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Tax experts decry ‘fair tax’ debate

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Tax advisers addressing an invited audience in Westminster last week warned that the tax avoidance debate is out of control, and that the concept of a ‘fair amount’ of tax is irrelevant and potentially damaging. However, a senior union official insisted that companies such as Google, Amazon and Starbucks should be paying more tax, and a Labour MP and shadow minister challenged tax professionals to accept that companies had a moral duty in relation to their tax affairs.

Last week, as the OECD prepared to present a progress report to G20 finance ministers on its ‘base erosion and profit shifting’ project, Milestone International Tax Partners hosted a debate at Portcullis House on ‘international corporate tax avoidance’.

While MPs were debating the Finance Bill across the road in the House of Commons, the Conservative MP Guto Bebb, a member of the Commons public accounts committee, introduced Milestone’s founder Miles Dean; the tax barrister David Goldberg QC; Kamaljeet Jandu, national officer of the GMB union and Labour candidate for next year’s European elections; and Mariana Mazzucato, professor of economics at the University of Sussex.

Bebb said he believed strongly that taxes should be low and should be paid – that was a starting point that a Conservative could feel comfortable with. The tax issue was often seen as an issue of the left, but it was also an issue of the right. ‘If the tax that is due was being paid, then perhaps we could have lower taxes,’ he said.

There was a very live argument surrounding international aid, Bebb added: ‘There is a strong argument that international companies should pay the tax due in the countries in which they operate, rather than expecting handouts from western economies such as the UK’.

Many tax professionals have voiced support for action to tackle aggressive tax avoidance, and tax advisers and businesses are among those contributing to the OECD’s review of the international tax system.

Miles Dean said a ‘media war on tax and tax avoidance’ had been raging for more than two years. It had escalated in recent months, fuelled at least in part by the public accounts committee and its chairman, Margaret Hodge. The debate was now ‘out of control’, he suggested.

‘Multinational companies, high net worth individuals, entertainers and sportsmen have all felt the brunt of the press,’ he said. Several household names had been ‘collared’.

Tax campaigners had ‘quite gladly’ blurred the distinction between tax evasion, avoidance and planning, Dean claimed.

The term ‘tax dodging’ had become a colloquial term for anything from legitimate planning to evasion, and there were some basic misconceptions.

‘I dare say the press are perhaps somewhat misinformed,’ he said. But tax was payable not on revenue, but on profit.

‘The thought that a multinational should operate and be taxed in the same way, or treated in the same way, as a corner shop down the road is a myth that needs to be busted. We are dealing with multinational companies that have operations, cost centres, profit centres and employees around the world. The idea that they should centre their entire operations and all their profits in the UK is a nonsense.’

Dean said he had watched one public accounts committee hearing with his head in his hands, because an important debate appeared to have descended into ‘finger-pointing and ranting’ at companies.

He took issue with the concept of a ‘fair share of tax’ and the argument that companies such as Starbucks and Amazon were immoral, or were not being morally correct in structuring their affairs. Both concepts were, he suggested, ‘totally irrelevant’ in the context of tax.

Dean added: ‘UK tax code is complex, we have the rule of law and due process, and we have extensive case law. The government have the power to change the law if they see fit. Rather than haranguing multinational companies for paying what they perceive not to be the fair share of tax, the law should be changed if that’s what Parliament wants – rather than bringing companies falsely to account.’

The new general anti-abuse rule would take ‘the concept of subjectivity’ into the tax code, Dean argued. ‘Whether that’s a good thing or a bad thing, I don’t know. At least [HMRC’s guidance confirmed] that structures employed by the likes of Google, Amazon and Starbucks would not be caught by the GAAR.’

Dean suggested that the real debate was about what the UK tax system should be designed to achieve. ‘Do we want to attract companies into the UK, and at the same time do we want to collect more tax from those companies? If that is the case, the rules need to change because at the moment, in my view, the likes of Google, Amazon and Starbucks are not avoiding UK tax, period.’

He did not think unitary taxation would ever gather any momentum. ‘It’s a neat academic idea but in practice it would require the UK to change its tax system completely, it would require the UK’s trading partners to change their tax systems, and it would also entail a rewrite of the UK’s double tax treaties.’ At the EU level, there was the proposed common consolidated corporate tax base (CCCTB), but other European issues were more pressing, he suggested.

