Authorities 'naming and shaming' citizens they do not like is a very old tactic, as Jeremiah, ‘the weeping prophet’ (626 BC) found to his cost when he was beaten and put in the stocks.
Just a few hundred years ago in Britain 'offenders' were still put in the stocks as a punishment. This practice was last used in the British Isles in 1872 but abandoned as cruel and demeaning.
Echoes of the past in modern day ‘naming an shaming’ are emerging in recent events in the UK with the publication of the HOC PAC report on Tax Avoidance: tackling marketed avoidance schemes.
HMT estimates of UK tax avoidance are £5bn from all sources, or about 1% of tax collections. A focus on tax receipts in a time of austerity is inevitable where deficit reduction targets are in peril due to lack of growth in the economy.
The focus on avoidance intensified with Starbucks, Amazon and Google, in terms of corporation tax payments. The K2 Jimmy Carr case has been revisited and thrown into the pot for good measure.
Now this piece isn’t an apologia for abusive tax avoidance. However, the negative emotion whipped up by the media and politicians is generating a lot of heat but not too much light.
Tax rules and rates are a sovereign matter for states to decide, and compliance the responsibility of individuals and corporations.
The international tax conventions prevalent today were designed under the League of Nations in the 1920’s. They recognise sovereign taxing rights but seek to avoid double taxation being a barrier to investment and cross border activity and trade.
The solution to the abusive schemes is simple, it is entirely within the hands of domestic tax authorities. A beefed up pre-notification scheme would pick these arrangements up early and they could be ruled offside. It’s simply a matter of focus, resource and management.
However, care is needed in this area. There is no clear bright line between sensible tax planning and tax avoidance as evidenced by the commentary in the General Anti Avoidance Study by Graham Aaronson undertaken on behalf of the UK government.
. “1.2 In broad terms the purpose of the study was to consider whether the introduction of some type of general anti-avoidance rule would be beneficial for the UK tax system.
. 1.3 Beneficial does not mean simply providing another weapon in the armoury to challenge unappealing tax avoidance schemes. The issue is more complex, and a number of important factors have to be taken into account to determine whether, looked at overall, introducing a GAAR today would be a positive step.
. 1.4 Most critical among these factors is whether such a step might erode the attractiveness of the UK’s tax regime to business. The continuing turbulence in financial markets and the fragility of the UK economy has kept this issue in the forefront of the Study Group’s discussions.
. 1.5 I have concluded that introducing a broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning. Such tax planning is an entirely appropriate response to the complexities of a tax system such as the UK’s.”
Set out to squeeze as much tax as you can out of every corporate and individual and you will soon see some consequences. Investment capital goes where its welcome and in the global village it can quickly flow elsewhere. John Redwood has recently commented https://johnredwoodsdiary.com/2013/02/20/hunting-tax-avoidance-schemes/ that Tax Saturation may have been reached, where higher taxes are collecting less tax.
The UK tax code along with most developed nations is highly complex, a result of centuries of accumulated laws, rules and regulations. UK, businesses and the revenue have difficulty understanding and applying it, and the whole area has been further complicated by the superficial pronouncement of moralising politicians adding even further to the confusion.
Although a small part of our business footprint, we do host the kind of sensible and responsible tax planned business that Graham Aaronson refers to. Our challenge is keeping the contrived, artificial, abusive schemes out.
Such schemes are mostly designed, marketed and approved in the UK. That is where the judgement must be made about their integrity.
We are not in a position to opine on the tax laws of another country and must rely on the certification that effectively comes from the country of origin.
Cross border taxing rights, spirit and letter, are subject to international conventions, and in a world committed to prosperity through international trade understandably countries don’t want to create tax barriers.
Calls by G8 leaders to review what they see as ‘gaming’ of the international tax rules by multinationals are gaining traction. Be careful what you wish for springs to mind, given the chatter is about taxing real economic activity.
Goods manufactured mainly in Asia, increasingly sold in Asia, could mean tax payments follow the trend in economic activity from west to east.
The truth is in a global interconnected village dominated by the internet, intangibles and brand are often worth much more than the production of the widget.
Global groups with global operations do not have a national loyalty to particular geography just because their head office happens to be located there.
What is the relevance of these debates to Jersey. The assumption is that ‘Tax Havens’ or IFCs as we prefer to be known are complicit in aiding and abetting tax dodging by these groups.
The reality is this type of activity is likely to be completely legal, largely based in onshore treaty jurisdictions, which are needed to alleviate dividend and interest withholding taxes on cross border capital flows.
The Netherlands, Luxembourg and Ireland will be the probable host for this kind of business, competing on a mix of low taxes, favourable treaties and accommodating special regimes.
The OECD are rallying to the call for action from the UK and others and have produced a paper on base erosion and profit shifting. Interestingly the report reveals that corporation tax as a percentage of total taxes collected has held steady at between 8 – 10% in recent years despite big cuts in headline rates and fears over avoidance.
My guess is they will quickly conclude that unitary taxation and other alternatives currently being touted will lead down a blind alley, but they will focus on double non- taxation, to ensure that businesses do pay tax somewhere.
Conflating tax planning, avoidance and evasion may be an appealing proposition to NGOs making a living out of tax lobbying, or to politicians on the ropes, hungry for public approval.
However, the current wave of condemnation creates the impression that Britain is a place where wealth creators and business are seen solely as a means of extracting revenue for a cash strapped government.
Evidence is emerging already that this approach is resulting in less tax being collected as business and individuals cease to invest or simply relocate.
A more considered debate is needed and the paper published today by the widely respected Institute for Fiscal Studies is a welcome contribution. https://www.ifs.org.uk/publications/6611
Ultimately fiscal considerations are not what will pull the world out of the current slowdown, they will cut the same pie differently at best.
More tax cash taken from companies and individuals is less cash for job creation and for investment.
Increased trade is the answer to the economic malaise and the job and we