The Financial Times recently published a piece criticizing three water companies that continue to maintain subsidiaries in tax havens. This type of criticism is nothing new, as water companies in the UK have faced scrutiny for several years. It is, however, noteworthy thanks to the increase in recent pressure for these companies to move their subsidiaries without any seeming effect on their actions.
The Companies and Havens
Welsh Water, Southern Water, and South-East Water all currently have subsidiaries in the Cayman Islands, a jurisdiction that most experts agree is a tax haven. These subsidiaries in the Cayman Islands were created 10 years ago to get around rules about raising cash via the bond markets. The rules in question are no longer valid, but that has not stopped the water companies from using them.
While the UK water companies in question claim that they do not receive any advantages in income tax from residing in these tax havens, that is not enough. Evidence shows that they pay very low tax rates. As of March 2020, Welsh Water and Southern Liquid had not paid any corporate tax. At the same point, South-East Liquid only paid 1.9 million in income tax despite having profits before tax of 33.8 million. This comes out to taxes of just 5.6 percent.
It is an interesting note that England is the only country in the world with a fully privatized system for sewage and water. This has been the system in the country since 1989.
There Is No Restriction on Tax Haven Holdings
An important point in this criticism is that water business regulators do not have any official prohibitions on holdings in tax havens. Despite this, it has frowned upon the financial strategy and has done so consistently for years.
The water regulators also pointed to past behaviors they called “damaging,” indicating them as motivation to encourage water companies to stop using tax havens. The argument comes down to the fact that water is a public utility, and as such, it should follow good practices that will help with public trust.
Those unhappy with the use of tax havens also point out that the water companies in question are exclusive monopolies and get their income completely from the British public. Essentially, the British people have no choice but to use these companies. With this in mind, the fact that they use tax havens becomes suspicious or at least highly unwanted.
Some Water Companies Have Made Changes
While three water companies refuse to move their subsidiaries from tax havens like the Cayman Islands, some have already done so. Anglian Water, Yorkshire Water, and Thames Water all closed their subsidiaries in the tax haven two years ago.
Those three companies, along with Southern Water, one of the companies currently facing scrutiny, made headlines in 2017. They had a combined 24 billion pounds of debt yet had paid no corporate tax in the previous years. Critics at the time argued that the debt was an attempt to reduce tax bills and instead receive profits.
Financing experts also pointed out that a great deal of the “cheap money” likely went to the owners of the water companies instead of providing any benefit for the British public who use the services.
The Actions Taken Then
Back in November 2017, the water regulators addressed these concerns, pointing out the issue of public trust, which continues to be a concern today. The regulator encouraged the water companies to reduce their debt and made plans to make stricter rules regarding the fees they were allowed to charge.
As of just a few weeks after those criticisms were published, still in November 2017, Thames Water had already announced it would close its subsidiaries in the Cayman Islands. Anglian Water and Yorkshire Water followed suit not long after.
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