2012年1月19日 星期四

Thank You For Smoking: A Way to Safeguard The Young?and State Tax Revenues Through Radio Frequency Identification Tagging of Cigarettes

Introduction: Cigarette Taxes andThe Law of Unintended Consequences

Arbitrage is a simple concept. It can be defined as the practice of taking advantage of a price differential between two or more markets. The same principle of buying an item in a lower priced market and reselling it in a higher priced one applies just a equally in the worlds of high finance with stocks, bonds, options, and currencies as it does in placing sports bets or selling collectibles on eBay.

Arbitrage applies to cigarettes as well. For decades, U.S. cigarette taxes were far lower than those in Canada, leading to a high volume of cigarettes heading Northbound with Canadian travelers. On an individual level, smokers have an incentive to take advantage of the tax disparity by purchasing lower taxed and lower-priced cigarettes in neighboring states. Literally, by driving a few miles or, in many cases, by simply crossing the street, they could save themselves $10 or $20 per carton. However, academic studies have shown that for most smokers, convenience outweighs economics. The fact is that approximately two-thirds of all of all cigarettes sold in the United States are sold by the single pack. For instance, a recent study by researchers from the University of California found that after Californias 50 cent per pack tax increase, fewer than five percent of the states smokers attempted to evade the heightened tax by purchasing their cigarettes online, from nearby state s, or on an Indian reservation (where cigarettes can legally be sold tax-free).

In the U.S., while there is a federal excise tax of 39 cents levied on each pack of cigarettes, the majority of cigarette taxes are imposed at the state level. And in this decade, states have significantly increased their cigarette taxes. In fact, in the past five years alone, the average state cigarette tax has risen from 43.4 cents per pack to $1.02 a pack. In addition, major cities, such as Chicago, New York City, and Anchorage are increasingly adding their own taxes on cigarettes. In fact, the total cigarette taxes in each of these locales exceed $3 per pack! Thus, the disparity in state cigarette taxes is large, ranging from a high of $2.57 per pack in New Jersey to just 7 cents per pack in South Carolina (for reference, Louisiana's cigarette tax stands at 36 cents per pack, making it the seventh lowest of all fifty states). The disparities are especially stark when you consider that in several instances, the cigarette taxes of one state can be often double, triple or m ore than that of its neighboring states. Consider that North Carolinas tax of 35 cents per pack is five times that of neighboring South Carolina, and that New York States tax rate of $1.50 per pack is more than four times that of North Carolinas (and more than twenty times that of South Carolina. The city cigarette taxes even exacerbate these cigarette price disparities, in New York City, the municipal tax of $1.50 per pack doubles the effective tax rate on cigarettes bought there versus in other parts of the state.

These tax increases have been generally popular with the public at least with the non-smoking majority, who see cigarette taxes as a means to provide a stable source of tax revenue, while working to help curb youth smoking by making smoking less affordable. Academic studies have shown that while cigarette tax increases do decrease overall smoking rates slightly, state tax revenues still increase with each tax increase, as the core group of smokers has an almost inelastic demand for the product. Perhaps most importantly, by reducing the smoking rate in society, the tax increases should in the long-term decrease the health care costs attributable to the treatment of smoking-related illnesses and concerns (causing less government spending on health services down the road). Yet, even with todays average price for a pack of cigarettes running at $4.28, health experts have calculated that the total health care and productivity costs attributable to smoking at over ten dollars p er pack!

The Booming Business of Cigarette Smuggling

The price disparity between these markets has not been lost on entrepreneurial types in both the legitimate and illegitimate business world. Online cigarette sales have been a flourishing business, with estimates on Internet sales of cigarettes reaching into the billions. Also, the many Indian tribes in the United States have aggressively promoted tobacco sales on their tribal lands as a major attraction, both in their own right and to promote sales of other items and visits to tribal casinos. While cigarette taxes are set by the individual states, the interstate transport and sale of cigarettes is governed by a 1949 federal law known as the Jenkins Act . This statute prohibits the sale or transfer of cigarettes across state lines unless the proper taxes are paid in the receiving state. Thus, trafficking of cigarettes across state lines makes the products contraband, and in most instances, Internet retail outlets and Indian tribal sellers are not paying the proper taxes. Thi s means what are legal sales can become illegal when state lines are crossed. It also means that states lose tremendous amounts of tax revenue, estimated to be upwards of one and a half billion or more dollars annually in a recent report from the federal Government Accountability Office (GAO).

The arbitrage window is also open for smugglers as well, with both small time and large scale operators to take advantage of the price disparities between state jurisdictions. From the perspective of John D'Angelo of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATFE), There is no doubt that there's a direct relationship between the increase in a state's tax to an increase in illegal trafficking. Indeed, there have been an increasing number of cases of cigarette smuggling (officially called cigarette diversion) in the United States since the rapid rise of tobacco taxes, beginning in 2000. There is also an increasing sophistication in these trafficking operations, with the increasing involvement of both organized crime elements and terrorist organizations in these black market operations. As the Irish Republican Army has been involved with cigarette smuggling in Europe for decades, in the past few years, cases have been uncovered in the U.S. mainland involving know n international terrorist groups, including Hamas, Hezbollah, Islamic Jihad, PKK (the Kurdish Workers Party), and Al Qaeda. Now, the U.S. faces the very real prospect that not only are we facing not only a tax problem, but an increasing threat from terrorism, funded significantly by a growing black market trade in cigarettes coming to our shores.

Indeed, what is occurring in the U.S. is the long reach of a global epidemic of cigarette smuggling. To a lesser extent, the U.S. is also seeing the tax burden on cigarettes sparking growth in the illegal importation of counterfeit cigarette products from China and a variety of other countries around the world . In fact, according to the most recent data available, the U.S. Customs and Border Protection seized approximately $25 million worth of counterfeit imported cigarettes in 2003, which represents almost one-fifth of all imported commodities seized for violations of intellectual property rights. According to the World Health Organization (WHO), more than a quarter of all cigarettes are smuggled, and the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives has found that Russian, Armenian, Ukrainian, Chinese, Taiwanese, and Middle Eastern (mainly Pakistani, Lebanese, and Syrian) organized crime groups are highly involved in the trafficking of contraband and counterfe it cigarettes. Finally, sales of cigarettes through the black market work around the prohibitions against the sale of tobacco products to minors (under 18 or even up to 21 in some states). Thus, the World Health Organization has taken the position that the burgeoning sale of contraband cigarettes serves to significantly counteract the efforts to curb youth smoking.

Using RFID Technology to Combat Organized Cigarette Smuggling (and You, Yes You, Buying Your Smokes at the Indian Casino!)

RFID is a new, old technology using radio wave technology to identify objects as opposed to manual or bar-code based optical scanning. It is being utilized in a wide variety of industries today, everywhere from retail to pharmaceuticals to animal science to aerospace, as the cost of the technology is making it practical for routine use. In contrast, todays cigarette tax technology dates back to the early 1950s, with tax stamps on packs of cigarettes being mandated by the Jenkins Act. These have proven easily counterfeited and subject to fraud on a massive scale. Indeed, there is a rampant black market just in the sale of counterfeit and stolen tax stamps themselves. California is the only state thus far to use a new generation of machine readable tax stamps, incorporating encryption technology that gives law enforcement the ability to scan stocks of cigarettes to verify that the proper taxes have been paid. With these new, high tech tax stamps, California has seen a signif icant rise in cigarette tax revenue well in excess of $100 million in the past two years since the new requirements went into effect. And with all states struggling with declining tax revenues due to the current economic situation, recapturing tax revenues will be an especially important subject for legislators and tax enforcement agencies over the next few years.

In mid-February 2007, then Sen. Ted Kennedy (D-Massachusetts) and Rep. Henry Waxman (D-California) introduced The Family Smoking Prevention and Tobacco Control Act (S.625 in the Senate and H.R. 1108 in the House). Their bills would for the first time grant the U.S. Food and Drug Administration (FDA) the power to regulate the manufacture, sale and advertisement of most tobacco products, including cigarettes and smokeless tobacco. The bill specifically authorizes the use of special codes or devices on tobacco product labels for the purpose of tracking or tracing the tobacco product through the distribution system. While the proposed legislation do not now specifically call for an RFID mandate, industry and political analysts believe that this could be the case when the bills reach their final form, or, when passed in the implementing regulations. According to a recent RFID Journal analysis, Congress, while not naming RFID specifically, could become the first legislative cat alysts for the technology's use in government regulation.

A Wall Street Journal editorial dubbed the proposed legislation The Marlboro Preservation Act, as the bill through advertising restrictions and other barriers to entry would help to protect the market dominance of the major tobacco companies, making it harder and most costly for smaller manufacturers to compete. In fact, tobacco industry analysts from Morgan Stanley and Citigroup believe that the legislation would work in favor of the incumbent, large tobacco companies. This is because the increased regulatory burden and advertising limitations would limit the ability of smaller competitors to make inroads into the cigarette market, while also serving to narrow the price gap between premium and low-cost brands.

The U.S. would not be alone in looking to RFID in regulating the cigarette supply chain to specifically combat the trafficking of contraband products. The United Kingdom also has a sizeable problem with contraband cigarettes entering the British market. In fact, according to the Tobacco Manufacturers' Association (TMA), an estimated two billon counterfeit cigarettes well over a quarter of all cigarettes sold annually - are smuggled into the UK. This translates into a loss of approximately 3.5 billion in lost tax revenue for the British government from contraband cigarettes. To counteract this problem, HM Revenue & Customs (HMRC) announced in March that within six months, the British government would begin requiring the use of a covert security mark on all cigarette packets. Again, while not specifically naming RFID as the technology that would be utilized for the covert marking, analysts anticipate this to be the case, as the ministry desires to enable customs officials to be able to use small hand-held readers to verify the authenticity of cigarettes and that crown taxes had been properly paid.

Indeed, the WHO has recommended that countries take several steps to curb cigarette smuggling, from raising criminal penalties and licensing all parties involved in the cigarette trade who handle the product as it moves from the manufacturer through the distribution channels to the ultimate consumer. The WHO has also posited the value of having each pack of cigarettes given a serialized identification code, enabling track and trace capabilities to not only assure product authentication and provide a pedigree trail, but to ensure tax compliance as well. Again, while not suggesting an RFID-based solution specifically, it would appear that RFID would be the only technology capable of providing this level of security to the tobacco supply chain.

