Aaaggghhh - I just spent an hour typing tax analysis for you and lost the lot when the battery died on my laptop 
. Here we go again....
This is going to be long. Sorry. I'm going to start from the presumption that you, gentle readers, are intelligent but not familiar with international tax concepts, so will go back to absolute basics. Apologies if that sounds patronising, it's not intended to.
Suppose a company has a successful product, but its core market is already at capacity. It has two choices about what to do next. It can invent new products to sell to its core customers (e.g. Apple inventing the ipod, iphone and ipad). Or it can find new customers for its existing product. Some companies start to market the existing product to a different segment of the market (e.g. Johnson's selling baby products for adult use); others expand overseas.
It's more risky for companies to expand overseas than stay in the same country. The foreign market isn't familiar to them, and a procuct that sells brilliantly here might tank elsewhere (remember M&S's disasterous foray into France and Germany?). So companies need an extra incentive to open foreign markets.
I'll come back to how the tax system can provide that incentive in a minute. Just for now I need to run you though the two structures that companies can use to do business abroad.
The first is to incorporate a subsidiary company overseas. There are several business advantages to this - some locals prefer to trade with a local company; it's easy for the UK parent company to see how much it's investing in its overseas subsidiary company and how much profit it's making; employment law is easy). However, there are several disadvantages too, around increased admin costs (filing fees, audit costs, local regulatory requirements, etc).
The alternative is to open a branch. A branch is just a business place owned by a UK company in a foreign country. It's exactly the same as Waitrose opening a new store in Amersham when it already had one in Chesham (guess where I live!) except that the new store is in a different country. It's quick, easy and cheap to open a branch.
So let's go back to how the tax system can incentivise overseas investment.
Under the current system, the UK will generally not tax an overseas subsidiary. Which is good news if the subsidiary is profitable, but a bit of a bugger if it's make losses (which you would expect in the early years due to start up costs). By comparison, a branch's results are taxed directly on the UK company. If it makes losses then the losses are automatically offset against the UK company's other profits. If it makes profits then it will be taxed on them in the UK.
So what companies generally do when they start to trade overseas is start off with a branch (for as long as the overseas business is making losses, because it can use the losses against its UK profits) and then move the overseas business into a subsidary company once is starts to make profits (because the UK company won't be taxed on the subsidiary's profits until such time as they're brought back to the UK, generally as dividends).
This is all very well established and familiar. Only the most hardened of tax activists view it as abusive - the Revenue certainly doesn't. The Revenue accepts that it's a good model for encouraging UK companies to expand, which is good for the UK economy as a whole.
The problem comes because some sectors use branch structures for non-tax reasons. Banks are one, and by far the largest. By banks, BTW, I don't mean investment banks - I mean the retails banks that we all have accounts with.
Let's take a moment to think about how retail banks make their money. Very broadly, they take in deposits from the likes of us and invest them elsewhere. Some they lend out as mortgages and loans (charging more in interest to the borrowers than we receive on our deposit accounts); some they speculate on the stock markets because they hope to get higher returns; and some they put aside for a rainy day (although not nearly enough, as we now know....)
In any case, they need to move very large sums of money many, many times per day. It's much easier to move money between a branch and its head office than between a subsidiary and a parent company. So banks generally have branches overseas taking in deposits, and a UK head office.
(If you like to think it analogies, think of this: if you go out on the town and don't want to take a handbag with you, then you need to have somewhere else to put your cash. You could put it in your pocket or give it to a kind friend who does have a handbag. If you want to buy a drink, it's much quicker if you can just reach into your pocket to pay. If your mate has it then you have to find her - and she's bound to be either sobbing in the loos or snogging some random bloke (or possibly that's just my mates!) - then get her attention, then wait while she roots around in her purse, etc etc.)
Banks have long complained that they have no choice but to operate using overseas branches, but doing so puts them at a disadvantage against both other UK companies (who can use subsidiaries if they want to) and foreign banks (many of whom operate in countries which don't tax branches in the same way that the UK does - more on that later).
