very nicely in this context, thankyou very much. Don't make the scheme wholly artificial: give it just enough real substance and employees to take the very nastiest edge off, and you are 'supporting genuine commercial activity.' Or, seen from another angle, you could argue that a tax avoidance scheme wrapped around a large and genuine economic activity is 'supporting genuine economic activity.'

This is not to say that the Barclays principles, if implemented, won't mark an improvement on the appalling abuse of taxpayers and subversion of democracy that had marked the previous Diamond era. The US tax court said of the STARS schemes, for instance, that

"The U.K. taxes at issue did not arise from any substantive foreign activity."

So principle 1 would appear to at least rule that out - though again, only with the proviso that Barclays sticks to the spirit of this commitment. They will have to earn our trust that they will do the right thing even on this feeble set of principles. Given the history, that's a whole lot of earning to be done.

And as a reminder: these principles fall woefully short of what is required. As Murphy concludes:

"If this is Barclays moving towards acceptability I am going to take a lot of convincing.

Where’s the mention of the spirit of the law? Or transparency? And what about foregoing the use of tax havens? What about consistency between substance and form? None of these are mentioned.

Sorry, but in my view this is a tax avoiders charter, not a move into the light. The fact that this was also on page 66 of 67 says a lot, I think."

Indeed. Now guess what: a new story based on a January 28th 2013 email from Barclays:

Barclays is ordering temporary workers to establish themselves as VAT-registered company contractors in a tactic that has been labelled an "extremely cynical ploy" to . . .  enable Barclays to avoid a range of employment obligations and the need to pay NICs."

Long sigh.

Important endnote, as another aside: Brooks also notes the OECD's major new tax reprot, which we broadly welcomed, looking at re-engineering the international tax system. We have spent a lot of time pushing unitary taxation and its individual components, notably Combined Reporting, but Brooks' extremely brief three-line recommendations for change were somewhat different:

"Apart from transparency, my concrete goals would be

• To get the OECD to agree that arrangements that are partly tax-driven can be ignored by tax authorities and 

• to get harmful tax practices in countries that are members of the 'club' (via EU and full low source state tax treaty networks) stamped out. 

The latter is primarily for the EU, but the OECD could say it's OK to suspend treaty rights when the use of a harmful tax practice is involved.  For example, a country doesn't have to allow royalty payments at the lower treaty rate of withholding taxes if it suspects they're benefiting from the Dutch royalty regime."

 Which all sounds very sensible.