Analysis

Will we see wide-scale tagging of cigarettes using RFID in the near future? Noted RFID analyst, Dr. Peter Harrop, Chairman of IDTechEx Ltd., cautions that with the cost of RFID tags (presently at least a quarter per unit): No one in their right mind would put a conventional RFID chip in a cigarette packet. Yet, as tag prices fall and new chipless forms of RFID emerge, the prospect of tagging individual packs of cigarettes will become more practicable. Still, the major tobacco companies may come to see RFID tagging at the pack level as enhancing their competitiveness, both in fighting the damage to their brand from counterfeit cigarettes and in putting more costs on their smaller rivals. Thus, there is likely to be an unusual degree of industry-government cooperation to foster RFID tagging of cigarettes, due to the alignment of their mutual interest to protect the legal cigarette trade. We may also see more government action in this area along the lines of the recent British government announcement and the bill before the U.S. Congress, which stands a good chance of passage this year.

Yet, the question remains as to whether labeling can be made practical from a cost perspective? The answer lies in the level of tagging. Certainly, cigarettes qualify as one of the best candidate products for tagging, due to the ratio of the cost of the tag to the value of the item in question which is right up there with high cost items such as pharmaceuticals, electronics, and liquor. The unusual situation with cigarettes is that the key level of tagging might not be at either the individual item level (the pack) or the case level. Rather, cartons of cigarettes a packaging level unique to the tobacco trade - presents a compelling business case. A carton of cigarettes is an industry standard, containing 200 cigarettes (20 cigarettes in a pack, 10 packs to a carton). By tagging cartons of cigarettes, in addition to tagging the cases and pallets that contain them, the cigarette industry and governments could significantly cut the ability of individuals and outlets to trade in contraband cigarettes. In the process, they would effectively create the largest RFID mandate and with it, new demand for RFID tags and labels into the billions of tags - that would perhaps go a long way toward promoting the market growth that would drive unit tag prices significantly downward.

Finally, as we have seen in the U.S., there is that perfect storm developing where the interest of all parties is converging to work towards both national, and perhaps even multinational, solutions. While smoking rates are declining in the U.S., it is important to note that both legal and illicit cigarette sales are a burgeoning market globally. According to the most recent analysis from the World Health Organization, there are well over a billion smokers worldwide more than one-sixth of the global population consuming the approximately 5.5 trillion cigarettes produced annually by the tobacco industry. Thus, when talking about RFID and cigarettes, there is no blowing smoke theres surely a growth opportunity here for innovative companies ready for an innovative, effective RFID-based solution for the tobacco industry.

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David C. Wyld () is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator.


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2012年1月18日 星期三

Boston, Chicago And Washington DC City Make Vacations In Cool Locations

Cities of the United State are attractive and well to spend vacations with more adventure. USA destination cities are well organized with peace. Three most visited cities are Boston, Chicago and Washington DC. Boston city well address of attractiveness. Other city named Chicago visitors like to also spend vacations in this one. Last but not least Washing DC in District Columbia State is the attractions point to the visitors to visit in the city. These cities has well adventure places like museums, beaches, shopping places and more visitor aspect in his dream places.

Boston

Boston city is the attractive city on its self. City so wealthy and influential that makes visitors to visit it again with more excited mood. It is situated in the Massachusetts in United State of America. Boston is capital of the Massachusetts State. Logan International Airport is famous airport and way to visit in it. And airlines services are available there. Other opti onal airports like Manchester-Boston Regional Airport and T.F. Green Airport. From airport car rentals, taxi, buses and other visiting sources also available. In city every facilities are like walking, driving, public transport, biking, sub ways exist as per choice you like it. More places to visit like museums Boston Children's Museum, Museum of Fine Arts, Harvard Art Museum, Isabella Stewart Gardner Museum, Museum of Science, New England Aquarium, Mapparium and many more. They contain not only attractions but also introduce history, knowledge, and adventure. And recreational places are Arnold Arboretum, Boston Harbor Islands State Park, Newbury Street Boston, Common and Public Garden, Freedom Trail, Theater District places have activities like shopping, wild animal watching, and great architecture of building generally seen. Fenway Park, Gillette Stadium and TD Banknorth Garden are also entertaining places, Stadiums for watching sports and more entertainment. The Cambridge side Galleria, Copley Place and Prudential Center, Downtown crossing like that places provide shopping facilities. Legal Sea Foods and Bull & Finch Pub are famous places o get delicious food facilities and other taste of other foods. Cheap lodging amenities like in hotels, inns are with best suited features. Night life makes life in of vacations and gets refreshment from day tiredness. Boston comes out the dream city for visitors.

Chicago

Chicago city is famous and more adventurous places in United State of Illinois. The cities with many attractions are like sky touching great architecture building beaches, shopping malls and others. O'Hare International Airport and Midway Airport are way to reach this city. Transport facilities are so nice from airport are so nice in the metropolitan city. There are many options like walking subway, biking, car rentals, trains, buses are also available. In Chicago city attractive places like Museum Campus, Adler Planetarium, Field Museum of Natural History, Museum of Science and Industry and many more to get adventure activities and other shopping , and knowledge about places and much more. Beach places like Oak Street Beach, North Avenue Beach and many more near to parks. More adventure activities like swimming, fishing, kayaking to put entertainment in holidays. Parks Grant Park, Millennium Park, Midway Park and much more get and see cool weather. Taste of Chicago, Gospel Fest, Lollapalooza and Jazz Fest that everyone gets enjoyed of adventure activities are happened there. Eating places that with delicious taste and sea foods. Cheap lodging amenities are like inns and hotels with best suit. Night life is so entertaining and full of adventure. Visitors visit this place and get adventure activities experience.

Washington DC

Washington DC City is in United State of District. Places in the city are so fabulous and visitors want to spend their vacations with peace. In city many beautiful attractions well great architecture building. Ronald Reagan Washington National Airport, Washington Dulles International Airport and Baltimore-Washington International Thurgood Marshall Airport are well known places. Transport facilities are so nice and easily get buses, trains, rental cars and taxi etc. in city most recognized plac es for which visitors really see to visit White House, US Capitol Building, Washington Monument, Lincoln Memorial and Reflecting Pool, Vietnam War Memorial, Jefferson Memorial, Air and Space Museum and many more. Washington Zoo is also interesting places and watch wild animal to take entertainment of that sight. In parks more adventurous activities are take place like hiking, biking and more crowed are there. Apart that other sport likes footballs, kickball, baseball and more. Festivals like National Kite Festival, National Cherry Blossom Festival, A Capitol Fourth, Political Protests and Screen on the Green are show culture of that place. Eating places Penn Quarter, Georgetown Little Ethiopia like places to get more to get food taste and other tasty and delicious foods. And more cheap lodging amenities like hotels and inns with more suitable attractions. Night lives are full of adventure and more crowds. Washington DC is such city to get more adventure and dream city for visitors.


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2012年1月17日 星期二

Airport Transportation services

Boston airport transportation services are enjoying a lot of popularity these days due to the unparalleled comfort and convenience that they promise to their clients. Rather than waiting endlessly for the taxi or bargaining with the taxi drivers at the airport for better rates, you can now book your Logan Limo, SUV, minivan, or any other car of your choice in advance to enjoy excellent and affordable Boston car service to reach your destination in comfort and of course, style.

However, the large number of companies offering Boston airport transportation services does not mean that all offer same level of services. There are some that are good and others that are not so good. So, if you wish to enjoy the best Boston car hire services, you must keep the following points in mind.

When selecting the Boston car transportation company, find out its reputation. Make sure that the company you choose for Limo hire or any other car hire is known for providing q uality services. It must have a list of satisfied clientele who keep coming back to them every time when they are in need of airport transportation services. You may visit online forums to find reviews about a particular car service company. Asking friends and family can also help you find reliable car service providers in Boston.
Next, you must get as much detail about the Boston airport transportation company as possible. Find out the fleet that the company owns, the areas that are covered by the company, the procedure for making bookings and the method for making changes in the reservation, and what in case you don't find the Logon Limo or any other car that you booked, on reaching the airport. How would you contact the driver in that case and how much time would they take to reach you? Also, what would be the course of action in case you don't get the Boston car service as promised by the company at the time of bookings? Know all these things before making your bookings to avoid any disappointments or heartaches later on.

Do read the terms and conditions carefully before making any payments for the Boston airport transportation services. Find out how much the Boston car service provider would charge for waiting time, for stopping at local shops en-route, cancellation fee, and no-sh ow-up fee. Is there any surcharge on all trips made on holidays like New Year's Eve, Christmas, Thanksgiving, Memorial day, and others? Who would be bearing the out-of-pocket expenses like tolls, parking, and airport fee?

Request the Boston Car Transportation company to provide all the important details to you in advance regarding the cost of Boston car service so that you can take a well-informed decision to avoid last-minute confusions and disagreements.

For professional, highly courteous, reliable, and affordable Boston Airport Transportation services, you may visit www.cambridgecar.com


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2012年1月16日 星期一

The History Of Long Island Macarthur Airport

Introduction

Long Island MacArthur Airport, located on 1,310 acres in Suffolk County, is the region's only commercial service facility which has, for most of its existence, struggled with identity and purpose.

Its second--and oval-shaped--50,000 square-foot passenger terminal, opened in 1966 and sporting two opposing, ramp-accessing gates, had exuded a small, hometown atmosphereso much so, in fact, that scenes from the original Out-of-Towners movie had been filmed in it.

Its subsequent expansion, resulting in a one thousand percent increase in passenger terminal area and some two million annual passengers, had been sporadic and cyclic, characterized by new airline establishment which had always sparked a sequence of passenger attraction, new nonstop route implementation, and additional carriers, before declining conditions had initiated a reverse trend. During cycle peaks, check-in, gate, and ramp space had been at a premium, while during troughs, a pin drop could be heard on the terminal floor.

Its Catch-22 struggle had always entailed the circular argument of carriers reluctant to provide service to the airport because of a lack of passengers and passengers reluctant to use the airport because of a lack of service.

This, in essence, is the force which shaped its seven-decade history. And this, in essence, is Long Island MacArthur Airport's story.

1. Origins

The 1938 Civil Aeronautics Act, under Section 303, authorized federal fund expenditure for landing areas provided the administrator could certify "that such landing areas were reasonably necessary for use in air commerce or in the interests of national defense."

