IT’S WAR. Just like the American colonists, the battle cry of “no taxation without representation” is heard throughout the land. No European tyrant will tax us without our consent. The Cayman people . . .
Steady on, don’t I mean the British people? The Chancellor of the Exchequer was yesterday repelling a fiscal assault on British sovereignty. A common European tax policy is a red line issue, he said proudly.
In the Cayman Islands they agree. They don’t want a committee in Brussels making tax laws for them and they wish the Chancellor would stop threatening to force European tax laws down their throats. Gordon Brown is threatening the imposition of the Savings Tax Directive, an EU law designed to curb tax evasion, which requires banks automatically to disclose to EU tax authorities details of interest paid to EU residents.
It is a messy law, a product of German, French and Italian concern that car bootloads of cash are disappearing into Luxembourg and Swiss bank accounts. But the curb on bank secrecy has failed because a compromise was needed to bring non-EU Switzerland on board. It was agreed that bank secrecy states (Austria, Luxembourg, Belgium and Switzerland) can avoid automatic disclosure if they impose a withholding tax on EU depositors.
Jersey and the Isle of Man have grudgingly agreed. But Cayman is still resisting and a deputation of islanders arrives next week in London, threatening legal action and pointing to Bermuda, which has escaped the EU net (it was omitted by accident from a list of Crown dependencies).
The big fish are already swimming to Shanghai, taking their euros with them. The net effect of this measure will be more capital flight, not less.
Cayman could follow the Massachusetts example and declare independence, but that may not be necessary. My spies tell me the Swiss have spotted a loophole: the directive applies only to deposits by individuals, and a massive offshore corporate restructuring is already under way.
Companies lose competition
WHILE the Cayman Islanders behave like irritating sandflies, the European Commission seems to be intent on goading the Chancellor of the Exchequer, even as he paints red lines all over the floor of the European Council chamber.
With exquisite timing, Frits Bolkestein (now styling himself as Taxation Commissioner) yesterday published a progress report on a project to remove company tax barriers within the EU. Accompanying the report was a useful Q&A briefing document, which addressed the question: “Is the European Commission advocating full EU company tax harmonisation?” The answer provided was negative. The EU strategy is about creating a single company tax base, a definition of taxable profits common throughout the Union. On that agreed base, national governments would be free to tax (or not to tax), thus promoting tax competition.
It sounds terrific. A quick glance at a schedule of corporation tax rates would be enough for a finance director to compute which EU state is the most tax-friendly towards his company. Tax accountants would be out of work and EU governments would be forced into a sort of Dutch auction, bidding down their tax rates like carpet sellers seeking to lure American tourists into their shops.
A terrific idea that does not have a chance of succeeding. There are obvious difficulties to surmount even before we consider whether any finance minister would ever allow himself to become so politically exposed in a fiscal auction.
For example, does the definition of taxable profits distinguish between income and capital gain? There is a lexicon of jurisprudence in Britain on the subject that has no relevance in many other EU states. At what rate should assets be depreciated and which expenses may be capitalised? The deduction of expenses raises interesting cultural issues. The Inland Revenue takes a dim view of client entertainment but such a puritan approach is not the rule in Latin countries.
Even assuming that a consensus emerged on the definition of profit, can we expect Gordon Brown to embrace a common approach? It is almost inconceivable that this Chancellor should give up the opportunity to tinker, to allow a deduction here, to deny relief there, to tweak. To remove from Mr Brown the right to micro-manage the economy would be as cruel as to remove his right arm.
No matter that thousands of British businesses would like nothing less.
Power of the regulator
CLUMSY tinkering is causing huge grief to Enel, the Italian electricity generator.
Last week the energy regulator delivered its views on the valuation of the company’s regulatory asset base. The Italian authority reckons Enel’s assets are worth less than previously thought, which implies lower tariffs for the period from 2004-2007.
Adding insult to injury, the regulator disclosed its opinion by publishing on its website, without warning, a lengthy document in Italian with no English translation. Within the space of 90 minutes, 60 million shares changed hands, three times the normal daily trade. While Italian investors dumped Enel stock, foreigners were frantically seeking translations of the regulator’s prose.The share price plunged.
Enel is not amused; neither is Morgan Stanley. Two weeks previously, the investment bank placed a large chunk of the Government’s Enel stock with foreign investors.
It’s all rather embarrassing.
carl.mortished@thetimes.co.uk
