The Guardian on Corporate Taxation Again

I\’m not an accounting expert, by any means, but I think The Guardian has the wrong end of the stick again here.

More than 50 PFI schemes have now been included in portfolios held in Channel Islands tax havens by three major PFI investment companies, HSBC Infrastructure, 3i Infrastructure and Babcock and Brown Public Partnerships.

Once the buildings have been completed, up to 90% of the ownership of the UK-registered company running the PFI is transferred to the companies which are based in the tax havens. This means that the income and profits from running the PFIs will be free of UK tax for up to 40 years, depending on the duration of the PFI.

I don\’t see how transferring ownership of a UK registered company offshore reduces a tax bill. Any profit that the UK company makes is taxed here in the UK, before any distribution or earnings to the owners. Now, a capital gain created by selling the shares of the offshore company would be tax free: but any capital gain created before the transfer would lead to a tax bill at the time of transfer, wouldn\’t it?

Now I can think of ways in which an offshore company could be used to dodge tax: use the offshore company as a bank, load up the UK PLC with debt borrowed, and thus convert profits into an interest stream, that interest stream then being untaxed in the haven.

Maybe that is what is going on, but if it is, why doesn\’t The Guardian tell us so? Do they actually know? Or have they just grasped this "offshore" bit and assumed that it\’s all a grand tax cheat?

Prem Sikka, professor of accounting at Essex University, said yesterday that the latest revelations should be the subject of an inquiry at Westminster.

Prem is, as we know, a mate of Richard Murphy. Still the same people behind all of this then.

4 thoughts on “The Guardian on Corporate Taxation Again”

  1. But somebody somewhere must be benefiting from setting up these off-shore structures, probably through reduced tax liabilities, otherwise they wouldn’t bother with it all. It’s all very well pointing out the Groan are doing a poor job of explaining it, but then again nobody seems to be able to explain it (actually, that’s not necessarily correct – a commentator on the Tesco thread, picked up by John Band, suggested that the tax break is felt by a pension fund, I think).

    If these structures aren’t as bad as the Guardian make out – perhaps for example they reduce the tax bill of pension schemes investing in them rather than reducing the (eventual) tax bill of the UK parent company, why don’t these companies tell us – and sue the Guardian for suggesting otherwise – you never know, this false information (should it be such) might cause some Guardian readers not to shop at Tesco.

    If I had time, and a blog, I’d be writing something along the lines of ‘In defense of Richard Murphy’ – much as I think he’s muddle, I don’t want to see companies or rich individuals scheming their way out of paying tax, either.

  2. Tim, your summary of tax position is broadly correct. But don’t forget that the ‘loading up with interest’ dodge only works if the interest is paid to a company resident in a country with which we have a double tax treaty which exempts interest payments from withholding tax. I can’t check as I’m not at work, but I don’t think that this applies to the Channel Islands.

    I also suspect that it’s largely a pension fund thing.

    Anyway, all these Gruaniad articles lambasting the PFI vultures are just a smokescreen for the fact that the gummint has totally buggered up here. I have a friend who works for a company (hedge fund?) and all they do is buy and sell contracts for future profitable PFI projects. Once you have signed the deal, you have made the bulk of the money and locked in your profits, you then sell on the NPV of the rights and obligations to a construction company who does the actual business.

  3. It may be that various payments labled “management fees, “IT Services”,”Accounting Services”, etc. are made to the off-shore enity to reduce the cash profit?
    This is used by the Japanese auto makers in the States to lower their State/Federal USA obligations. Evidently, Japanese Corporate Tax is at a lower rate. They don’t appear to go to “off-shore”, but to the home country.

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