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05 April 2009
Thank You, Gordon, Now Here's The Money For Your Bus Home Just in the last week, the outlines of the 'new world order' which will shape
the international fiscal landscape for the next few decades have become perceptibly
clearer, with low-tax jurisdictions rushing to sign information exchange agreements
with their high-tax tormentors in order to avoid inclusion on the OECD's new
blacklist, which most of them have indeed escaped.
Before giving up on offshore as a bad job, however, it is worth remembering
what has actually changed, and what happened last time that the OECD bullied
low-tax countries, in 2000. On that occasion the OECD wanted two things: transparency
and higher taxes. It got transparency, as dozens of offshore jurisdictions enacted
'know your customer' rules and banned bearer shares. But it didn't get higher
taxes - the offshore jurisdictions banded together and shamed the OECD into
agreeing a 'level playing field' which maintained tax competition as a respectable
concept.
This time the OECD is attacking secrecy, making sure that high-tax country
citizens cannot hide their wealth or income away from the eyes of their home
tax authorities. But the OECD is flogging a dead horse: fishing expeditions
by tax authorities in the UK, the USA, Ireland, Germany and France have made
offshore concealment a dangerous and expensive game to play. No sensible, seriously
wealthy person would any longer take the chance of evading taxes on a major
scale. And they don't have to, anyway, there are plenty of legitimate ways of
protecting your wealth without hiding it under a rock on a Caribbean island.
One of the best ways of protecting yourself from taxes is by not living in
a high-tax country, and the counterpart of the OECD's efforts to prise open
the offshore shutters will be an ever-increasing stream of tax-emigres. Something
that the tax authorities don't 'get' is that taxation is a bargain with two
parties - the taxman and the taxpayer. Taxpayers pay because the bargain is
worth it to them, and for the last fifty years wealthy people have accepted
the bargain because they were able to protect most of their wealth from taxation,
using legitimate or illegitimate means.
The behaviour of the cloth-eared British Treasury over 'non-doms' is a perfect
example of how to kill the goose that was laying such a rich harvest of golden eggs.
New rules apply an annual GBP30,000 charge to any long-term non-domiciled UK
resident (not born there, roughly speaking) in addition to local-source taxation.
One in four resident but non-domiciled taxpayers in the UK who responded to
a recent poll regarding the changes to the non-dom tax regime have already made the decision
to leave the country, and another 25% have said they will wait and see before
doing so. Now, do you suppose these are the poorer 50% of non-doms, or the richer?
No prizes for guessing that the richer people will leave, while the poorer ones
will stay.
Something else that the tax authorities don't 'get' is the Internet. There
is no longer any need for a business person, an investor or a company to have
a physical presence in a country in order to operate there. The foreign hedge
fund managers in New York who have been able to treat 'carried interest', ie
their fund management profits, as low-taxed capital gains rather than high-taxed
income will all be on the way to Dublin, Zurich or Cyprus as soon as Congress
passes the inevitable law to change the current regime. All the rich Russians
have already left Moscow as fast as their Lear Jets could carry them.
And this uncomprehending behaviour at a moment when the trillions of taxpayers' money being thrown
at the world's banking sector by short-sighted politicians hang like a toxic
cloud over the rich countries' fiscal landscape. Taxes are going up, make no mistake
about it, and big time. They will have to - but not offshore, where the banks
are mostly as solid as the rocks they stand on. In between the year 2000, when
the OECD launched its anti-offshore rockets, the banking and investment fund
assets held offshore have increased by approximately 500%, and it has become
almost impossible to find anywhere to live at a reasonable price in any offshore
territory with a halfway-decent climate and good Internet connectivity. Now
that the world's leaders are kindly insisting on the removal of the last shreds
of ill-repute from offshore, just watch it grow in the next 10 years!
You have been
reading an entry on the following blog:
It's very confusing to read the newspapers at the moment, with
every economic pundit peddling his or her own nostrum for how to right the wrongs
of the banking sector. And over Davos the air has been positively blue with
a cloud of conflicting agendas for our economic future.
Well, I'm a financial journalist as well. If they can do it, why
can't I? So here goes! You have been warned; now is the time to stop reading.
To begin with a history lesson: Bang!
Big Bang, that is. The process by which partner-based investment
banking firms were absorbed (at mind-blowing cost) into commercial banking firms
who wanted to be 'universal' banks. Mostly this happened in the early 1980s,
and the process largely demolished the centuries-old model in which people with
capital formed private partnerships in which they could make or lose money without
any embarrassing onlookers such as shareholders.
It's fact that investment banking (m&a, ipos, what is now
called private equity, and all the trading that is associated with these activities)
can make silly amounts of money, and occasionally lose it as well. How can there
be any objection to that if it is done in private? There never was any; the
problem has come with the fact that the clever wheeler-dealers who make these
enormous sums of money now do it in the full public view, and that makes them
vulnerable.
