Tuesday, May 22, 2007

Offshore Disclosure Facility - is it abuse?

We have, obviously, been reading lots about the 'Offshore Disclosure Facility' being offered by the UK revenue services. Basically it means that if you have undeclared income from savings or investments offshore then you can declare it, pay the back taxes and and a 10% fine and you will be OK.

Personally we think this is a good deal for those who did not plan their tax situation correctly in the first place. It is a clean start from which you should take proper advice and structure your tax affairs in the right way (erhmmm...give us a call) as there are many ways to legitimately plan your offshore tax strategy.

However, the issue that we have is this situation is is far more serious:

When the EU savings directive was brought in we were told that there would be no disclosure involved. This meant that banks in other EU jurisdictions (and in Switzerland) would withhold tax on savings and repatriate a percentage of the tax to the domicile of the account holder...Okay Dokey, all well and good. In fact here is the Wikipedia explanation of how it would work...

"The European Union withholding tax is a withholding tax which is deducted from interest earned by European Union residents on their investments made in another member state. Its aim is to ensure that citizens of one member state do not avoid taxation by depositing funds outside the jurisdiction of residence. The rate of tax is currently at 15% of the interest earned. The tax is withheld at source and passed on to the EU Country of residence without any disclosure as to who was actually the recipient of the interest concerned."

And this is a quote from a major accountancy firm on the new situation:

"KPMG believes that the announcement of the Offshore Disclosure Facility is a response by HMRC to deal with the mountain of information it has received about the holders of offshore bank accounts and structures, and from exchange of information with overseas tax authorities under the European Union Savings Directive in a quick and cost efficient way."

Unless we are much mistaken (it happens!) this is a clear and blatant abuse of information and we hate to say "I told you so." Some time ago we issued notes to clients explaining that although the Savings Directive was supposed to be anonymous we could not believe, in this day and age, that this information would not be usurped by governments looking to raise ever more revenue to cling onto power for as long as they could. We suggested setting up correct tax structures that effectively 'wrap' offshore investment to take them out of the scope of the directive. Many people did, some didn't, and those letters about disclosure are going out now.

We understand that tax evasion is bad, not only bad but pretty stupid. As we have said there are many ways to legitimately plan for tax and either reduce or defer its impact, but this abhorant abuse of power is one step too far in our opinion and brings into question many privacy issues that we have been previously in favour of, DNA database, identity cards etc. Now we are not so sure.

When Europe can create a directive that promises anonymity but then uses that information to create revenue and what will amount to criminal cases, in some circumstances, and does not even give a thought to its original purpose, then that, dear reader, is a dictatorial power in all its glory and we cannot be sure that other such 'information' gathering exercises will not be abused.

The guy in the street doesn't care because the spin will be that the government are after multi millionaires stashing their 'ill gotten gains' in offshore accounts, but what the guy in street probably doesn't realise is that if the government can use information to get at those who have the means to defend themselves what chance does the guy have who can't?

Sunday, May 20, 2007

Private Equity - History repeating itself?

There have been several interesting articles recently about the rabid pace of buy-outs by private equity firms. We have all seen the newspapers that discuss the issues of private equity engulfing ever more firms and in ever larger deals.

Is this good for the economy? It is certainly good for the stock market at the moment with buyout targets stock prices fueling ever more growth and therefore ever more speculation creating a vicious circle of rapid stock market appreciation. Seen that before? The dot com boom had similarities but for my money was a different kettle of fish. The Internet boom was a frenzy of optimism about the new media and how it could be utilised, money poured into some crazy ides at at alarming pace and the stock market lapped it up. Traditional valuation theory went out of the window and with it any hope of there being a happy end, and we all know, there wasn't.

