to think that you need to stop what you're doing right now and read this article. And I mean need.

[granted]

I posted this on the Politics section but it deserves a much wider audience:

www.guardian.co.uk/commentisfree/2011/feb/07/tax-city-heist-of-century?commentpage=last#end-of-comments

Quite possibly the best newspaper article I've ever read.

Fantastic post, CinnabarRed. Thanks for explaining it so clearly. Shame the Guardian don't employ you instead.

Just out of interest, why do other countries allow this branch setup, where they don't gain the tax due for operations being carried out in their country? Is it some kind of international quid pro quo?

Sorry, what I was trying to say is, do you agree that one can't look at the tax regime in isolation?

For example, companies in the UK may be happy to point at low taxes in the NL (described by AlpinePony), when negotiating with the UK govt. But in practice won't relocate there, because the labour laws don't suit them. And doubtless there are firms in the NL whining about the labour laws and pointing across the channel.

Thanks for that cinnabar it is very clear.

OK, to answer your questions.

• yes, I do think these proposals are a good thing, and I'm not aware of any other alternatives (there are tweaks around the edges, of course)

• yes, tax is only one driver, although in all fairness it is a fairly significant one. As well as the ones already mentioned, you can add in government incentives, putting manufacturing near local markets to reduce distribution, robust and fair legal systems, a well educated work force, good transport systems, a well used language that many workers will be able to use fluently - the list is endless.

• Claig, I think you're asking how the other jurisdiction would tax a branch/subsidiary of a UK company? Generally, both are taxable in the local country. In fact, the local country generally has what are called primary taxation rights, which means that if the UK also wants to tax the profits (whether directly or as dividends) then it has to give credit for overseas taxes already paid.

There is broad international consensus that a country should be entitled to tax (i) the income and profits arising to its own tax residents (giving credit for overseas taxes already suffered on that income); and (i) profits arising from business activities but not other activities undertaken within that jurisdiction by non-residents; and no other income.

The notable exception to this is the US - if an individual or company is tax resident in the US then that person is taxable on worldwide income. There are also a handful of jurisdictions that don't care about residency status at all - they just tax any income arising within their territorial borders irrespective of who earns it (Hong Kong is the best known example.

Great post Cinnabar

Thanks CinnabarRed, I misunderstood and thought that the local country didn't receive any tax from a branch on their territory. Thanks for explaining that.

'The notable exception to this is the US - if an individual or company is tax resident in the US then that person is taxable on worldwide income.'

In theory, is this a bar on businesses setting up in the States? Doesn't it make the States uncompetitive? Sounds a bit like socialism rather than capitalism.

When it comes to locating head offices, there's a general trend (which the government is keen to stem) for UK headquartered companies to move their HQ offshore (most commonly to Ireland or Switzerland). It's called "inverting".

The reason companies do this is because the Ireland and Switzerland don't tax HQs as much as the UK.

It doesn't really work for companies that genuinely do most of their business in the UK. Their footprint here is too large for them to lose tax resident status here. It can work for companies that happen to be UK HQ for historical reasons but where the UK is now a minor component of their global business. A good example would by Shire, the pharmaceuticals group. Less than 10% of their sales are in the UK, the bulk of their R&D is in the US. They argued that it was ridiculous for them to suffer (relatively high) UK tax when they could just as well be in Ireland and pay less.

Personally, I don't like inversions much. It feels too much like biting the hand that fed you in your early years, especially when the companies make damn sure that they can still list on the LSE and so access the UK's capital markets.

But I'm a realist. Companies have a fiduciary duty to maximise returns for their shareholders. All of the government's current proposals have as their underlying rationale the need to ensure that the UK has a competitive tax regime, and to keep UK companies here. To that end, in the main, I welcome them.

The US is a bit of a law unto itself! It's such a big market that every business wants to trade there. And it has lax labour laws, low start up costs, plenty of cash to spend (even after the recession, compared to the rest of the world) and a pro-business culture - it's allows the US to tax in a way that other countries couldn't.