Changes to the transfer pricing rules in the UK might work, however. ‘There seems to be a multiplicity of choices for multinationals to use various methodologies to come to an arm’s length price for goods and services provided intra-group. Perhaps the choice available makes it very difficult for HMRC to challenge those inter-company prices.’

Dean questioned whether HMRC was sufficiently resourced to tackle large-scale transfer pricing.

Another possible solution was to amend domestic legislation to include ‘some form of cap on deductibility of group expenses, so that a multinational having a business operation in the UK is not allowed to deduct more than a set percentage of the combined inter-company charges such as royalties and interest’.

Dean added: ‘I’ve really had enough of the fair share and morality argument surrounding tax. If the government wants to change the law and increase its tax take from multinationals, then it should consult on a proper basis and the law should be amended. I really don’t think that pillorying multinational companies operating within the rules is a sensible thing, and it doesn’t give the right message in terms of the UK being open for business.’

‘There is nothing natural about a tax,’ David Goldberg declared. ‘All taxes are inherently artificial and have to be created by words which require interpretation.’

The ‘non-natural’ nature of tax meant that it was possible to have different views about how legislation imposing a tax should describe the taxable subject matter, he said.

There were legitimate economic arguments about whether a particular tax was sensible, but that it was ‘never truly possible’ to say that one form of tax was inherently fair or morally right while another was not.

‘What is a fair amount for company X to pay?, he asked. ‘How, in the absence of law, do I determine the answer to that question?’

Goldberg argued that companies criticised recently had done no more than apply the rules of domestic legislation to themselves, in a way that was strictly in accordance with the law.

‘To call that avoidance, or doing something that is not fair, is at best childish and at worst rabble-rousing. If the complaint is that our rules do not impose an amount of tax which a commentator considers sufficiently significant, then the fundamental question is what the rules should be – not whether taxpayer A or taxpayer B has been behaving properly.’

He added: ‘There can then be a proper debate about how our tax system should be designed and what it should be achieving.’ Legislators had failed to understand how the tax system was designed, or what it seemed to achieve.

A ‘shameful’ example of this lack of understanding, he said, was criticism of RWE npower. ‘It appears that [the company] has not played corporation tax because it made investments attracting capital allowances. In other words, this company did what the tax system is designed to encourage it to do – invest in capital assets. It cannot be possible on any rational basis, or even on any semi-rational emotional basis, to criticise it for doing that.’

There was an urgent and fundamental need, Goldberg argued, for a consideration of what the tax system was doing and what it was supposed to do. Legislators were, he claimed, showing a worrying ‘disrespect’ for the rule of law.

‘The proposed general anti-abuse rule in its current form is a provision which no civilised state should consider enacting. That it will probably will be enacted demonstrates that we are in a dangerous situation.’

‘Miles and David, you are going to love me,’ Kamaljeet Jandu said. He would argue for a financial transaction tax, the closure of tax avoidance schemes and an increase in corporation tax.

‘April 2013 will go down in history as a pivotal moment when a raft of cuts, and reforms in health, welfare and taxation came into force and when the UK, I think, changed for the worse,’ he said.

‘We don’t live in isolation. We are moral beings, we are constantly making judgements about being right or wrong, good or bad. We find ourselves in a time when the basic needs of living and surviving – such as food, shelter, access to education and employment – are being denied to many by political judgements and policies implemented by state institutions.’

Jandu said the same judgements were being made to support ‘the status quo of the plenty and those who have opportunity, against those who do not have the same opportunity’.

He noted that ‘virtually every town’ in the UK now had a food bank. ‘It’s tragic that as a nation we cannot feed all our citizens, and that some British citizens have to go hungry. On the other hand, there are many citizens and corporations sitting on great wealth and cash mountains that they will never utilise in their lifetime.’

This was not the politics of envy, Jandu said. ‘This is the politics of survival and fairness.’

The gap between the rich and poor had increased, facilitated by ‘generous tax breaks, tax avoidance and tax havens’.

Big companies like Google, Starbucks and Amazon should pay more tax, he said. ‘I see no reason why not. It is not flawed thinking, it is not blurred lines – let’s look at outcomes.’

Jandu argued that the UK was ‘a global leader for tax secrecy’. He advocated a ‘fairer, tighter’ general anti-avoidance principle and a ‘minimum tax rate for those at the top’.

