Cayman asks UK for inclusion in European Tax Convention
From Virgin Islands News online
Caribbean Journal
The government of the Cayman Islands has formally asked the United Kingdom to be extended membership in the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
The convention aims to combat tax evasion and “aggressive tax avoidance” by allowing member states to assist each other on tax matters.
“Our formal request to join comes after many months of substantive discussions between Cayman and the UK, and it underscores our continued commitment to proactive participation in matters related to international tax cooperation,” said Wayne Panton, Cayman’s Minister for Financial Services.
Panton said the convention was aligned to the international standard on information exchange for tax purposes, calling it a “major development in the global tax and transparency landscape.”
“The financial services industry [in Cayman] was consulted, through Cayman Finance, during these discussions, and we are confident that the implementation of the bilateral agreements that will arise from the convention will consider the needs of our jurisdiction,” said Gonzalo Jalles, CEO of Cayman Finance.
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Tax Special Investigation: HMRC ‘particularly feeble’ over failure to close loophole
By Richard Whittell , Emily Dugan From UK Independent
Despite the tax exemption costing the UK economy at least £500m a year, the Government bowed to pressure after intense lobbying from the financial sector to allow companies to use it
The Government chose not to close a tax loophole which costs the UK economy at least £500m a year after intense lobbying from the financial sector, The Independent has learnt.
A consultation in March 2012 proposed limiting the use of the quoted Eurobond exemption, which is being used for tax avoidance by a range of UK companies. But after being bombarded with submissions from financial firms, companies using the legal loophole and major accountancy companies, HMRC decided not to take the proposals forward last October.
HMRC estimated the Exchequer was losing £200m a year due to use of the exemption. However, listings on the Channel Islands Stock Exchange and UK accounts registered at Companies House suggest this was a significant underestimation.
More than 30 companies are paying more than £2bn in total to their overseas owners every year as interest on borrowings. As these can be deducted from the companies’ taxable UK income, this amounts to a corporation tax saving of around £500m when compared to equivalent investment in shares in the company.
Without the exemption, any tax savings from the interest deductions would be greatly reduced by the 20 per cent withholding tax that HMRC would otherwise take from interest payments going overseas. As many more companies list debt in the Channel Islands, and the loophole also works in other exchanges including Luxembourg and the Cayman Islands, the total tax lost may be significantly higher.
Margaret Hodge MP, chair of the Public Accounts Committee, which will raise the findings at a meeting of the committee with HMRC this Monday, said she found HMRC’s behaviour over the consultation “extraordinary”. “It is a persistent finding of my Committee that HMRC is nowhere near tough enough in cracking down on avoidance and closing loopholes. In this case they appear to have been particularly feeble,” she said.
The exemption was introduced in 1984 to encourage outside investment in Britain, but HMRC noted in its March consultation that: “In recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required.”
The interest also minimises the UK company’s tax bill. HMRC can choose to disallow a proportion of the deductions, deciding what this figure should be on a case-by-case basis. The Government invited submissions to a proposal that the quoted Eurobond exemption “would not apply where the Eurobond is issued to a fellow group company, and listed on a stock exchange on which there is no regular trading in the Eurobond”.
Using documents published under the Freedom of Information Act, the investigation, jointly conducted with Corporate Watch, found that not one of the 44 submissions to HMRC by financial bodies supported the loophole being closed. The majority (34) argued it was necessary to keep it open, while the remainder were keen to find out more about the specifics of the exemptions.
Among those making submissions were companies such as Thames Water, that have previously been revealed as benefiting from the loophole. Representations were also made by the “Big Four” accountancy firms – PWC, KPMG, Deloitte and Ernst & Young – who between them audit the accounts of all of the firms found to be using this loophole. Different companies argued that closing the loophole would be “fraught with practical difficulties”; that the tax raised “is likely to be negligible”; that there are a range of other loopholes companies could use; that such a move would “introduce uncertainty and disrupt markets that are critically important for the UK economy”; that it was impractical to eliminate because the tax relief is “extremely widely used”; and that HMRC could stop it being abused with other tools.
The language used in the anonymised letters was often hectoring, in one case calling the proposals “neither a necessary or sensible approach”.
A spokeswoman for PWC said: “All our responses to Government consultations are done in an open and transparent way. We share our experience on request, particularly on the likely practical impact of proposals, such as how they will affect the Government’s ‘open for business’ agenda. Governments seek input from a wide range of organisations.” A spokeswoman for KPMG said they had never “lobbied” on behalf of any clients about the Eurobond exemption. She said: “We made recommendations on detailed technical aspects but we did not give a recommendation that the exemption should not be changed and we suggested further analysis.”
A spokeswoman from Ernst & Young said: “We do not decide tax policy… We assist HMRC in identifying any unintended consequences of tax legislation. Our responses are the views of EY and not those of our clients..”
A spokesman for HMRC said: “The figure of £200m was a provisional figure. The number of Eurobonds issued intra-group was not known and one of the purposes of the consultation was to identify the likely real impact. It became apparent that the changes suggested in the consultation would not have yielded that amount and would have had adverse effects on companies that are entitled to pay gross under double taxation treaties. The Government decided to explore the issue further in the context of a wider consideration of cross-border payments.”
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Eurobonds scandal: The high street giants avoiding millions in tax
By Richard Whittell , Emily Dugan From UK Independent
Many of Britain’s best-known high street chains are avoiding millions of pounds in tax through the controversial Eurobonds scheme.