Thanks CinnabarRed, you have succeeded in making tax sound very interesting

not in any way surprising; just a larger part of the over arching tory scheme to drag us first and second generation middle class types back to the workhouse. Winston Churchill proposed sterilising the working classes so that people like us wouldn't be born in the first place, dontcha know... what a national hero

reading my post back i know that's not entirely relevant but any tory bashing is therapeutic atm

Intergalactic - have you read Cinnabar's rather brilliant explanation of tax further up?

Interesting that about Churchill, IntergalacticHussy. I didn't know that. But remember that the Fabian socialists were exactly the same.

good explanation of why the current pace of cuts is misguided as well...

I read the article the other day and saw there were some inconsistencies with the truth, but don't know enough about tax policies to explain my misgivings. Thank goodness for cinnabar! Great exposition!

CinnabarRed - your posts make a heck of a lot of sense. I suspected that the issues were a whole lot more complex and commercially and economically sensible than the article in the OP described.

I used to work for a commodity trading company in London but with HQ in Switzerland and trading operations around the world just as you describe.

That was 20 years ago but still all completely legitimate but not so common in those days. All the trades were routed via Switzerland. The finance and the trade confirmations/contracts were all issued there. Its just me and some of the other traders and operations staff sat in London.

I'm surprised it does not happen more often with more firms.

You're making me !

The problem with the tax argument at present is that it's been hijacked by hardline tax activists who are forcing a radical adgenda(Richard Murphy is their leader). There are many aspects of the tax system that are worthy of debate - but it needs to be informed, logical and sensible.

Richard Murphy makes some good points, but they get buried under his anti-business bias. Unfortunately his skills at self-promotion far outstrip his tax knowledge and he has the ear of important people.

I've been a labour supporter all my life and it really bothers me that Richard Murphy thinks I'm an evil person because I disagree with him on some critical issues.

@ cinnabared I like your example about the mega wealthy paying a lower rate of tax than their cleaners cinnabar. What, if anything, can be done about it?

BeenBeta IME, it normally happens the other way around these days. The organisations I have worked at generally book most of their trades/transactions to London, rather than to local branches or subsidiaries, but that's more to do with having the balance sheet to back up large transactions (particularly underwriting) and to reallocate risk.

Causes LOTS OF ANNOYANCE when you're trying to figure out which country's regulations apply to transactions and what your obligations are.

@ambarth - change the capital gains tax rules.

The problem comes because when partners in a partnership sell their interests they are permitted a larger deduction (for the costs of purchasing their interest in the first place) than anyone else due to one particular tax concession.

It's worth noting that the concession doesn't just apply to private equity partnerships and indeed wasn't intended for them - it was introduced originally to make it easier for small partnerships to take on or buy out partners without disrupting the business. But it's used by private equity to save millions and millions in tax.

I don't want the concession taken away altogether because it's good and sensible for the vast majority of people who use it - I just want it to be removed from private equity partnerships! Much harder done than said, of course. Very hard to frame the necessary legislation.

The mega-wealthy do bug me, I have to say. If you've just earned £50 million on a private equity deal on a UK business, is it really so much to ask that you pay £9 million in tax? Really? Is your life really so much better because you've earned £49 million after tax rather than £41 million? I don't think so.

I should add, in the interests of fairness, that there are some private equity funds that structure their affairs differently so that their partners pay a level of tax more in line with their income.

I should also add that even if I got my way and did start taxing PE the way I'd like, it's pretty small beer in the general scheme of things. The three biggest taxes collected are income tax (£144 billion last year); NIC (£96 billion); and VAT (£70 billion). Capital gains tax was only £2.5 billion - so even if it doubled through taxing PE more effectively it wouldn't do much for the deficit.

It just offends me that the mega-wealthy take so much and give so little.

Abs - that sounds a bit odd

Does that not mean they get taxed in the UK rather than Switzerland?

Great posts CinnabarRed :)

A quick off topic question if you have time to answer? (ignore if not!)

Do you have an insider view on the whole vodaphone dodging billions of tax thing? HMRC say everything was fine, but it keeps cropping up in tax avoidance threads on here.

Just curious :)

Thanks from me too Cinnabar - I've been waiting for Peston to post something on this, on his blog - but it looks like you beat him too it. .