So is the private equity boom the same? Yes and no. Wherever there is vast amounts of money chasing the same deals there is bound to be mistakes. Investment bankers/private equity house (are they any different these days?) are no strangers to being goaded into paying over the odds because of fear of losing fees, bravado or even, dare I say, greed. If you don't believe me see paragraph 2... yup, there would not have been dot com floatation's of a bazillion times earnings if some investment banker somewhere hadn't said it was OK, and some of these crazy ideas would not have got to market if some VC had not funded them.

Money is cheap at the moment and, it appears, in endless supply to hedge funds and private equity houses. This, to me, sounds like simple supply and demand. If there are more buyers in the market with more money chasing similar deals prices will rise and somewhere on that price rise scale there should be a big red mark saying "TOO EXPENSIVE". However, I suggest that this will be ignored and there will be a few spectacular failures in our not too distant future.

This time, fortunately, we are not talking about flimsy new age companies with a business plan dreamed up by some teenagers and plumped up by fee hungry investment bankers, today the product being pumped up by avaricious investors are companies with a history, Chrysler, ABN Amro to name but two. No, today we are seeing proper grown up businesses being bought and taken private with a view to offering them back to the markets in a few years where will be expected to believe that they have been cleaned up and are now worth twice as much as they were before.

Invariably, some of these old boys of business will benefit and will come back to us with a hip replacement and a dose of vitamins, skipping sprightly along to the second phase of their stock market life with new vigor and direction. Some, however, will come back with bloated management full of money and power. It is then that I believe history will repeat itself and will will see the de-merger cycle occur.

Come on, don't tell me you have forgotten already? Sir James Goldsmith, Carl Icahn etc. The corporate raiders who stalked businesses that had grown into huge conglomerates with diversified companies nothing to do with the core. Telecoms companies owning logging companies, biscuit companies owning tobacco companies was all the rage. These acquisitions and management were fueled by the knowledge that a smaller company couldn't borrow enough money to buy a bigger company. Management became entrenched and corporate excess became renowned. This all changed when 'junk bonds' put capital in the hands of the raiders who burned the fat while making themselves billions.

Still can't remember? Here is a reminder...

I can't help thinking that the private equity industry is lining us up for just such another feeding frenzy down the line, only this time undoing what the private equity firms are creating; monsters of business.

As a final thought, how come in the eighties the raiders told us that business was big and fat, and divesting non core businesses leaving a sleek core was the best and now we are being told (by some of the same people) that to survive in a global environment you need to be big, therefore mergers are the way to go?

I don't know, maybe I am being cynical, but if history has taught us one thing it is that when too much power is concentrated in the hands of the few, it is often at the expense of the many.

Sunday, May 13, 2007

Tax Advisor Warns Of HMRC's 'July Offensive' Against Offshore Account Holders,

As you may, or not be aware, the revenue are mounting an offensive against those who have undisclosed offshore accounts. There are many legal ways to maintain your offshore account in accordance with UK revenue rules and still be extremely tax efficient. If you need assistance with this issue please get in touch

by Jason Gorringe, Tax-News.com, London 11 May 2007

HM Revenue and Customs will launch its clampdown on undisclosed tax liabilities in offshore accounts on 9 July - just 16 days after the 22 June notification deadline under its new offshore amnesty facility, warns tax advisory firm Chiltern Plc.

According to Steve Besford, head of tax investigations at tax adviser Chiltern, those with undisclosed tax liabilities connected with an offshore account who do not notify by 22 June could well find themselves under investigation any time after 9 July.

By contrast, people who notify their intention to make a disclosure before the deadline of 22 June can be assured that HMRC will not raise any enquiry into their affairs prior to the disclosure deadline of 26 November, he claims.

Mr Besford said: "9 July is the first date on which HMRC can be assured that all notifications have been processed and the appropriate 'no enquiry' signal posted to the taxpayer's computer record."

Chiltern says it is known that the offshore account information in HMRC's possession has already been 'risk assessed' using a central resource. Cases for investigation will be distributed to local offices, Civil Investigation of Fraud Offices and Special Civil Investigation Offices immediately after 9 July.