At the outbreak of World War II, Congress appropriated $40 million for the Development of Landing Areas for National Defense or "DLAND," of which the Development Civil Landing Areas (DCLA) had been an extension. Because civil aviation had been initially perceived as an "appendage" of military aviation, it had been considered a "segment" of the national defense system, thus garnering direct federal government civil airport support. Local governments provided land and subsequently maintained and operated the airports. Construction of 200 such airfields began in 1941.

Long Island regional airport, located in Islip, had been one of them. On September 16 of that year, the Town of Islip--the intended owner and operator of the initially named Islip Airport--sponsored the project under an official resolution designated Public Law 78-216, providing the land, while the federal government agreed to plan and build the actual airport. The one-year, $1.5 million construction project, initiated in 1942, resulted in an airfield with three 5,000-foot runways and three ancillary taxiways. Although it had fulfilled its original military purpose, it had always been intended for public utilization.

Despite increased instrument-based flight training after installation of instrument landing system (ILS) equipment in 1947, the regional facility failed to fulfill projected expectations of becoming New York's major airport after the recent construction of Idlewild. Losing Lockheed as a major tenant in 1950, the since-renamed MacArthur Airport, in honor of General Douglas MacArthur, would embark on a long development path before that would occur.

2. Initial Service

A 5,000-square-foot passenger terminal and restaurant, funded by the federal government, had been constructed in 1949. Infrastructurally equipped, the airport, surrounded by local community growth, sought its first public air service by petitioning the Civil Aeronautics Board. Islip had attempted to attract scheduled airline service as far back as 1956, and this ultimately took the form of Gateway Airlines three years later when it had commenced operations, on an air taxi level, with a fleet of 11-passenger de Havilland Doves and 15-passenger de Havilland Herons to Boston, Newark, and Washington. Inadequate financing, however, had led to its premature termination only eight months later.

The airport, which only had 20 based aircraft at this time, annually fielded some 30,000 movements. Allegheny Airlines subsequently received full scheduled passenger service route authority from the CAB in 1960 and inaugurated four daily Convair- and Martinliner round-trips to Boston, Philadelphia, and Washington in September, carrying more than 19,000 passengers in 1961, its first full year of operations.

Two years later, the FAA opened a New York Air Route Traffic Control Center and a seven-floor control tower, and in 1966, a $1.3 million, 50,000 square-foot oval terminal replaced the original rectangular facility.

Mohawk, granted the second CAB route authority that year, inaugurated Fairchild FH-227 service to Albany, and the two scheduled airlines carried some 110,000 passengers from the since renamed Islip MacArthur Airport by 1969. The 210 based aircraft recorded 240,000 yearly movements.

The runways and taxiways were progressively expanded, partly in response to Eastern and Pan Am's designation of the airport as an "alternate" on their flight plans.

3. First Major Carrier Service

Long envisioned as a reliever airport to JFK and La Guardia, which would provide limited, but important nonstop service to key US cities and hubs, such as Boston, Philadelphia, Washington, Atlanta, Pittsburgh, Chicago, and the major Florida destinations, the Long Island airport urgently needed additional, major-airline service, but this goal remained elusive.

The cycle, however, had been broken on April 26, 1971, when American Airlines had inaugurated 727-100 "Astrojet" service to Chicago-O'Hare, Islip's first pure-jet and first "trunk" carrier operation, permitting same-day, round-trip business travel and eliminating the otherwise required La Guardia commute. Because of American's major-carrier prestige, it had attracted both attention and passengers, indicating that Islip had attained "large airport" status, and the Chicago route, now the longest nonstop one from the air field, had provided a vital lifeline to a primary, Midwestern city and to American's route system, offering numerous flight connections.

The route had been quickly followed in the summer with the inauguration of Allegheny DC-9-30 service to Providence and Washington, while Altair had launched Beech B99 and Nord N.262 turboprop flights to Bridgeport and Philadelphia two years later.

American, Allegheny (which had intermittently merged with Mohawk in 1972), and Altair provided the established Long Island air connection during the 1970s.

In order to reflect its regional location, the facility had, for the fourth time, been renamed, adopting the title of Long Island MacArthur Airport in 1978.

During most of the 1970s, it handled an average of 225,000 annual passengers. Allegheny, the premier operator, had offered nine daily pure-jet BAC-111 and DC-9-30 departures during 1978.

By March of 1982, USAir, the rebranded Allegheny Airlines, had been its only remaining pure-jet carrier with daily DC-9-30 service to Albany and BAC-111-200 service to Washington-National--perhaps emphasizing its ability to profitably operate from small-community airfields with its properly-sized twin-jet equipment.

The early 1980s were characterized by commuter-regional carrier dominance, with operations provided by Pilgrim, New Haven Airlines, Altair, Air North, Mall Airways, and Ransome. The latter, first flying as part of the Allegheny Commuter consortium, later operated independently under its own name in affiliation with Delta Air Lines, offering some 17 daily M-298 and DHC-7 departures to seven regional cities.

Aside from Ransome, it had often appeared as if the airport's regional airline floodgates had been gappingly opened: Suburban/Allegheny Commuter, Southern Jersey/Allegheny Commuter, Empire, and Henson-The Piedmont Regional Airline had all descended on its runways. Precision, which had inaugurated multiple-daily Dornier Do-228-200 services to both Boston and Philadelphia, operated independently, as Precision-Eastern Express, and as Precision-Northwest Airlink, and had been the only airline to simultaneously offer scheduled service from neighboring Republic Airport in Farmingdale, primarily a general aviation field.

4. Northeastern International Airlines

Market studies had long indicated the need for nonstop Long Island-Florida service because of its concentration of tourist attractions and to facilitate visits between Long Island children and Florida-relocated retiree parents. Deregulation, the very force behind multiple-airline creation, divergent service and fare concepts, and the relative ease of new market entry, had spawned Northeastern International, which was founded to provide high-density, low-fare, limited-amenity service, and fulfilled the idealized nonstop, Long Island-Florida connection when it had inaugurated operations on February 11, 1982 with a former Evergreen International DC-8-50, initially offering four weekly round-trips to Fort Lauderdale and one to Orlando. After a second aircraft had been acquired, it had been able to record a 150,000-passenger total during its first year of service, with 32,075 having been boarded in December alone.

Although its corporate headquarters had been located in Fort Lauderdale, its operational base had been established at Long Island MacArthur and it ultimately served Fort Lauderdale, Hartford, Miami, Orlando, and St. Petersburgh with the two DC-8s and two former Pan Am 727-100s with seven daily departures. Incorporating both the charter carrier strategy of operating high-density, single-class, low-fare service, and the major airline strategy of flying large-capacity aircraft, it actually served a very competitive routethat of New York-to-Floridawithout incurring any competition at all by operating directly from Islip.

By 1984, with Northeastern having served as a catalyst to carrier and route inaugurations, eleven airlines had served the airport, inclusive of Allegheny Commuter, American, Eastern, Empire, Henson, NewAir, Northeastern, Pilgrim, Ransome, United, and USAir, relieving JFK and La Guardia of air traffic, directly serving the Long Island market, and fulfilling the airport's originally envisioned role of becoming New York's secondary commercial facility. Simultaneously providing nonstop service to Chicago-O'Hare from Islip, American and United both competed for the same passenger base.

By 1986, Long Island MacArthur had, for the first time in its 36-year scheduled history, handled one million passengers in a single year, a level since equaled or exceeded.

To cater to the explosive demand and ease its now-overstrained passenger facilities, the Town of Islip embarked on a progressive terminal facility improvement program which had initially encompassed the addition of two commuter aircraft gates, the enclosure of the former curbside front awning, and two glass-enclosed wingsthe west for the now-covered baggage carousel and the east for the three relocated rental-car counters and the Austin Travel agency. The internal roadway had been realigned and additional parking spaces had been created.

A more ambitious terminal expansion program, occurring in 1990 and costing $3.2 million, resulted in two jetbridge-lined concourses which extended from the rear portion of the oval terminal, adding 22,700 square feet of space. Runway 6-24's 1,000-foot extension, to 7,000 feet, had ultimately been completed three years later after a decade of primarily local resident resistance due to believed noise increases.

By the end of 1990, the transformation of Long Island MacArthur Airport from a small, hometown airfield served by a couple of operators to a major facility served by most of the major carriers had been complete.

Several conclusions could already be drawn from the airport's hitherto 30-year scheduled history.

1. Allegheny-USAir, along with its regional subsidiaries Allegheny Commuter and USAir Express, had provided the initial spark which had led to the present growth explosion and had been the only consistent, anchor carrier during its three-decade, scheduled service history, between 1960 and 1990. During this time it had absorbed other Islip operators, inclusive of the original Mohawk and Piedmont, the latter of which had intermittently absorbed Empire and Henson, and had shed still others, such as Ransome Airlines, which, as an independent carrier, had almost established a regional, turboprop hub at MacArthur.

2. Three carriers had been tantamount to its three-decade evolution: (1). Allegheny-USAir, which had reserved the distinction of being Long Island MacArthur's first, largest, and, for a period, only pure-jet operator; American, which had changed its image by associating it with large, trunk-carrier prestige; and Northeastern, whose bold, innovative service inauguration and low fares had been directly responsible for the latest, unceasing growth cycle.

3. Many airlines, unaware of the facility's traffic potential, never permanently abandoned the air field, including American and Eastern, which had both suspended operations, but subsequently returned; Northeastern, which had returned after two bankruptcies; United, which had discontinued its own service, yet maintained a presence through two separate regional airline affiliationsPresidential-United Express and Atlantic Coast-United Expressthus continuing to link its Washington-Dulles hub; Continental, which had returned through its own commuter agreement; and Pilgrim, which, despite service discontinuation, had maintained an autonomous check-in counter where it had handled other carriers until it itself had reinstated service.

4. Of the approximately 30 airlines which had served Long Island MacArthur, many had indirectly retained a presence either through name-change, other-carrier absorption, or regional-airline two-letter code-share agreements.

5. The Northeastern-forged air link between Long Island and Florida had, despite its own final bankruptcy, never been lost, with other carriers always filling the void, including Eastern, Carnival, Braniff, Delta Express, and Spirit Airlines.

Because of its market fragility, however, the Long Island regional airport was far more vulnerable to economic cycles than the primary New York airports had been, recessed conditions often resulting in the exodus of carriers in search of more profitable routes. In 1994, for example, three airlines discontinued service and one ceased operating altogether.

