Mar 07 2011

UK encourages tax avoidance via Eurobonds

Posted by: Nick Shaxson in: Thoughts

The Progressive Tax blog has an important article up today, looking at a new report by the UK’s Office of Tax Simplification at the Treasury. And it picks out a section looking at Eurobonds, unregulated offshore bonds that are denominated in a currency other than that of the country where they are issued. (So, for example, a company based in London might ask investors for US$ 1 billion and promise to pay that back in five years, plus interest.)

One of the most important things about Eurobonds is that they are, unlike many other types of bonds, not taxed at source. In other words, when investors in a bond receive interest payments (which is a form of income) they aren’t taxed on that income. Eurobonds are major vehicles for tax avoidance and evasion, as Treasure Islands reports. And this new UK report is brazen in its explanation for why this particular loophole is granted:

The original policy rationale is to encourage the growth of the UK Eurobond market, as London is one of the centres of the worldwide Eurobond market.

In other words, the original policy rationale is to build up the City of London as a tax haven: a place that attracts money by assisting others to avoid tax. That is a quite extraordinary admission.

And this is a huge market: UK £393billion (US$641 billion at current exchange rates.) That is for 11 months: over 12 months that would be worth around US$700 billion. That is a whole lot of tax dodging. The exemption applies to “quoted Eurobonds” which can in practice, as Prog Tax reports, mean bonds issued in on stock exchanges in the Channel Islands or Caymans, for instance.

So a US company with one subsidiary in the UK and another in the Caymans can get its UK subsidiary to issue Eurobonds on the Caymans stock exchange, and get its Caymans subsidiary to buy those Eurobonds. The Caymans subsidiary receives the interest income – but pays no tax on that income, because it’s in the Caymans! Meanwhile, the UK company deducts its Eurobond interest payments from its income there, and cuts its tax bill! And because of this loophole designed to make the City of London more attractive as a tax haven, there’s no witholding tax involved (which would normally be a defence against these shenanigans.)

Everyone is happy! Everyone, that is, except for ordinary taxpayers who have to pick up the tab.

And the justification for this $700 billion annual market, given by the Office for Tax Simplification? Take a look. The justification they give is:

“The policy rationale remains valid and it is a simplification for the holders. We recommend that this relief be retained.”

In summary: we want to protect and promote tax haven UK, and if we help tax cheating, it will make life ‘simple’ for wealthy individuals and corporations.

one comment

Short Breaks in England 5rd May, 2011 5.54 pm

Short Breaks in England…

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