Food chains including Nando’s, Pizza Express, Café Rouge, Strada and Pret A Manger have cut their taxable profits by borrowing from their owners through the Channel Islands Stock Exchange. High street retailers doing the same include BHS, the electronics retailer Maplin, Office and Pets At Home. The revelations form the third part of an investigation by Corporate Watch and The Independent into major UK companies using the quoted Eurobond exemption, a regulatory loophole the Government knows about but has decided not to close.
David Cameron is expected to be questioned today in Parliament about the scheme and HMRC’s failure to tackle it. Instead of putting their money in the shares of the companies they buy, the owners – mostly private equity funds – lend it instead. The interest on the loans cuts the UK companies’ taxable income each year and the exemption – triggered because the loans are listed on the Channel Islands Stock Exchange – means the interest goes to the owners tax free. Without this loophole, HMRC could deduct a 20 per cent “withholding tax” from payments overseas and the overall tax saving would be greatly reduced. Yesterday The Independent reported how Camelot had avoided tax using this method and how HMRC was lobbied by financial firms to keep the loophole open.
Murray Worthy, a tax campaigner with War on Want, said: “This isn’t just a niche issue that’s being used by a handful of companies. We’ve seen how angry people are about the ease with which these companies can avoid paying their fair share, [and] the only reason this is happening is because of the influence of big business on the Government’s tax rules.” Gondola Group – which owns Pizza Express, Zizzi and Ask – has avoided as much as £77m in UK corporation tax since it was bought by the Cinven private equity fund in 2006. Cinven loaned Gondola more than £300m at a 12.5 per cent interest rate but only invested £8m in equity. Instead of receiving the interest payments on the loans every year, Cinven has allowed it to accrue on the debt, compounding the amount taken off Gondola’s profits every year. When Cinven sells the restaurants, which it is reportedly considering, it can receive the £276.8m it is owed tax free.
Gondola’s UK corporation tax bill last year was only £200,000, after an operating profit of £39m. In 2011, it recorded a tax credit of £5.8m. Cinven also owns Spire Hospitals and Partnerships in Care – healthcare companies that The Independent revealed earlier this week were using the same arrangement. Pizza Express and Zizzi have previously been criticised for their poor pay. Pizza Express sacked a waiter who revealed the company kept 8 per cent of tips as an “admin fee” in 2009 while in the same year Zizzi staff were paid £4.25 per hour before tips were added. Gondola did not give more up-to-date information on its pay.
Tragus Group, which owns the Café Rouge, Strada and Bella Italia chains, could have avoided more than £13m in tax after accruing £47.7m in interest on 17 per cent Eurobonds it owes to the Blackstone private equity fund, which owns the group through a Cayman Islands subsidiary.
The electronics retailer Maplin accrued interest of £68.9m in 2012 on borrowings from its owners, Montagu private equity. However, a spokesman argued that the majority of the interest cannot be taken off its tax bill following negotiations with HMRC. Interest of £361m has accrued over the previous five years, on top of the £137.5m it originally borrowed from Montagu at 16.5 per cent. It is unclear how much tax has been avoided because Maplin would not disclose the figures involved – or how long the interest had been disallowable for, but the potential savings could still be in the tens of millions.
Sir Philip Green’s wife, Lady Green, brought BHS into the family’s Arcadia group, which also owns Top Shop, by investing through the Channel Islands Stock Exchange in 2009. The group deducted interest of £13.5m from its taxable profits in 2012, avoiding £3m.
Pret A Manger owed £237.9m to its owner, the Bridgepoint private equity fund, at the end of 2012. The loans were listed with at a 12 per cent interest rate but a spokeswoman told The Independent that they were only allowed to deduct 45 per cent of the interest from their income with HMRC’s approval. They have since repaid £150m of the loans.
Tim Hames, director general of the British Private Equity and Venture Capital Association, said: “The retail sector is one which has suffered deeply since the financial crisis. But there are at last signs of a genuine recovery, much of it brought about by putting investment to work and creating value.”
A spokesman for BHS and Arcadia said the figures were accurate but gave no further comment. Tragus and Silverfleet Capital, which own Office, said they complied fully with all relevant legislation. Pets At Home said the company was acting within the law and had expanded its business.
Nando’s said that the loans were the most efficient way to accelerate its growth in Britain. “Nando’s Group Holdings Ltd incurred corporation tax of £10.4m on an operating profit of £41.9m in the year ending February 2012. Nando’s growth has been funded by a combination of equity and debt,” a spokesman said.
Gondola said it “works closely with HMRC to ensure that we pay the right taxes. Our structure is in line with a significant proportion of UK companies, in the high street and beyond. We are also a substantial contributor to the UK, having paid £200m in taxes in the last three years, created 3,200 British jobs and invested £300m in the last 6 years”.
A spokeswoman for Pret did not dispute the figures but said it was “misleading” to call it tax avoidance. She said: “Pret pays a fair amount of tax given the business’s profit levels and its continued investment in growth, building more shops and creating more jobs. Our 2012 operating profits before interest were £22.5m and we paid £7.5m in tax.”
An HMRC spokesman said the department did not recognise that £500m was being lost: “The rules on cross-border withholding tax are being looked at as part of a package of work on the international tax rules.”
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