A $13.2 million expansion program of the 32-year old, multiply-renovated oval terminal, funded by passenger facility charge (PFC)-generated revenue, had been initiated in the spring of 1998 and completed in August of the following year, resulting in a 62,000-square-foot area increase. The enlarged, reconfigured structure included the addition of two wings--the west with four baggage carousels, three rental car counters, and several airline baggage service offices, and the east with 48 (as opposed to the previous 20) passenger check-in positions. The original, oval-shaped structure now housed an enlarged newsstand and gift shop and the relocated central security checkpoint, but retained the departures level snack bar, the upper level Skyway Caf and cocktail lounge, and the twin, jetbridge-provisioned concourses added during the 1990 expansion phase, while the aircraft parking ramp had been progressively increased until the last blade of grass had been transformed into concr ete. A realigned entrance road, an extension of the existing short-term parking lot, 1,000 additional parking spaces, and a quasi-parking lot system subdivided into employee, resident, hourly, daily, and economy (long-term) sections had completed the renovation. Shuttle bus service between the parking lot and the terminal was provided for the first time.

5. Southwest Airlines

An effort to attract Southwest Airlines had begun in late-1996 when the rapidly-expanding, highly profitable, low-fare carrier had contemplated service to a third northeast city after Manchester and Providence, inclusive of Newburgh's Stewart International and White Plains' Westchester County in New York; Hartford and New Haven in Connecticut; and Teterboro and Trenton's Mercer County in New Jersey. All had been smaller, secondary airports characteristic of its route system. It had even briefly explored service to Farmingdale's Republic Airport on Long Island and Teterboro in New Jersey, both of which had been noncommercial, general aviation fields with business jet concentrations. Three had offered terminal improvements in exchange for the service. But Long Island MacArthur was ultimately selected because of the 1.6 million residents living within a 20-mile radius of the airport, local business health, and, according to Southwest Chief Executive Officer, Herb Kelleher, "u nderserved, overpriced air service" which was "ripe for competition."

Following initial Southwest interest in 1997, then-Town of Islip Supervisor Peter McGowan and other officials flew to Dallas, where Herb Kelleher stated the need for the previously described terminal and parking facility expansions before operations could begin. The meeting had ended with nothing more than a symbolic handshake.

The nearly two-year effort to entice the airline had culminated in the December 1998 announcement of Southwest's intended March 14, 1999 service launch with 12 daily 737 departures, including eight to Baltimore, two to Chicago-Midway, one to Nashville, and one to Tampa, all of which would provide through- or connecting-service to 29 other Southwest-served cities. Although the low-fare flights had been expected to attract some passengers who may otherwise have flown from JFK or La Guardia Airports, they had been primarily targeted at the Long Island market and, as a byproduct, had been expected to attract an increased airport traffic base, additional carriers, and generate an estimated $500,000 per year for the Town of Islip. Two Southwest-dedicated gates could accommodate up to 20 daily departuresor eight more than the inaugural flight schedule includedbefore additional facilities would have to be obtained. The Islip station, staffed by 44, represented its 53rd destination in 27 states.

Southwest had provided the fourth spark in Long Island MacArthur Airport's airline- and passenger-attraction cycle, traced as follows:

1. The original air taxi Gateway Airlines service of 1959 and the initial scheduled Allegheny Airlines service of 1960.

2. The first trunk-carrier, pure-jet American Airlines flights of 1971.

3. The first low-fare, nonstop Northeastern International Florida service of 1982.

4. The first low-fare, high frequency, major-carrier Southwest service of 1999.

American, the last of the original, major carriers to vacate the airport, left it with three predominant types of airlines as the millennium had approached:

1. The turboprop commuter airline serving the nonhub destinations, such as Albany, Boston, Buffalo, Hartford, and Newburgh.

2. The regional jet operator feeding its major-carrier affiliate at one of its hubs, such as ASA feeding Delta in Atlanta, Comair connecting with Delta in Cincinnati, and Continental Express integrating its flight schedule with Continental in Cleveland.

3. The low-fare, high-density, no-frills carrier operating the leisure-oriented sectors to Florida. As of December 1, 1999, three airlines, inclusive of Delta Express, Southwest, and Spirit, had operated 15 daily departures to five Florida destinations.

Long Island MacArthur's expansion and passenger facility improvements, Southwest's service inauguration, and the attraction of other carriers had collectively resulted in a 113% increase in passenger boardings in 1999 compared to the year-earlier period. The figure, which had been only shy of the two million mark, had been the highest in the Long Island airport's four-decade commercial history. Southwest had carried 34% of this total.

Eleven airlines had provided service during this time: ASA Atlantic Southeast, American, Business Express, Comair, CommutAir/US Airways Express, Continental Express, Delta Express, Piedmont/US Airways Express, Shuttle America, Spirit, and Southwest itself.

Less than two weeks after Southwest had secured a third gate and increased its daily departures to 22, it announced, in a unprecedented move, its intention to self-finance 90-percent of a $42 million expansion of the East Concourse in order to construct four additional, dedicated gates and overnight parking positions by the end of 2001, thus increasing the airport's current 19-gate total to 23.

The concourse extension, intended to provide it with both increased employee and passenger room, would free up its existing three gates for other-carrier utilization while its new four-gate facility would permit a service increase to some 30 daily flights based upon future passenger demand, aircraft availability, and Town of Islip-approved departure increases.

The expansion would mark the seventh such development of the original terminal, as follows:

1. The original oval terminal construction.

2. The partially enclosed arrivals baggage belt installation.

3. The construction of two commuter gates.

4. The enclosure of the front awning, which entailed the relocation of the rental car companies and the Austin Travel agency, and the installation of an enlarged, fully enclosed baggage belt.

5. The construction of the jetbridge-equipped east and west concourses.

6. The construction of the West Arrivals Wing and the East Departures Wing, the gift shop expansion, and the central security checkpoint relocation.

7. The Southwest-financed, quad-gate addition, increasing the number of departure gates from 19 to 23.

Victim, like all airports, to post-September 11 traffic declines, Long Island MacArthur Airport lost eight daily departures operated by American Eagle, Delta Express, and US Airways Express, although the airport's October 2001 passenger figures had only been six percent below those of the year-earlier period. No nonstop destinations had, however, been severed. With Delta Express's daily 737-200 Florida flight frequency having been progressively reduced from an all-time high of seven to just one--to Fort Lauderdale--its operations could be divided into three categories:

1. Turboprop regional

2. Pure-jet regional

3. Southwest

Nevertheless, in the four years since Southwest had inaugurated service, the airport had handled 8,220,790 passengers, or an annual average of two million. Without Southwest, it would, at best, have handled only half that amount.

On April 30, 2003, for the second time in a five-year period, Long Island MacArthur Airport broke ground on new terminal facilities. Designed by the Baldassano Architectural Group, the Long Island architectural firm which had completed the $13.2 million airport expansion and modernization program in 1999, the new, 154,000-square-foot, four-gate addition was constructed on the north side of the existing east concourse which had housed Southwest's operations. Citing increased space and potential growth as reasons for the new facility, Southwest claimed that the existing three gates, which had fielded a combined 24 daily departures, had reached their saturation point and that additional "breathing room" for both passengers and employees had been needed, particularly during flight delays. The net gain of an additional gate, which would be coupled with larger lounges, would eventually facilitate eight additional flights to new or existing US destinations, based upon market dema nd.

The project, initially pegged at $42 million, but later increased to $62 million, was financed by Southwest, which sought government reimbursement with the Town of Islip for up to $18 million for the non-airline specific construction aspects, such as airfield drainage, which was considered a common-use utility.

The 114,254-square-foot, Southwest-funded and -named Peter J. McGowan Concourse officially opened at the end of November 2004. Accessed by a new awning-protected entrance from the airport's terminal-fronted curbside, the new wing, connected to the existing passenger check-in area, curved to the left past the flight arrival and departure television monitors to the new, large security checkpoint from where passengers ascended, via two escalators, to the upper level departures area.

Concurrent with the opening had been the announcement that Southwest would now proceed with Phase II of its expansion by building a second, $20 million addition which would connect the new concourse with the old, altogether replacing the east concourse which had served it since it had inaugurated service in 1999. The project incorporated four more gates, for a total of eight, enabling up to 80 daily departures to be offered.

6. New Leadership, Service Reductions, and Infrastructure Improvements

The end of the 2000-decade, characterized by new leadership, airline service reductions, and infrastructure investments, once again signaled a reversal in Long Island MacArthur Airport's growth cycle.

Al Werner, who had grown up in nearby Bayport, served in the Air Force, and become an air traffic controller in the MacArthur tower in 1951, retired on November 16, 2007 as Airport Commissioner after 53 years, passing the torch to Teresa Rizzuto. Accepted after a three-month, nationwide search conducted by Islip Supervisor Phil Nolan, she brought considerable airline industry experience with her, having commenced her aviation career as a United Airlines Ramp Service Agent at JFK in 1992. Promoted, six years later, to United's Terminal Manager at Newark Liberty International Airport, she had fielded 36 daily United flights, along with those of six other carriers, which had resulted in a five million annual passenger throughput and for which she had been given a $30 million budget, while still later she had been in charge of 1,600 employees as a United Hub Manager at Washington-Dulles International Airport. Comparatively, Islip offered 36 daily flights, which carried some tw o million yearly passengers, with an associated $8.9 million budget.

Appointed Long Island MacArthur Airport Commissioner on February 5, 2008 after an Islip Town Board vote, she was entrusted with heralding the regional facility into the next decade whose multi-faceted agenda necessarily included the following goals:

1. Devise a marketing plan to increase airport recognition, thereby attracting a larger passenger base.

2. Establish new, nonstop routes of existing carriers and attract new airlines able to compete with existing, lost-cost Southwest, to provide the required core service for this enlarged passenger base, yet avoid alienating local residents because of excessive noise.

3. Invest in infrastructure modernization and development, particularly on the airport's general aviation west side.

4. Increase revenues for the Town of Islip, the airport's owner and operator.

Long Island MacArthur's very existence relied upon its ability to serve its customers' needs, and both destination and airline reductions during the latter part of the decade, coupled with flickering, but quickly extinguished glimmers of new-carrier hope, only obviated its purpose.