The marriage of private and public banking, with a substantial
injection of 'popular capitalism', led to securitization, itself nothing new
(every public company has been 'securitized'), but a dangerous weapon in the
hands of deal-obsessed investment banking magicians. This was the moment at
which, with hindsight, the regulators should have set up a structure to measure
and control the risks being generated by new instruments such as CDOs. But the
regulatory structure is compartmentalized in every country as well as internationally:
retail banking, insurance, futures and so forth.
Understanding the reasons for the collapse that ensued is not
to withhold blame: there was a Faustian pact between the politicians who need
growth to show off to their electorates (and certainly don't understand 'rocket
science'), the inexperienced young bankers who dined out on toxic mortage debt,
and perhaps most culpable of all, the ratings agencies, themselves totally unregulated
and unsupervised, who allowed and encouraged the ball to continue long after
midnight. But it's very difficult to blame the investment bankers; they were
just doing their job.
There's no going back, however. Any sort of forcible separation
between commercial and investment banking a la Glass-Steagall will simply set
back international economic growth by a decade. The ignorance of politicians
about investment banking and the popular anger that results can be cured by
education - you can see this process taking place already as more and more hacks
like myself come to understand that investment bankers are a necessity. 'The
unacceptable face of capitalism' was Edward Heath's comment, and the Germans
simply call them 'locusts'. But we have to accept them, like root canals and
traffic wardens, as a part of our complex society.
As to preventing the next 'crash'? Well, we can't. While human
nature stays as it is, booms and busts are as inevitable as love and infidelity.
What can be done is to fine tune the regulatory systems, try to bring them up
to date and to stop them lagging behind innovation quite so badly in future.
And most of all, say no to any 'solution' put forward by politicians, because
they are the very last people capable of understanding the problem.
The British government is now face to face with the consequences of the mistakes
it has made over the last ten years in regulating and taxing its gaming sector.
It is scarcely the only country to have trodden the same error-strewn path,
but in the case of the UK the damage is greater because of the highly profitable
industry which the government's policies have now almost destroyed.
'For many reasons, increasingly few companies active in the British market
are now regulated by the Commission,' bleats Minister for Sport Gerry Sutcliffe.
So what has happened?
In 2001 the Government replaced its age-old system of taxing punters with a
15% tax on gaming gross profits (and operators also have to pay VAT plus corporation
tax plus a super contribution on any horse-racing turnover to a superannuated,
cosy old industry nag called the Betting Levy Board). This step wouldn't necessarily
have been fatal on its own, but when Internet betting started to supersede the
betting-shop kind, and UK-based operators began to desert in droves to Malta,
Gibraltar, Costa Rica and the Channel Islands, the government imposed a 15%
tax on Internet gaming profits for all those firms which it licensed, and created
a tough licensing regime under the Gaming Commission. But it could only license
firms on its own territory and was forced to allow in all EU-based firms, without
being able to tax them.
Now, with gaming tax revenues disappearing down a black hole, it is having
a King Canute tantrum and wants to impose licensing (and hence taxation) on
all the firms that operate in the UK (ie advertise there for punters). But why
should the EU permit this? There are perfectly adequate regulatory, licensing
and taxation regimes in Ireland, Malta and Gibraltar, all EU Member States,
and where the ex-UK betting firms now prosper. Under what circumstances are
they going to allow the UK to steal their revenues, or to replace their rules
with a new set? And under what law can the UK forbid another properly-licensed
EU operator from advertising freely throughout the EU?
The ECJ's Gambelli ruling in 2003 was unequivocal: gambling is a service and
is subject to EU freedom of establishment rules. There is no way in which one
EU Member State is going to be able to impose its own legislative practices
on another one. The EU Commission has already attacked France on this issue.
It is a mystery how Minister Sutcliffe could be so badly advised as even to
try.
What the government should have done was to accept the inevitable and offer
a light-touch, low-tax regime to compete with Malta et al, instead of hiding
benhind a hypocritical ('protect our children') smokescreen. All it really cares
about is the tax, and now it has lost that along with the gaming industry. The
existing law is a dead letter, as the government is implicity acknowledging:
you can ban a foreign firm from advertising on the Internet, but Berkshire is
not Beijing, and if a 16-year old wants to place bets with a Costa Rica poker
site using his father's Swiss credit card and bank account, who is going to
stop him?
Even now it is not too late for the government to come to its senses, but under
Pastor Gordon Brown's presbyterian theocracy, and faced with the Treasury's
emptying treasure-chest, what chance is there of that? The few remaining British
gaming firms will now pack their bags and leave. 'Mene, mene, tekel upharsin'.
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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