A tax crackdown ordinary folk might welcome
COMMENT: 'Advisers hate the idea of general anti-avoidance provisions because clients would then demand the exercise of their judgement to steer them through the grey areas. But why are they so reluctant to do this?'
Tuesday 19 December 1995
While ordinary folk might think that the new approach might keep corporations on the straight and narrow, tax specialists are concerned that it would not work. They admit that general anti-avoidance provisions do exist in such territories as Canada and New Zealand, but claim they are not particularly effective.
What they are really worried about is the lack of certainty if they have to prove a business rather than a tax minimising purpose behind each transaction. It might seem that tax advisers benefit from confusion in the law, because of the amount of work it generates. They deny this, claiming it is better for business to be able to tell clients that they will definitely be taxed on X, but will be caught for Y. Hence the warm welcome for last week's paper on tax simplification - because professionals believe clearer legislation will be easier to understand and create certainty about what the law says.
They hate the idea of general anti-avoidance provisions because clients would then demand the exercise of judgement as their advisers steer them through the grey areas.But why are they so reluctant to do this? Surely judgement and expertise are what professionals are in business to offer clients?
One prominent tax specialist even conjures up the old notion of a threat to Britain's commercial reputation. Companies might be put off making deals because companies would be under much greater pressure to go to the Inland Revenue for an advance ruling on whether a transaction is acceptable or not. That would require mountains of paperwork.
Perhaps it is this line of argument that best proves the sense of the Revenue's case. Does it not imply that many transactions make better tax sense than business sense? The really compelling argument, though, is that pre-transaction rulings are already routine in some areas of UK taxation as well as elsewhere in the corporate arena. Indeed, the Office of Fair Trading allows advisers not only to ask for prior approval of mergers but to negotiate deals to make them more acceptable.Tax advisers should be relishing the thought of similar freedoms.
Amec wins reprieve, not a rescue
After fighting a poor campaign, Amec beat off Kvaerner by a much wider margin than it expected or perhaps deserved. There was, after all, that unsuccessful foray at the beginning when it tried to talk merger with Sir Alfred McAlpine, and only last week the company dropped its public relations advisers after an embarrassing fracas with the Takeover Panel over leaks. Kvaerner's advisers, SG Warburg, must be reflecting there is no justice in the world.
But it is clear enough why they lost. The 90p a share offer for the preference shares was lower than expected and went down poorly. And the decision to make the bid final and set a foreshortened 21 day timetable - as the rules allow - removed all flexibility for negotiation and left institutions feeling they were being pushed around.
Amec is at the bottom of the engineering and construction cycle and there are two reasons to take it over now: the industrial logic of the merger, as argued in detail by Kvaerner, and the scope for speculative gains by buying a company cheaply just on the turn of the market.
Amec has not excelled itself in recent years, and Sir Alan Cockshaw was in charge then and remains at the helm of the company. There was natural scepticism about whether he could deliver the fruits of the recovery as well as he promised. But the card in his favour was that institutions were looking at an each-way bet that will probably be resolved, one way or another, during 1996.
Kvaerner, which was hinting a few days ago that it would dump its 26 per cent stake if it lost, failed to repeat this threat in its statement last night, after the result came through. The stake will overhang the market, but it will also make a renewed bid - either by Kvaerner in a year's time or another party before then - a distinct possibility. No wonder PDFM, the fund managers with a 14 per cent stake, felt justified in backing the management, for the moment. But this is a reprieve, not a rescue.
Why Fed should ease pressure now
Markets on either side of the Atlantic plunged yesterday on fears that chairman Alan Greenspan and the rest of the Federal Open Market Committee won't cut US interest rates today. But there must be a very good chance that they will. They certainly should.
The latest shenanigans in Washington over the budget clearly prompted the sell-off on Wall Street. With some reason: the US Fed has indicated that a budget deal would be rewarded with a further cut in interest rates following the quarter per cent reduction in early July. So the second partial shutdown of the Federal Government in a matter of weeks was hardly designed to cause a market rally.
But a more compelling view is that the markets had simply run ahead of themselves in the long bull run. Last week, the US long bond dipped below 6 per cent on several occasions during the course of trading. In other words, investors who were willing to lock up funds for 30 years were being paid a yield of a princely quarter of a per cent more than the short-term rate of interest set by the US Fed. Even after yesterday's mayhem, investors in long bonds were only getting half a per cent more for their pains.
The markets have thus clearly been signalling their view that the Fed's policy is too tight. The most recent readings on the state of the economy suggest they are right. They have pointed to a slowing economy and an absence of any inflationary threat.
Jobs growth in the last two months has been modest. Industrial production has been flat since August, bringing the annual rate of increase sharply down to under 2 per cent compared with over 6 per cent at the beginning of the year
The inflationary background is also favourable. Consumer prices were unchanged in November - the first time there has been no monthly increase in four years. The annual rate of inflation fell from 2.8 to 2.6 per cent.
This picture of a slowing economy and a favourable inflation outlook should persuade the Fed to act today despite the latest theatre in Washington over the budget negotiations. If the Fed doesn't ease rates down by a further quarter point, the markets should contain their disappointment: it will then be likely to cut by even more - a half percentage point - in January.
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