Exploratory talks in 2007, with Southwest-modeled, Ireland based-Ryanair, for instance, would have resulted in both the airport's first international and first transatlantic service, hitherto precluded by the absence of customs and immigration facilities, few connecting possibilities, and inadequate runway length on which heavy, fuel-laden widebody aircraft could take off for intercontinental sectors. But higher thrust engines facilitating shorter-field performance had remedied the latter problem, and pre-departure US clearance would have been performed in Ireland. Because Southwest and Ryanair maintained the same business models of operating single-type, 737 fleets from underserved, overpriced, secondary airports whose lower operating costs could be channeled into lower fares, domestic-international traffic feed between the two had been feasible. Despite existing Islip service provided by Delta and US Airways Express, Southwest still carried 92 percent of its passengers. However, the proposed strategy had yet to produce any concrete results.

Indeed, by the end of the year, the number of potential Southwest connecting flights only declined when decreased demand had necessitated the cancellation of six daily departures, including two to Baltimore, three to Chicago, and one to Las Vegas.

Potential service loss counterbalancing occurred on May 1 of the following year, however, when Spirit Airlines, after an eight-year interval, reinaugurated twice daily, round-trip, A-319 service to Ft. Lauderdale, with $7.00 introductory fares, facilitating 23 Caribbean and Latin American connections through its south Florida hub. The service, reinstated because of Islip's ease of access and uncongested operating environment, was prompted by a 50-percent landing fee reduction during its first year of operations, and had the potential to generate $300,000 in airport revenues from parking fees, car rentals, and concessions. It became the second carrier, after Southwest, to serve Ft. Lauderdale, the latter with three daily departures.

The A-319, the airport's first, regularly scheduled airbus operation, touched down at 0954 on Runway 6 on its inaugural flight, taxiing through a dual fire truck-created water arch, before redeparting at 1030 as Flight 833 with a high load factor. The second flight departed in the evening.

The departures were two of Spirit's more than 200 systemwide flights to 43 destinations, but the weak flicker of light they had provided had been almost as quickly doused when, three months later, on July 31, rising fuel prices and declining economic conditions had necessitated their discontinuation, leaving only a promise of return when improved conditions merited their reinstatement.

Further tipping the scales to the service loss side had been Delta Air Line's decision to discontinue its only remaining, single daily regional jet service operated by its Comair counterpart to Atlanta, severing feed to the world's largest airport in terms of enplanements and to Delta's largest connecting hub, and ending the Long Island presence established as far back as 1984. Delta had cited the reason for the discontinuation, along with that in other markets, as an attempt to "optimizefinancial performance." Its 19 employees had been rendered redundant.

The second carrier loss, leaving only Southwest and US Airways Express, had resulted in a 10.2-percent passenger decline in 2008 compared to the year-earlier period.

Another attempted, but mostly unsuccessful airline service had occurred in June of 2009 with the appearance of PublicCharters.com, which had intended to link Islip with Groton, Connecticut, and Nantucket, Massachusetts, during the summer.

In order to remedy Long Island MacArthur Airport's identity recognition deficiency, a study completed by a Phil Nolan-assembled task force strongly concluded that the search for and attraction of new airline service "should be a major focus of management," a function up until now mostly ignored. The airport's lack of recognition, coupled with JFK's and La Guardia's close proximity to Manhattan and their dizzying array of nonstop services, further urged the need for the study.

A $150,000 federal grant, aimed at answering the elusive question of why Long Islanders still chose to use New York airports when Islip itself offered a nonstop flight, attempted to determine local resident travel patterns and then attract carrier-providing service.

A partial remedy had been the implementation of a $300,000 market campaign, in conjunction with the Long Island Railroad and Southwest Airlines, to increase airport awareness by the eastern Nassau and Suffolk County population, featuring the slogan, "We make flying a breeze."

Significant attention to airport infrastructure improvement and a related masterplan had also been given.

A $1.6 million sprinkler installation and asbestos removal program, subsidized by $300,000 of airport funds, had been prompted by the forced, August 2006 closure of the T.G.I. Friday's Restaurant located in the original, oval portion of the terminal, due to state code dictating presence in its vicinity, although its bar and take-out portion had continued to operate. The Town of Islip awarded a Melville company a $75,000 contract to design the sprinkler system that September, but its installation was delayed when it had decided to include the asbestos removal in the renovation.

Outside, the long-awaited ramp repairs had also been made. One year after the $12.4 million apron covering gates five through eight had been laid in 2004, cracks, in which engine-digestible debris could potentially collect, appeared, and were traceable to an inadequate, six-inch-thick subbase which failed to rise above the ground level, and was therefore susceptible to frost. Water, seeping into the subbase, was subjected to freezing-thawing cycles which expanded the concrete, loosened its gravel, and propagated the cracks.

Because the concrete fronting gates three and four had been laid at the same time, it had also been removed and resurfaced.

A $1.3 million Federal Aviation Administration grant had equally enabled it to repave its longest runway, 6-24, during low operational times, between 2300 and 0500.

In order to replace the decaying, 105-foot control tower constructed in 1962, the FAA awarded J. Kokolakis Constructing, Inc., of Rocky Point, a $16.4 million contract to build a new, 157-foot, cylindrical tower next to it in January of 2008, a project completed in November of the following year, at which time internal equipment, costing another $8.8 million, was installed.

Because Long Island MacArthur is an alternate to JFK and La Guardia and a Suffolk County emergency response staging area, its previous 100,000-gallon underground jet fuel tanks were replaced with more-than-triple capacity, 325,000-gallon units, after extension of a $5 million loan from Southwest Airlines, thus increasing the airport's reserve from 1.5 to almost five days.

Other improvements have included new runway light installations, a surveillance camera system, Wi-Fi, a revised website, and an internal roadway reconfiguration.

Instrumental in the airport's modernization had been the redevelopment of its 45-acre west side, which currently houses charter companies, flying schools, and airport maintenance in mostly dilapidated hangars and buildings, but could potentially be replaced with new energy efficient and conservation compliant structures optimally used by educational institutions offering air traffic control curriculums.

During the latter portion of the decade, Long Island MacArthur Airport once again rode the descending side of the revenue curve, but remains a vital air link and economic engine to eastern Nassau and Suffolk Counties.

Between 1996 and 2003, it had experienced an average annual economic impact growth rate of 6.85 percent and between 2001 and 2007 more than 900,000 square feet of commercial space was developed along Veterans Highway, its access roadway, as a result of it. According to Hofstra University's Center for Suburban Studies, its 2003 economic impact was pegged at $202 million and was projected to increase by 68 percent, or to $340 million, by the end of the decade without any further expansion, indicating that, as a revenue generator, that its potential had hardly begun to be tapped. The service reductions, increases in Homeland Security costs, and eroding economy had all reversed that potential, but its infrastructure improvements, more than 500,000-square-foot passenger terminal, four runways, easy access, uncongested environment, two-mile proximity to the Long Island Railroad's Ronkonkoma station, and four-mile proximity to the Long Island Expressway places it squarely on the threshold of growth in the next decade, when conditions improve. According to newly appointed Airport Commissioner Teresa Rizzuto, "We're ready" for new carriers at that time.


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2012年1月15日 星期日

UK Tax Policy and the Euro-dollar Market

UK TAX POLICY AND THE EURO-DOLLAR MARKET *

A. Introduction

The view of the UK Treasury and the Inland Revenue was that, the way was now open for the nationalised industries and the local authorities to borrow in this way, if the UK wanted this to happen, and that the Boards and authorities concerned were prepared to go ahead.

This led to a very important issue, which had to be fully recognised. The amendment to the Finance Bill will allow interest payments to be paid free of tax only where the bond of stock was issued through an overseas agent subject to foreign law. It did appear to mean that, when a Euro-bond was issued in London, withholding tax will still apply where the interest was paid out of UK income. Thus the effect of the amendment would be to impair the status of the London issuing houses since if the amendment leads to a rise in this type of borrowing they will be effectively excluded from participating in the increase: an increase which will derive entirely from the UK sources. It was envisaged that the UK would have a presentational problem on its hands. As, if the UK government wanted a public sector authority to borrow in foreign currencies, it had to approve in their arranging for the issue to be made through an overseas agent and in an overseas centre. In short, the UK governmen t had cut out the possibility of the public sector itself utilising the Euro-dollar resources of London with regard to its borrowing operations .

The tax change, under which interest paid on foreign currency borrowing for home investment would be treated as an expense for corporation tax purposes, though designed to encourage such borrowing by the nationalised industries, would create an incentive also for the UK commercial concerns. Given the rate structure in the Euro-dollar market, the new tax incentive may well create substantially increased interest by UK firms, particularly those with overseas income, in currency borrowing for home activity. A central question was, how would this be regarded under the exchange control rules? There had been little interest shown by UK firms in this type of activity but given the prime need to strengthen the reserves, it plainly made sense to allow firms to borrow fairly freely in the Euro-dollar market for home investment if they found it attractive to do so. The UK governments attitude, was that, if UK firms want to borrow on appropriate terms in Euro-dollars for home investment, they would normally be allowed to do so .

Hence, due to Levers proposal: An insertion of a provision in the Finance Bill was needed, to allow a corporation tax deduction in respect of interest paid on Euro-dollar bond issues, where the funds were to be invested in the UK . The change would serve no useful purpose unless the UK firms concerned were prepared to arrange for their loan contracts to be signed outside the UK, e.g. in Switzerland or Luxembourg. The reason for this was as follows: Subscribers to Euro-bond issues were interested in no shares other than those on which interest was paid gross of local tax. Under the provisions of the 1952 Income Tax Act, UK borrowers may not pay interest gross to non-residents unless the interest had a non-UK source in the hands of the bond-holder. For UK companies (including the nationalised industries) the latter condition can be complied with only by the conclusion of the approximate loan contract abroad. There are strong Revenue arguments against any relaxation, in which, L ever and the official Treasury had been inclined to accept.

However, it should be noted that; firstly, the change would not affect materially the position of the potential UK borrower who has substantial overseas income. Secondly, in respect of other companies, including the nationalised industries other than the Air Corporations, the change would encourage foreign currency borrowing only if the relative contracts are established abroad under foreign law. Thirdly, much of the extra banking business, which was created by the change, would therefore benefit overseas rather than London banks .

This meant that, the UK were not in the position, or able to hold the situation of the proposed change, and would face early pressure for the relaxation of the income tax rules on payment of interest gross. This was what the Revenue had always foreseen, and what led them to resist any changes, even changes in the corporation tax .