We could, of course, tell the banks to poke it. Personally, I don't think that's a smart thing to do. I calculate (based on figures from the Office of National Statistics) than banks hand over around £50 billion of tax to the Exchequer each year. To put that into context, the whole annual tax take is £450 billion, so £1 in every £9 of tax collected comes from banks. We really do need them to be here and to be doing well.
The alternative is that some banks are seriously considering moving their headquarters out of the UK.
So the solution that's being proposed is to level the playing field between branches and subsidiaries. In other words, that branch profits shouldn't be taxed in the UK, but neither should branch losses be relieved (which would mean that it would no longer matter whether overseas profits were earned in a subsidiary or a branch, because the UK tax implications would be the same). It's called a branch exemption system.
Turning to Monbiot's article:
- these are currently only proposals. The consultation period closes today. It is genuinely the case that the Treasury will weigh up all of the responses received and may well change its policy as a result. To present it as a foregone conclusion is disingenous.
- It's factually incorrect to say that the UK is only the second country (behind Switzerland) to implement a branch exemption. Many, many other jurisdictions do.
- And it's nothing to do with tax havens either. Retail banks don't have deposits in tax havens because there aren't enough customers to take deposits from! The notable exceptions are the Channel Islands and the Isle of Man, but there's already specific legislation to deal with them.
- It's misleading to say that businesses will be able to offset the costs of funding their overseas branches against UK profits. It implies that profits will be exempt but losses will still be relieved. That's not the case. What he means is that if a UK company borrows to expand overseas then it will be allowed a tax deduction for that borrowing irrespective of whether its overseas business is structured as a branch or a subsidiary. That's a critical point that's necessary to level the playing field between the two.
- the proposals are not designed to drain wealth and jobs from the UK. Quite the contrary. They're designed to keep wealth and jobs in the UK by encouraging the banks to stay here. Remember that £50 billion of tax they pay?
- any business which does try to funnel its earnings through a tax haven will be taxed under a different part of the UK tax legislation. It's complicated, but I'm happy to go into more details if people want. Please trust me that it's practically impossible to shove profits into a tax haven and NOT have them taxed in the UK.
- It is true that the branch exemption is only proposed to apply to large companies. That's because the Treasury wants to continue to provide tax incentives for small and medium businesses to start trading abroad (by allowing them to offset overseas branch losses against UK profits, as outlined above). It's meant to help smaller businesses, not shaft them.
- It's true that many members of the advisory committees come from big business. There are two reasons for this. The first is that big business finds it easier to spare one individual to a government committe than small business does. The second is that many of the proposals relate to international taxation and many small and medium businesses don't operate internationally (and so don't have relevant experience). BTW, the committees are also packed with academics and retired judges for balance.
- Tax havens again: Monbiot thinks that they've been legitimised. With all due respect, I disagree. You may have heard the phrase "race to the bottom" - it's the idea that "good" jurisdictions have to sink to the level of "bad" jurisdictions in order for their tax systems to remain competitive. But I don't see that in practice. Instead, what's happening is an emerging consensus in the international tax community about the norm of best practice, with intense pressure on non-compliant countries to step in line. In fact I've just been hired by a tax haven to assist it reform
. The "Treasure Islands" book is a cracking read, but some of it is incorrect and much of it is already out of date.
- In my view, the tax system does enrich the megawealthy. I find it distasteful in the extreme. But it's nothing to do with branch exemption proposals. If you want to campaign, campaign against the private equity funds, whose partners can tax plan their personal tax rates down to a lower level than their cleaners'. Robert Peston writes very well on this.
- It is factually correct that there is a net flow of financial resources from poor countries to rich countries. However, I dispute that it's tax motivated. It's also factually correct that rich countries have higher tax rates than poor countries. It doesn't make sense - from a pure tax perspective - to transfer profits from low tax poor countries to high tax rich ones; you'd just pay more tax! By far the most significant issue is corruption in poor countries. We all need to campaign for international assistance to stamp out corruption - that should be the message we scream from the rooftops.
OK. This might be a contender for Mumsnet's longest ever post! I'm happy to expand on any of the points, or address new ones, if you like.