Mr Besford added: "If additional tax is found to be due as a result of these enquiries, HMRC will seek considerably higher penalties than the 10% on offer under the amnesty and may even launch criminal investigations."

In April, HM Revenue and Customs announced arrangements enabling investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns.

HMRC said it has recently obtained information about holders of offshore accounts from a number of banks and has obtained similar details through the European Savings Directive. The banks in question are thought to include Barclays, HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB, according to reports.

For a limited period, the amnesty will allow taxpayers to come forward and make a full disclosure of all undeclared liabilities, not just those connected with an offshore account. Personal disclosures or those made on behalf of others will also be accepted under the terms of the Offshore Disclosure Facility.

Saturday, May 12, 2007

Nasdaq sees private placement portal up by June

The following article from Reuters in an interesting pointer that reminds us of the power of private placements and PIPE type transactions.If you are interested in investing in this area please take a look at our specialist investment account.

By Joseph A. Giannone

NEW YORK, May 4 (Reuters) - Nasdaq Stock Market Inc. Chief Executive Robert Greifeld said on Friday the exchange operator expects to launch as early as June a system allowing institutional investors to monitor private stock placements.

The volume of private sales of stock, known as 144a transactions, is massive and growing, Greifeld said at a Securities Industry and Financial Markets Association conference in New York.

Last year, $162 billion of capital was raised through private placements, more than from all the public offerings through the New York Stock Exchange, American Stock Exchange and Nasdaq combined, where $154 billion was raised, according to Thomson Financial data cited by Nasdaq.

Nasdaq, the top U.S. electronic equity exchange, receives 10 times as many applications to register placements than it does for offerings, Greifeld said.

The new system, which awaits regulatory approval, would improve on the traditional practice whereby investors must contact brokers to determine what securities are available and their prices, Greifeld said.

The portal would not be a transaction execution system, Greifeld added. Interested investors still must contact the placement agent to buy or sell these shares.

"This could be the most important development for the equity market since 1971," Greifeld said, when the Nasdaq was founded. "I'm very excited about what this could become."

Nasdaq wants to build new sources of income as the mainstay stock trading business faces stiff competition from electronic trading systems. Greifeld also is under pressure to show Nasdaq can boost earnings following its recent failure to acquire the London Stock Exchange.

Greifeld also expects Nasdaq to launch an options exchange in the fourth quarter. Greifeld on the sidelines said Nasdaq is interested in making acquisitions in the options business, though he declined to elaborate.

Nasdaq, according to market speculation, has been in talks with the Philadelphia Stock Exchange, one of six major options exchanges in the United States and bourse operator OMX. Greifeld declined comment.

Greifeld, though, in the sideline interview said Nasdaq is not interested in making a bid for International Securities Exchange, an electronic options and stock exchange operator that recently agreed to be acquired by Deutsche Boerse for $2.8 billion.

Wednesday, May 09, 2007

UK Looks To Scrap Tax On Foreign Profits

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax.

According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions.

The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average.

The expected revenue loss for the government from exempting foreign dividends from tax is thought to be relatively small - in the low hundreds of millions of pounds. However, according to the report, in its informal discussions with business, the Treasury expressed concern that the change could lead to more substantial tax leakage, as firms borrow in the UK to invest in low-tax jurisdictions. Consequently, the Treasury is likely to claw back any lost tax receipts with more anti-avoidance legislation, in a bid to ensure that any change in the law is revenue neutral. The measures are also not expected to bring about an overall tax cut for businesses operating in the UK.

Nonetheless, it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.

In 2005, a similar measure enacted by the United States Congress, whereby repatriated profits qualified for a special 5.25% tax rate for one year as opposed to the standard rate of corporate tax of almost 35%, led to many billions of dollars being repatriated by some of the country's largest firms. However, many observers believe that the law largely failed in its objective of encouraging US firms to invest and create jobs at home.