B. Opinions of the Inland Revenue

On the 26th June 1968 a confidential meeting on Euro-dollar borrowing was held by Lever, the Inland Revenue, the Treasury and Mr. Stainton of the Parliamentary Counsel. Lever first raised the question of an arrangement by which interest might be paid gross on loans raised in the Euro-dollar market. It was emphasised that Lever was anxious not to allow payment of interest gross to UK residents, but that it was possible to pay interest gross to non-UK residents without excluding UK banks from taking part in the arrangement of these loans .

However, the Revenue stated that they were not going to accept a position where interest was paid gross in London to UK residents. This was based under the rule that interest could not be paid gross, except where existed a non-UK source. Various Court decisions, interpreted by the Revenue, meant that the Revenue were prepared to regard interest payments as having a non-UK source when they were made under a contract concluded abroad under foreign law, with a foreign paying agent, even where the income which were used to pay the interest was itself generated in the UK . This was a new different area, as statute law did not cover it in any detail, and decisions had to be taken on interpretation based on a few court decisions. Under these circumstances, it was possible that some modification of the Revenues existing rules were possible. For example, it was possible to accept that a UK bank in London might pay interest gross in external sterling to non-resident accounts, as in pra ctice this was a very similar operation to a foreign bank paying gross abroad in a foreign currency. However, it was not possible to legislate in this area in the Finance Bill of the time, as there was no time to work out the necessary complicated clause .

Lever, nevertheless, stated that he was interested in further exploring the extent to which UK banks were able to take part in loans raised abroad. However, he was content that the law was not altered involving the definition of foreign source income in the Finance Bill. So, the clause was approved in principle. Lever raised the question of allowing in the clause for loans the interest on which might, at the option of the lender, be paid in sterling. There was no objection to this in the meeting, provided the option was exercised at the discretion of the lender .

The machinery problem of the Inland Revenue

However, this issue was not passed onto Lever, because of the machinery problem caused by certain large barriers that were raised by the Inland Revenue . There was three issues of principle: firstly, non-resident borrowers paying interest through London (if they are not paying interest through London there is no reason why any aspect of UK taxation should affect them). Here there is a machinery problem, the Affidavit procedure, which has been removed. Secondly, UK borrowers paying abroad provided that the bonds are denominated in foreign currency and held only by non-residents, and that the issue formally takes place in a foreign market, gross payment of interest without formality is possible and, under the proposed Finance Bill change, payment will count as an expense before assessment to Corporation Tax. Finally, UK borrowers paying through London it is here that the problems still remained. The primary problem through London would almost certainly disqualify borrowers f rom payment gross of tax, with or without an Affidavit procedure. The Inland Revenue will be considering whether, provided the borrowing is in the form of foreign currency bonds, with interest payable in foreign currency, and to be held only by non-residents, they could agree to payment of interest gross, without requiring the additional non-UK features of issue abroad and payment abroad .

What was not clear was, assuming that the Inland Revenue were to decide that they could allow payment gross of tax even with Issue X and payment Y in London, but on the narrower limitations of foreign currency denomination and interest and non-resident holders, the Inland Revenue would still have to take special steps to remove the obligation of Affidavit procedure, or whether this would simply not apply in any case .

Obstacles to raising foreign currency loans by UK companies

The law and the practice of the Inland Revenue was unsatisfactory in relation to Section 52 (5) and provided obstacles to the raising of foreign currency loans by UK companies. It was considered, by the Inland Revenue that there was no justification for the continued separation between annual interest payable to residents and to non-residents . These obstacles were:

Firstly, relief is not available in cases where a loan has been raised for purely investment purposes, e.g. the acquisition of a new subsidiary. This construction is an obstacle to foreign borrowing in cases where the borrower has insufficient Case IV or Case V income, and it ignores the realities of much foreign investment where the acquisition of an existing business will almost always be made through the acquisition of shares. Furthermore, it ignores the Revenues own practice in allowing short interest incurred on loans used to purchase capital assets rather than as working capital .

Secondly, relief is not available for interest payable in the currency of a country outside the Scheduled Territories when it is payable either to a company which controls or is controlled by the UK company liable to make the interest payments or to a company which is under the control of a third company which also controls the UK company. This refusal to allow inter-group interest payments is an obstacle to foreign borrowing in cases where, for good practical and business reasons, a foreign subsidiary, having acted as the primary borrower from the foreign lenders with the guarantee of the UK parent company, relends the proceeds of the foreign currency loan to its UK parent company on the same terms as those applicable to the underlying loan. The subsidiary/parent company loan can be made on a short-term basis which could be renewed year by year so that the interest would qualify as short interest and therefore be allowed against corporation tax. However, this would not be sa tisfactory in the case where the foreign lenders wishes to take security by a charge on the parent companys indebtedness to its foreign subsidiary. Also, there is some doubt whether a 360-day loan between parent and subsidiary, which is renewed year after year, would be regarded as a short-term loan .

Thirdly, to obtain relief, the interest must be paid to a non-resident. It is not practical for UK issuers of foreign public bonds to obtain evidence of residence from persons who obtain payment of interest at paying agencies outside the UK. The Inland Revenue will not unconditionally accept that interest paid in those circumstances is in fact paid to non-residents and cases have been known, to mark their position, where the Inland Revenue only allow 99% of the interest payments to be charged against corporation tax. This position is inequitable and penalises the UK borrower for a situation over which it has no control. It seems to fail completely to recognise the exchange control and paying collecting agent tax regulations relating to the holding by residents of the UK of foreign currency securities. Under those regulations, a UK resident can only hold foreign currency securities through an authorised depositary and upon receipt by the relevant bank of any interest or divide nd payments the bank is obliged to deduct and account for any applicable UK income tax .

C. Public Sector and nationalised industry foreign currency borrowing

(1). Introduction

1969 was facing a difficult liquidity situation in which, the Treasury had favoured for some time steps to enable public and private borrowers to borrow foreign currencies in the Euro-bond market. This was a means of meeting some of their financing requirements and, at the same time, of increasing the nations reserves. However, the issue of tax was causing some problems with the British government.

The issue in which a local authority may be able to pay interest gross on an issue of bearer bonds denominated in foreign currency was a welcome opportunity, as if this was accepted, it was likely that one local authority, the GLC, would begin negotiations. The Bank of England took the view that it was advantageous that the first Euro-bond issue by a public borrower was the GLC. Due to this reason, they wanted to get the position on the tax difficulty cleared up as soon as possible. Their understanding seemed to be that, since GLC borrowing would be secured on a domestic asset (the GLC rate revenues), it would not qualify for the permission to pay interest gross conveyed in the 1968 Finance Act.

It was clear that there was a genuine obstacle standing in the way of GLC and other local authorities borrowing foreign currency abroad, and it was necessary to consider means of removing an impediment to foreign currency borrowing by UK local authorities in the Euro-bond markets. It was suggested that the required provision should be generalised in order to cover nationalised industries or private sector borrowers as well as local authorities; to cover a direct charge on UK assets as well as the indirect one that arised from a subsequent loan contract, which was the particular problem of local authorities; and to limit the arrangements to foreign currencies, excluding currencies of the Scheduled Territories. Looking at the tax position on foreign borrowing - any UK borrower wishing to tap sources of funds in the international capital markets needs to take into account the following two points:

(a.) He will have to contrive a means of paying interest to the lenders gross without formality, because this is a demand of lenders in the international capital markets.
(b.) He will naturally wish to be able to charge the interest payable on his borrowing as an expense for the purpose of UK tax assessments.

(2). Payment of interest gross

Euro-bond issues were not practicable unless the borrower undertook to pay interest gross, and it was therefore important to be clear as to the terms on which London, other local authorities and the nationalised industries could arrange borrowing on gross terms. It was possible for a local authority or nationalised industry to arrange to pay interest gross, without attracting any UK tax charge, provided that the interest has an overseas source in the hands of the bond-holder . This interest has an overseas source if; firstly the loan contract is made abroad, secondly if the loan contract is governed by foreign law, thirdly if the interest is payable abroad, and there is no UK paying agent. Finally if the loan is not secured on any specific assets or revenue in the UK.

The Revenue had to consider all the specific arrangements before they took a final view that it takes the relative interest outside the UK tax charge. In their sterling borrowing hitherto, the local authorities had secured their loans on their revenue, largely from rate income. The fourth condition would preclude this. On the basis of the forth requirement being fairly inflexible, there was no means by which the local authorities could secure their loans (if for good reasons they wished to do so) on any assets or income in the UK .
It was important to clarify the point of whether there was any difficulty for the GLC in making a Euro-bond issue provided that the borrowing contract was signed abroad. To enable the authority to pay interest gross, to give the interest a foreign source, it was necessary for the four conditions to be met. The fourth condition was of extreme concern the provision that the loan should not be secured on any specific assets or revenue in the UK. The concern was that the GLC and other local authorities almost invariably secured their sterling borrowings of rate income, they would wish to do the same in the Euro-bond market, and the fourth provision would effectively preclude them from paying interest gross. It was far from clear that it would be necessary for the GLC or any other local authority to offer a lien on the rates if they undertook a Euro-bond issue .

It seemed that, it was almost certainly necessary to give an indirect lien in the following way. On the basis that the loans to the cities Oslo, Bergen and Copenhagen being regarded by the bond market as the relative precedents, it was necessary for the GLC to give a negative pledge to the effect that if on any subsequent borrowing a security is given, then this security will be available equally for the bond issue. It seems likely, that if the fourth provision was indeed inflexible, then the negative pledge would also fall foul of the Revenue requirements, and it would not be possible for the authority to pay interest gross. This seemed like a very tiresome procedure which involved three possibilities; firstly the Revenue may conclude, on reflection, that the revenue to which reference is made; in the fourth provision (that the loan is not secured on any specific assets or revenue in the UK.) relates to trading income, and does not therefore cover the rate or other income of local authorities; there will therefore be no problem. Secondly, the law could be amended in the 1969s Finance Act. Thridly, the local authorities might discontinue their practice of securing sterling loans against rate income .

However, this problem did not arise for the nationalised industries, because they did not, secure their loans on specific assets or income. The Chancellor of the Exchequer (on the 15th January 1969) approved the conclusion that foreign currency bond issues by nationalised industries were desirable as a contribution to Britains foreign currency financing problem, and that the Government should offer to carry the exchange risk so as to facilitate the making of such issues and other local issues . It was noted that the GLC might be debarred for tax reasons from making such issues. If local authorities were in fact debarred, or the GLC decided not to make an issue, it will not be worth extending this arrangement to local authorities as well as nationalised industries. It was finally decided that, if the GLC were not debarred and they have firm plans to make an issue, then the door can be opened to local authorities .