Mariana Mazzucato said that while she agreed with much of what Jandu said, ‘it actually weakens the case by talking the moral case [alone]’. She would focus on the economic case.

‘So much about what we have seen happen to tax has been done through different types of lobbying, which actually has almost no economic evidence behind it and is more driven by ideology or different types of moral points made on who the wealth creators are.’

There were many different views about the state’s role in the economy. ‘If we think the state is simply a nuisance, we need it just to do the basics, then you could argue what Nigel Lawson argued – that we should have the lowest tax rate possible and get people to pay it. If instead, you think the state should do something more – for example, fix market failures – then you need more of a state budget.’

Much of the scientific research in the US, for example, was state funded. However, if the state was doing even more, for example shaping and creating markets, you would need even more tax.

Innovation had been funded ‘hugely’, she said, by governments. ‘You need to pay tax because the government is not just a nuisance, it’s not just correcting market failures, it’s doing this big stuff which in theory everyone is trying to do, which is innovation-led growth.’

Mazzucato added: ‘If you look at what drives business investment, and you listen to what companies ask for, it’s all about tax.’

But tax policy, and in particular recent reductions in capital gains tax in the UK and the US, had been driven by ‘stories about what drives business investment’.

Technological market opportunities drove investment, she argued: ‘There is no evidence at all that either corporate income tax or capital gains tax has any effect on business investment.’

Mazzucato concluded by calling for ‘more of an economic argument’. We should not just resort to morality, she said, adding that she thought there was a moral case. Those who focused on morality alone, however, would be attacked and unable to get their message across.

Moral obligation

Chi Onwurah, Labour MP for Newcastle upon Tyne Central and shadow minister for social entrepreneurship, observed that neither Dean nor Goldberg appeared to believe that the moral argument was appropriate.

Many companies were now ‘even more’ trying to emphasise their corporate social responsibility or citizenship, she said. ‘Whilst being a corporation is a limited financial liability, why on earth do you think that gives a limited moral liability? People will judge companies by their morality .’

Goldberg responded by asking Onwurah what was a ‘fair amount of tax’.

Onwurah replied: ‘I’m not sure it is for me to tell you what a fair amount of taxes, but I could possibly tell you what is an unfair amount if you pay less tax than your cleaner, for example.’

Dean said: ‘In terms of the avoidance debate, I think a company has a legal obligation rather than a moral obligation to pay tax. I don’t see how morality comes into that area at all.’

Onwurah asked whether there was any morality attached to companies, in areas other than tax.

‘That’s not a fair question,’ Goldberg said. ‘The question is not whether a company should behave morally, but whether tax has anything to do with morality.’ Differences of view as to how much tax a company should pay were political and not moral, he suggested.

The avoidance debate

Tim Crosley, head of tax at the law firm Memery Crystal, said that in general, the standard of tax debate in the House of Commons had been ‘woeful’.

‘There are intellectual matters as well as moral matters here, and the focus has been on sound-bites … So-called fair taxation is now very much an international issue and it must have an international solution. Supplies of goods and services are becoming increasingly online and international, and people and businesses are now genuinely movable. This has to be a key consideration in debating how, and how much, we tax people.’

Crossley added: ‘Looking at this in territorial isolation is incomplete and potentially very dangerous and destructive. I’m no fan of aggressive tax avoidance but it’s not about paying a “fair share”, and I agree that it’s a nonsense term because everyone has a different idea of what fair is.

‘It’s about paying tax under a tax system which is itself fair and proportionate, with a tax authority that is well staffed, well-motivated and properly trained. Until we get those two things, we are never going to move on.’

The OECD project

Tax Journal asked the panellists what they would like to see, and what they expected to see, in the OECD’s action plan to tackle base erosion and profit shifting.

Dean said: ‘I expect to see changes to bring the transfer pricing rules up-to-date, particularly in view of the growth in online retail.’

Jandu said fairness should be at the core of any proposals in order to restore faith in the system, while Mazzucato said tax policy should ‘reward value creation, not just value extraction’. Present tax policy was ‘dysfunctional’ because value creation was disincentivised, while value extraction was incentivised, she said.

Goldberg said he wished to see nothing, and expected nothing, from the OECD project. ‘Getting large number of countries to agree on tax policy is going to be impossible. If some of them decide to follow a particular route, companies are going to be taxed in multiple jurisdictions over and over again.’