Posts Tagged ‘Tax’

Tax on income is easy to levy but fundamentally unsound

September 18, 2012

The latest Mitt Romney “gaffe” is getting much attention. But I was a little surprised to find that while what he said may well be a gaffe in electoral terms – and he may even have lost the Presidential election here – his statement was actually quite correct. I had not appreciated that almost half of all US households paid no federal income tax at all. In the US, federal income tax is a major source of tax revenues and contributes about half of all tax revenues (tax revenues about 15.4% of gdp in 2011 with federal income tax providing 7.3% of gdp). Romney in his leaked video said:

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Tony Blair has income of £12 million, spends £8 million on administration but pays only £300,000 tax

January 8, 2012

I am not Tony Blair’s greatest fan and don’t have very high expectations of him. Nevertheless, the manner in which he cashes in on his former position is breathtaking! Personal ethics are clearly unknown to him.

Paying 2.5% of his income as tax is a pretty impressive case of tax avoidance (which is probably perfectly legal and not tax evasion). But it makes him a parasite. Some parasites are useful but he is not one of them.

The Telegraph:

Former Prime Minister Tony Blair channelled millions of pounds through a complicated web of companies and paid just a fraction in tax

Official accounts show a company set up by Mr Blair to manage his business affairs paid just £315,000 in tax last year on an income of more than £12 million. In that time, he employed 26 staff and paid them total wages of almost £2.3 million. ….

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Chasing losses for Corporate tax planning

September 2, 2011

Loss making companies have acquired a new value in M & A activity, especially if they have accumulated losses which can be carried forward against future profits.  In some countries carry-forward losses are as high as 25% of GDP.

Shifting profits to tax havens has been used by corporates (and individuals) increasingly since the 1970’s, but shifting losses to high-taxed countries can be just as effective. A new report has just been issued by the OECD, Corporate Loss Utilisation through Aggressive Tax PlanningISBN Number: 9789264119215, Publication Date: 12/08/2011, Pages: 92

An OECD press release  states:

30/08/2011Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law.  

This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it. Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers.

.. countries have identified financial instruments that create artificial losses or obtain multiple deductions for the same loss. They have also seen loss-making companies acquired solely to be merged with profit-making companies and loss-making financial assets artificially allocated to high-tax jurisdictions through non arm’s length transactions.

Reuters reports that

The OECD report, which singled out one industry — financial services — said banks headquartered in high-tax countries were buying and selling derivatives among operating subsidiaries in low-tax jurisdictions and then shifting losses to higher-tax jurisdictions to “manage large loss-making financial assets” held on their balance sheets.

Martin Sullivan, an economist at Tax Analysts, a trade publication, said he thought the majority of the loss-shifting described in the report “pertains to banks, since they are the ones that had huge losses in 2008 and now are making profits.”

The tax-boosting principle at work centers on loss carry-forwards, a legal accounting technique that allows corporations to apply their current year’s net operating losses to profits in future years. While the move is designed in part to help companies avert bankruptcy, it also allows them to reduce their tax bills. ..

The OECD report identified what it called three high-risk schemes designed to maximize the tax value of carry-forward losses. They are:

  • Corporate reorganizations, in particular those in which profitable companies buy money-losing companies solely for the tax benefits of their losses, which is illegal in the United States.
  • Certain financial instruments, including currency swaps and schemes that “refresh” soon-to-expire losses.
  • Non-arm’s-length transfer pricing, or the prices companies charge between subsidiaries for goods and services. This is not legal in the United States and is a subject of growing scrutiny by the Internal Revenue Service.


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