The obvious thing to do was for the local authorities to make an issue unsecured. It seems that unsecured borrowing was a normal procedure in Continental capital markets. However, the borrower was normally expected to provide a negative pledge. E.g., the Euro-bond markets may take some issues by the cities of Oslo, Bergen and Copenhagen as precedents. These cities borrowed without security, but provided a negative pledge to the effect that if on any subsequent borrowing a security was given, then this security would be available equally for the bond issue. If a local authority must provide adequate security when it is borrowing in this country, then it seems that the negative pledge would result in a borrower providing security in the foreign currency market as well. This falls foul of the revenue requirements. This is a difficulty, which does not stand in the way of a possible foreign currency issue. An appropriate amendment to the Finance Act is necessary .

A tax problem arose, because the Revenue considered that income paid by a UK borrower does not qualify as foreign source income, and is therefore outside the UK tax net, unless the loan is not secured on any specific assets or revenue in the UK. The problem arises for the GLC and other local authorities from the authorities traditional practice of giving a lien on the rates and other revenues in respect of their London market loans, and the insistence of Euro-bond subscribers on receiving special most favoured nation treatment. This means that the local authorities will almost certainly be required to agree to insertion in the loan agreement of a security provision on the lines of those in the loan agreement for the cities of Copenhagen, Bergen and Oslo. The result, if Revenue stand by their interpretation of the statutory position, is that the act of creating a lien on rate income in the first Sterling loans after the Euro-bond issue will cause the interest paid by the local authority to revert to the status of UK income source, thus coming within the tax charge .

The position of the local authority would be impossible in this situation. It would be regarded as part of the preliminary negotiations as well as in the loan agreement itself, to indicate that interest would be payable gross and yet would be inserting in the agreement a second provision which would be bound in a relatively short time to frustrate its ability, within the law, to fulfil the first requirement. This problem did not arise for the nationalised industries, because it was never their practice to create a lien on UK assets because they borrow under Treasury guarantee. The solution was to remove the offending Revenue requirement in respect of overseas borrowing by the nationalised industries and commercial borrowers (for simplicity and to avoid highlighting the position of the local authorities) . There were four alternatives: firstly, to abandon the idea of foreign currency borrowing by the local authorities. Secondly for the local authorities to abandon their old-es tablished practice of creating lien to secure their sterling issues. Thirdly, a less statutory interpretation by the Revenue of the statutory position to regard the interest payable on these issues as retaining its foreign source connotation even when the indirect pledge became effective. Finally, to amend the law.

Examining these alternatives, the first alternative was unquestionable, especially since the GLC and Manchester had relative borrowing powers. The second alternative was impracticable. The third alternative was a possibility. So it seemed that the fourth choice was fairly obviously the right solution .

The point was that bond issues could be made in the Euro-bond market only if the borrower undertakes to pay interest gross. That the relative interest income has to be given a foreign source (based on the four requirements). The only point of difficulty arose on the fourth the requirement that the loan should not be secured on any specific assets or revenue in the UK. The problem had arisen only for the nationalised industries where it may be necessary to create an indirect security where the borrower is called upon to give a direct security in a subsequent loan .

However the Revenue view stated that if by such a provision a loan became subsequently secured on assets or income in the UK, then the source could no longer be regarded as foreign. This problem did not arise for the nationalised industries, as they borrow under Treasury guarantee. Therefore, two possibilities were either to abandon the idea of local authority foreign currency borrowing in the face of this tax difficulty or, alternatively to modify the loan established practice under which the local authorities charge their London market borrowing on their rate income. The first possibility was clearly unsatisfactory, due to the potential gain for the reserves, which would have been forgone. The second was considered impracticable. Therefore the tax position was the only consideration. There was a strong case in the longer term for removing the loophole through which income has a UK source in all but the legal sense can be paid gross to non-residents .

The policy was to encourage foreign currency borrowing, and to encourage UK borrowers to use the artificial foreign source route to the fullest extent possible. There was no objection on principle to any modifications on the proposed legislations in order to get the maximum benefit from it. A subsidiary point had arisen as a result, as whether it was necessary or desirable to confine the amendment to the local authorities. The tentative view was that there were advantages in generalising the change to apply for all UK borrowers. As it would have been impractical if the nationalised industries or private sector borrowers were called upon to introduce a charge on UK assets in their loan contracts, and because the tax change was confined to the local authorities, were inhibited from further foreign currency borrowing .

The possibility of local authorities borrowing in foreign currencies unsecured was governed by Section 197 of the Local Government Act 1933 (extended by Schedule 4 (43) of the London Government Act 1963) to include the Greater London Council and the London Boroughs) which required that all moneys borrowed by a local authority in England and Wales should be secured on all revenues of the authority, except any money borrowed by way of a temporary loan or overdraft without security. It seemed that there was no possibility of local authorities being able to borrow unsecured, except at the very shortest term, either in sterling or in foreign currencies. Also that local authorities could have had difficulty in meeting the requirements of the international capital markets for payment of interest gross. A clause was needed in the 1969 Finance Bill to get over the difficulty, giving wider facility to the tax difficulties which obstructs foreign borrowing. As the present tax arrangemen ts had the effect that in order to be able to pay interest gross, borrowers had to arrange loans in contracts ruled by foreign law and with interest payable overseas. This gave rise that there needed to be some changes in the fiscal rules to allow straightforward borrowing in London to qualify for payment of interest gross .

(3). Tax arrangements on borrowing by UK companies from non-residents

Lever with the Inland Revenue and the Treasury reached a conclusion in January 1969, which involved three separate suggestions which were designed to facilitate borrowing by UK companies from non-residents. The conclusion was that there was no particular need for further relaxation and that the three particular suggestions could not be recommended .

Payment of interest gross

The first suggestion was that UK companies should be permitted to pay interest due to non-residents on overseas loans gross of UK tax, irrespective of the source of the interest or the residence of the paying agent.

The suggestion arises because (a) in respect of interest which has a UK source, tax is deductible unless the interest is bank deposit interest, short interest, interest payable on certain British Government securities and interest exempted under a double taxation agreement. (b) Subscribers to Euro-bond issues require payment of interest gross without formality and will not subscribe on other terms .

UK borrowers at the time met the requirement at (b) provided that they arrange their loan contracts so as to give the interest a foreign source; in essence this means that the relative loan contract must be established under foreign law and the interest is paid overseas. Such arrangements are not particularly difficult to set up and they involve no tax or other penalty on the borrowing company. The disadvantages are: first, that it would be slightly easier, and certainly more straightforward, if UK companies could set up their arrangements through London agents; secondly, that the need to use an overseas base may seem to be a little undignified particularly for an important UK company or a nationalised industry; and thirdly, that the modest professional fees and commissions associated with the handling of these arrangements go abroad instead of remaining in London .

None of these objections was particularly powerful, and there was no evidence that they inhibit borrowing possibilities at all. The small inconvenience and possible indignity of arranging a loan contract governed by foreign law, once the decision to borrow from foreign sources has been taken, does not appear to affect potential borrowers one nationalised industry commented revealingly that it meant no more than a day in Luxembourg for the directors. The amounts involved in professional fees are trifling and there is no suggestion that foreigners involved in the loan arrangements could use them as a point of entry for wider operations.

Against these modest and in part merely presentational advantages, there were strong objections against changes in the principles and practice of taxation of the kind which would be involved in the payment of interest gross .

In general and in common with other countries the UK sought to tax all income arising within its borders, wherever the recipient of the income resides, and the law was constructed accordingly. The right to charge income having a UK source was of course given up in many double taxation agreements in relation to investment income, but this was always subject to reciprocity by the other country and on the understanding that the other country will in general tax the income concerned in full. In the case of interest the UK had gone further and surrendered unilaterally its right to tax short interest, bank deposit interest and certain interest on Government securities going abroad. There was the further special case of loans based on contracts governed by foreign law, where UK tax law may in principle provide for the deduction of tax, but the UK had to recognise that the lender may be able to sustain a refusal to accept less than the full amount of the interest, and the UK had adop ted the somewhat artificial convention that the interest on a loan where the contract was governed by foreign law was regarded as deriving from a source outside the UK, provided that it was paid outside the UK and that the loan was not secured on specific assets in the UK. It was under this arrangement that UK borrowers issued Euro-bonds with payment of interest gross .

Despite these special exceptions, the UK considered that the principle of its right to tax income arising within its borders remained broadly intact, and that any further erosion of it, except on the clear basis of reciprocity, would be mistaken.

The potential dangers were considerable. Willingness to give up its right unilaterally would undoubtedly make it more difficult to secure reciprocal exemption in double taxation agreements. There were many cases in which a concession given unilaterally would involve loss of revenue without countervailing advantage, thus: some deduction of UK tax may be acceptable to the lender if he is resident in a country with which the UK has a double taxation agreement and in which he can credit his UK tax against his own countrys tax charge the effect of a concession from the UK would be a benefit to the revenue authorities of the other country. Some of the UKs agreements provide for interest to be taxed in the country in which it arises at some low fixed rate, usually 10% or 15% - here the tax the UK would give up would be completely lost, because claims to a partial repayment of the UKs 41 % charge on interest have to be made through the other countrys revenue and it must be assumed t herefore that the lenders concerned are not striving to remain anonymous from their own authorities; and coming closer to the field of Euro-bond issues, the UK tax deduction is regarded as acceptable in the case of other fixed interest borrowing and to refrain from taking UK tax in such circumstances would be an absurd self-denial .

In the particular case of Euro-bond issue, there would of course be no direct tax loss, given the UKs assumption that potential borrowers are already able to adopt the method of a loan contract under foreign law which avoids UK tax liability in any case. But it is difficult to envisage an arrangement under which a concession could be confined to Euro-bond issues without encroaching on important fiscal principles elsewhere .

Finally, although the UK are content to adopt the artificial convention that the interest on loan contracts set up under foreign law derives from a source outside the UK, the whole discussion is addressed to Euro-bond issues whose proceeds are used for domestic investment in the UK, and a more realistic appreciation would recognise that the true source of the interest is within the UK. On economic grounds, therefore it was considered reasonable and right for the UK to demand its tax entitlement. At the time in the late 1960s, the UK were content to waive this in the interest of encouraging a source of foreign borrowing .

