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Cameron questions distinction between tax evasion and aggressive tax avoidance

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David Cameron has challenged ‘friends in the accountancy profession’ who say government should ‘keep changing the law’ to make aggressive tax avoidance illegal. While there is a difference between illegal evasion and legal avoidance, he said, ‘moral questions’ should be asked about whether aggressive avoidance should be encouraged or allowed. He did not define ‘aggressive’ avoidance but was discussing corporation tax.

The OECD announced last week that it will draw up an action plan, to be presented to the G20 in the summer, to ‘reinforce the integrity’ of the international tax system. The UK will lead a review of the transfer pricing rules.

The UK’s draft Finance Bill includes a general anti-abuse rule to counter the use of abusive tax avoidance schemes. However, it is widely accepted that the GAAR was not intended to address avoidance by multinationals that use low tax jurisdictions to reduce their effective tax rate, and that only international co-operation can tackle ‘profit-shifting’. Many tax professionals consider that multinationals using arrangements that take advantage of opportunities offered by the national and international tax rules are doing nothing wrong.

The prime minister, leading a British trade delegation to India, was addressing an audience at the Hindustan Unilever office in Mumbai.

Cameron was asked whether businesses should regard tax as a cost of doing business or an appropriation of profits. He replied: ‘I think tax is a part of the cost of doing business, but there is a deal. [In Britain] we are cutting the level of corporation tax on profits down to 21%. That is a good, low, competitive rate. [Businesses] should be paying that rate of tax rather than seeking ever more aggressive ways to avoid it.’

He added: ‘I think there has been a problem in this debate in the past, in that people have said: “Of course there is a difference between tax evasion, which is illegal and should be pursued by the full force of the law, and then there is tax avoidance, which is perfectly legal and ok”.

‘I think the problem with that is that there are some forms of tax avoidance that have become so aggressive that I think there are moral questions that we have to answer about whether we want to encourage or allow that sort of behaviour.

‘Now of course, some would say “just keep changing the law to make aggressive avoidance illegal”. But, with respect to friends in the accountancy profession, it is difficult to do that. So I think there is a legitimate debate to say that very aggressive forms of avoidance are not appropriate. Particularly in a country that has set a low tax rate, it is fair to ask people to pay it.’

Last month Cameron told a business audience in Lancashire that there was a need for a debate ‘not only [about] what is against the law … but what is unacceptable in terms of really aggressive tax avoidance’. He added: ‘Some people say to me “well, it’s all within the law – you’re obeying the law, it’s okay”. Well, actually there are lots of things that are within the law that we don’t do because actually we have some moral scruples about them and I think we need this debate about tax too.’

Cameron said today that there was a ‘very important international agenda’ about transparency. Countries that want to develop need a tax base, he said. ‘They need to be able to raise legitimate tax revenues.’

There was a need for more transparency, more information sharing between countries and ‘fair rules of the road’ for governments and businesses to obey. The UK would use its chairmanship of the G8 this year to encourage a ‘real debate’ on ‘greater transparency and greater fairness, so that people pay their fair share’.

In recent evidence to a House of Lords sub-committee on the Finance Bill, Judith Freedman said that although tax planning by multinationals relying on the structure of the international taxation was the focus of media and political attention, it was ‘arguably not properly called avoidance at all’. Freedman, who was a member of Graham Aaronson’s GAAR study group, co-authored a paper last year which ‘accepted and shared’ some of the ‘widespread concerns about the way in which both the national and the international tax systems work’. But the authors said it was ‘not helpful’ to see that activity as being the ‘same kind’ of activity as abusive schemes that would be caught by the GAAR.

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