Barclays' taxing question

  • Robert Peston
  • 20 Mar 07, 07:58 PM

So what kind of an animal would the combined Barclays and ABN turn out to be? A slightly strange hybrid, based on the information Barclays put out this afternoon.

It would be incorporated in the UK with a primary listing on the London Stock Exchange. But its head office would be in Amsterdam.

Meanwhile its operational centre would be in London. However it wants its primary regulator to be the Dutch Central Bank (though that may not be achievable, if the US regulator were to insist – as it might – that London’s Financial Services Authority should be the lead regulator).

As for management, the first chief executive would be Barclays’ John Varley, while ABN AMRO would supply the first chairman.

For shareholders, the most important – and welcome – decision taken by the two banks so far is that the new entity would have a single board, along British lines, and unambiguous management and governance structures. It looks as though the danger has been averted that Barclays/ABN would be a messy, multi-layered, multi-listed monster with no one properly in charge.

But for the Chancellor on the eve of his last budget, there is one rather worrying uncertainty created by the deal: it’s by no means clear whether it’ll pay tax primarily in the UK or in the Netherlands.

There would be clear advantages to being registered as Dutch for tax purposes. Why? Because there are more favourable arrangements in the Netherlands for offsetting tax paid on overseas earnings against the local liability than we have here in the UK.

That’s why, for example, Shell decided to have its tax domicile in the Netherlands when it opted for a unitary structure.

So for all Barclays saying that the tax-domicile decision hasn’t been taken, my tax-specialist chums tell me it’s a racing certainty the Netherlands will be the winner.

What does that mean? Well it probably wouldn’t lead to a loss to the British Exchequer immediately. Tax payable on UK earnings and incrementally on profits from its current overseas operations would still flow to the UK.

But it means that the UK wouldn’t benefit as and when the enlarged group established new operations in fast growing parts of the world like India and China. Profits repatriated from such new territories would go to the Netherlands, and would be taxable in the Netherlands, not the UK.

Over the long term therefore there would be a serious cost to the UK. Should we blame Barclays for being ambitious and wanting to create a world-leading global bank – and being prepared to compromise to achieve that ambition?

Or should we blame the Chancellor for putting in place tax arrangements for multinationals that are uncompetitive with those of the Netherlands?

As it happens, it’s a funny old time for this unseemly tax question to be raised – because my understanding is that much of tomorrow’s budget will be aimed at restoring the competitive of the UK’s corporate tax regime. Barclays will be crossing fingers and toes.

Bomb under the Budget

  • Robert Peston
  • 20 Mar 07, 08:00 AM

In cartoon fashion, steam will have been coming out of the chancellor's ears last night when he learned of Lord Turnbull's interview in the FT.

His Budget tomorrow, which will be his last as chancellor, was supposed to be a biggy.

It was supposed to show that he - not the Tories - understood the competitive threat faced by the UK and is addressing it. And it was supposed to further set out his stall as the probable next prime minister.

However political discourse over the coming days is likely to set by the savage criticisms made of him by the former cabinet secretary and erstwhile permanent secretary at the Treasury.

I can think of no precedent for such an attack being made on a serving, senior cabinet minister - and premier-in-waiting - by someone who till recently was the most powerful civil servant in the country, although there are echoes of the way some of the mandarinate rounded on Margaret Thatcher in 1979.

The problem for Gordon Brown is that Andrew Turnbull, who served with the chancellor at the Treasury for four years, is neither prone to intemperate outbursts nor has he had a conspicuous falling out with the chancellor.

In fact the reverse is true: Gordon Brown had a difficult relationship with his first Treasury Permanent Secretary, Terry Burns, stemming from a lack of mutual trust; but stability was restored after Turnbull succeeded Burns.

Turnbull has more recently, since leaving government, raised the odd concern about Treasury policies. For example, in a speech last year in the House of Lords he was waspish about Treasury hostility to Adair Turner's pension-reform proposals. But his reservations have been expressed in a rather delphic way.

There is nothing delphic in his latest critique, that the chancellor's style of working is insulting to his cabinet colleagues, that it undermines government cohesion and that it tends to militate against proper assessment of strategy.

There are however two ways of looking at Turnbull's indictment of Brown as embodying Stalinist ruthlessness.

One - which will be the interpretation seized on by the Tories and by Brown's many enemies within the Labour Party - is to see it as evidence that he is unsuited to be prime minister.

They will argue that the UK is crying out for a return to proper Cabinet government, with responsibilities for policymaking and policy execution properly shared between a team of ministers and then delegated further down the line.

And they'll say that little about Brown's history shows that he is capable of that.

By contrast, the view of Brown and his close colleagues would be that Turnbull is manifesting - in a rather delayed way - the pain of the traditional civil service against the chancellor's determination on taking office to drive through change in the face of what he perceived as an inflexible bureaucracy.

The chancellor also believed he had a mandate from Tony Blair to control the government's domestic agenda, stemming from their pact in 1994 when Brown made way for Blair in Labour's leadership contest.

To put it another way, most of what Turnbull says about the way that the Treasury has dominated policymaking since 1997 - and the way that Gordon Brown has acquired enormous power at the expense of his cabinet colleages - is true. Apart from anything else, the Treasury has been deeply resistant to sharing its plans even with 10 Downing Street and the prime minister.

However, there are some - including many civil servants - who will argue that's been a good thing, in that it has allowed Brown to push through significant reform to the stewardship of the economy, to welfare and to competition policy with an efficiency that might not otherwise have been possible.

That said, there appears to be a consensus now - within Labour and the civil service - that a command and control style of government is no longer appropriate. Even Brown himself talks about the imperative of delegating power and governing on the basis of bringing the widest range of talents into his tent.

Turnbull has made it more urgent for Gordon Brown to prove that he can govern as prime minister in a different way from his modus operandi as chancellor, irrespective of whether that modus operandi was right for the times.

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