However, there were still those in the Treasury and the Inland Revenue who considered, that the UKs arrangements of the time had gone too far, and that there would be a weighty case in the medium term, when the UK could afford to be less encouraging towards foreign currency borrowings, for reverting to a more rational and defensible arrangement under which all interest paid out of income generated in the UK is subject to UK tax, unless reciprocal tax agreements apply. Generally, there were dangers in making fundamental changes in the tax system or indeed peripheral changes which bear upon fundamental principles of the system as part of arrangements designed to meet a balance of payments and reserves situation which was expected to improve over the years ahead. So, it was concluded that the balance of argument was overwhelmingly against the suggested change .

Interest on loans in Sterling Area Currencies

The second suggestion, was that the concession in Section 22 of the 1968 Finance Act should be extended to enable companies in computing their profits to deduct interest in respect of loans denominated in any currency of the Outer Sterling Area as well as loans covered in the Section 22 concession denominated in foreign currency. The object was to facilitate borrowing in currencies of the Outer Sterling Area as well as foreign currencies, particularly prompted by the thought that Kuwaiti funds might well be a promising source of overseas borrowing .

There was no ground of tax principle for dispensing less generous tax treatment (for the purpose of computing profits) in respect of loans denominated in sterling area currencies. Also, that, there would be no difficulty in principle in allowing a payer of interest a deduction in computing his profits for interest paid on a sterling area currency loan made to enable him to earn these profits. The difficulty was the serious practical one that further liberalisation of the treatment of interest going abroad would much enhance the dangers of avoidance and evasion of tax. The avoidance danger was that profits earned in the UK would be drawn out of the country without suffering any Corporation tax, through the creation of artificial loan liabilities. Thus, a company can lend money to an overseas associate (on interest free terms) and the associate can lend the money back to another UK member of the group which then incurs a liability to pay interest abroad, and may thus be able to pay in interest gross of UK tax. If the associate is resident in a tax haven, part of the profits of the group have then effectively been taken out of the UK tax net. This could be achieved under the existing law of the 1960s, but the scope for such avoidance schemes was considerably restricted by the fact that the associate either had to be in a non-sterling country (when exchange control comes into operation), or a double taxation agreement had to be invoked to enable the interest to be paid gross and there were provisions in double taxation agreements designed to prevent the misuse of the reliefs allowed under them . Extension of the Section 22 concession to loans denominated in sterling would make it practicable for UK borrowers to pay interest gross to a sterling area country (for example a West Indian tax haven) without deduction of tax, and such avoidance schemes would be much more difficult to counter. Anti-avoidance provisions similar to those appearing in out dou ble taxation agreements could be included in the necessary legislation, but these might well be ineffective since it would be difficult for Inspectors to link up a chain of associated lending operations designed to take advantage of the concession. It was then suggested that, the UK should not then be able to consult the other countrys Revenue to confirm that the relief was not being abused .

The scope for evasion of tax on interest received by individuals resident in this country would also be extended if UK borrowers were able to claim a deduction in computing their profits for interest paid on sterling area currency loans and it thus became practicable to pay interest gross to sterling area countries. Interest from an overseas source paid through a UK paying agent or collected by a UK collecting agent was subject to UKs foreign dividends machinery; interest on British Government securities payable gross to persons not ordinarily resident in the UK was policed in a similar way. This machinery ensured that where dividends or interest are paid direct to a UK resident, tax was deducted and accounted for to the Revenue by the paying or collecting agent. To evade tax on such income, therefore, a UK resident had either to make it appear that the income was payable to a non-resident or that he had to keep it entirely outside the paying and collecting agent machinery e ither by retaining the income abroad or by having it remitted to this country in a form which does not bring it within the taxing machinery. If the income was left abroad, the UK were not likely to find out about it (unless the UK learn of it indirectly, e.g. in the course of a back duty investigation) . Often however, the individual would want to use the income in the UK and this was difficult to arrange without coming within the taxing machinery, particularly if the income was in a non-sterling currency.

While therefore evasion of tax on interest payable abroad was possible under existing arrangements the scope for it was restricted. Furthermore, many individuals prefered to buy bonds of UK companies rather than of foreign companies. To extend the Section 22 concession in the manner proposed would have enabled UK borrowers to pay interest gross on sterling area currency loans under overseas loan contracts, and this would substantially increase the field in which evasion could take place. Admittedly, UK residents were already able to buy Euro-dollar bonds issued by UK companies, but for this purpose they must either pay the investment currency premium (which would make the investment unattractive) or evade the exchange control. Bonds issued in sterling currencies by UK companies would be more attractive to UK residents and it would be more difficult to counter evasion of tax on interest on such bonds .

Against these severe practical difficulties, the UK had to counter the possible benefits to the balance of payments and reserves of overseas borrowing in sterling area currencies. If the proposed additional facility did not increase the total amount of overseas borrowing, but merely replaced some foreign currency borrowing by some borrowing in sterling area currencies, this would be unwelcome. To the extent that the UK obtaining sterling area currency prevented the sterling area country concerned from an equivalent diversification of its reserves into foreign currency. The UKs borrowing in this form would be as good as foreign currency borrowing. But the more likely situation would be that the sterling lending to the UK would be only partly an alternative to diversification and would mainly be offset by a reduction in sterling holdings .

There was however the question of the extent to which the additional facility would open the way to increased overseas borrowing. This was not easy to judge. There was no shortage of available funds for foreign currency borrowing, but an important element in the reluctance of potential UK borrowers to commit themselves was the exchange risk associated with foreign currency borrowing, particularly where the proceeds were to be used for domestic investment. It was thought that the deterrent effect of this risk would be smaller in the case of sterling area currency borrowing, but even this judgement was doubtful. The fact was that experience of the reaction of other countries to UKs devaluation in November 1967 had demonstrated the probability that, on any future similar occasion, the stronger sterling area currencies would not move with UK sterling . Adding to this, the fact that the sterling area currencies which were most likely to be available for overseas borrowing are thos e of the countries in relatively strong balance of payments and reserves positions, such as Kuwait, it becomes rather doubtful whereas UK borrowers will in general see the additional facility of sterling area currency borrowing as being so attractive as to increase their overall willingness to borrow.

On balance, it seemed likely that the additional facility of borrowing in sterling area currencies would induce some switching by UK borrowers from foreign currency to sterling area currency which would be disadvantageous, and might be offset to some extent by willingness to borrow on a rather larger scale in this form. There certainly seemed to be no ground for thinking that the additional facility would create a substantially greater level of overseas borrowing, and it was concluded that it was not worth embarking on this against the background of substantial difficulties in tax evasion which would unavoidably be associated with it .

Loans for Non-Trade Activities

The third suggestion was a further extension of Section 22 concession to allow deduction for Corporation Tax purposes for interest paid on loans in support of other and general purposes, as well as the purpose of the borrowers trade already covered by Section 22.

Even if there were an argument on balance of payments grounds for making some further relaxation in the treatment of interest, there was no reason why the right to pay interest to non-residents gross should be extended beyond the field of borrowing for trade purposes. Overseas borrowing of money which will be used in a UK business, and thus tend to strengthen the whole UK economy, was one thing. Borrowing abroad and thereby placing a continuing burden on the current balance of payments for the purpose of, say, buying a villa at Cannes, was quite another. Restriction of the concession to loans for trade purposes meant that the concession was available for direct investment, but not portfolio, but it was far from clear that the UK wanted to encourage domestic portfolio investment by UK borrowers using foreign currency finance. The UK certainly did not want to encourage such borrowing to finance or facilitate the payment of import deposits, and indeed in general it seems untimel y of such thinking of unrestricted access to foreign borrowing which might in many directions have interfered with attempts to control domestic credit .

D. Conclusion

The general conclusion was therefore negative on all three suggestions, which was open to strong objections of fiscal principle or practice and did not offer commensurate advantages. Levels of overseas borrowing by UK companies for domestic purposes had hitherto been modest. The joint judgement of Lever, the Inland Revenue and the Treasury was that tax differences have played little or no part, and that the most important influences had been fears of exchange risks on the one hand and relatively easy access to funds on the domestic market on the other. Therefore it was considered that there was no mechanical or technical changes which could usefully lead UK companies in the direction of greater borrowing abroad.

In response towards this, Lever recommended the following inclusion in the 1969 Finance Bill of a clause which would authorise the Treasury to direct, in respect of any specified loan raised by a local authority in the currency of a country outside the Scheduled Territories: firstly, that the interest should be payable without deduction of tax at source. Secondly, that it should be exempt from UK tax so long as the stock or bonds in question are held by a non-resident. Thirdly, that the Capital should not be subject to any present or future UK tax on capital where the beneficial owner was neither domiciled nor ordinarily resident in the UK .

The purpose of this clause was that it was in the public interest for nationalised industries and large authorities to borrow on the Euro-dollar market . The Chancellor of the Exchequer in his Budget Speech clarified this point and further explained that the proposed Finance Bill clause was designed to facilitate foreign currency borrowing by local authorities :

A point which has been urged upon me from time-to-time is that some of our public authorities should be enabled to take advantage of funds available in the international capital markets for long-term borrowing, and in doing so bring support to our reserves. The House is aware that a number of nationalised industries are being encouraged in this direction, with the assistance of special arrangements which have been devised to relieve them of exchange uncertainties, and indeed the Gas Council has completed arrangements, and in part funds, from total borrowings of over 30m recently. I am anxious that this facility should be available to local authorities also, and I propose to include in the Finance Bill a clause which will remove a minor tax obstacle which at the moment prevents this.

ENDNOTE

* Here are two very similar definitions of the term Euro-dollars:

Robert Gilpin, (The Political Economy of International Relations, Princetown University Press, 1987, p. 314-315), states that: The Euro-dollar market received its name from American dollars on deposit in European (especially in London) banks yet remaining outside the domestic monetary system, and the stringent control of national monetary authorities.

Enzig and Quinn (The Euro-dollar System: practice and theory of international interest rates, MacMillan Press, 6th edition, 1977, p. 1) state that: the Euro-dollar system is a term used to describe the market in dollar deposits and credits which exists outside the United States of America.

This paper is based on the following PRO files:

T 295/628: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds; (B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (5/06/1968 8/01/69). File Number: 2FEC 123/76/01 PART B

T 295/560: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds;(B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (10/01/69 30/04/69). File Number: 2FEC 123/76/01 PART C

T 295/628: Confidential letter on Euro-dollar borrowing for home investment, from Mr. D.A. Walker to Mr. Littler of the Treasury, on 5th June 1968.


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