Where is tax due?

Articles 15.05.2015 Author: Robert Maas

Robert Maas, tax consultant at Carter Backer Winter was struck by April's economia essay in which Diarmid O’Sullivan – an advisor at ActionAid UK – set out ActionAid’s five-point plan to tackle tax avoidance

 

  where-tax

The article’s first point starts by demanding that “British tax rates do not incentivise tax avoidance by British companies in developing countries, chiefly by reforming the CFC rules so that they apply to all profits shifted into tax havens”. But how does this help the poor in, say, Zambia? It would surely be better to help Zambia collect its taxes than to have UK rules under which the UK taxes profits diverted from Zambia.

A great many people are facing severe financial problems because they genuinely believed that by entering into a tax-efficient investment they would support the British film industry

 

The UK has made a policy decision to tax a UK multinational group only on profits earned in the UK, or those it perceives to belong in the UK. I suspect that Diarmid’s concern is with that policy. Like many campaigners, his definition of tax avoidance is “not paying the tax that he believes ought to have been due if UK tax policy had reflected his views”. Why should the UK want to collect tax that properly belongs elsewhere in the world?

Secondly, profits do not normally get “shifted into tax havens”. A valuable asset is sold at its full value to a tax haven company and the UK company leases back that asset for a market rent. The real issue is whether (and why) the deductibility of a bona-fide business cost should depend on whether the supplier of the service is located in a high tax country or a low tax one.

ActionAid’s next proposal is to require multinationals to publish reports of their turnover, profits, taxes paid and other data on a country-by-country basis.

Actually the Finance Act 2015 does just that. It requires such information to be published to all of the tax authorities involved. But that is not what ActionAid wants. It wants public publication. Personally, I think this is a dangerous idea because the information is bound to be misleading.

In the international arena the profit from a sale is often generated by activities in a number of countries. How should the profit be attributed to each of the countries involved? One way would be for each country to make an arm’s length profit on what is done in that country with the balance of the profit being attributable to the UK. That is basically the current system.

However in practice, ascertaining the arm’s length profit due to each country is easier said than done. It can easily take 10 years to agree the figure with a tax authority. So the company’s initial estimate is fairly meaningless. It is not wholly meaningless to a tax authority, as it helps it to validate its own initial view of the profit attributable to its country. Publishing to tax authorities makes sense; wider publication does not.

Mining is both expensive and risky. What if a country with substantial mineral resources grants a tax holiday for a period of years to encourage a mining company to undertake the risks? Does ActionAid want the mining company to say it pays no tax? In the modern international world, taxing profits is not necessarily the best way to collect state revenue and comparing a turnover tax to profits is both pointless and highly misleading. Sales of licences, perhaps coupled with production royalties, are not taxes so presumably will not even feature in country-by-country reporting.

Read the essay from ActionAid’s Diarmid O’Sullivan here

The third proposal is to curb the avoidance of tax on profits earned in substance in the UK by multinationals based elsewhere – a Diverted Profits Tax “but without the loophole for loan arrangements”. The loan arrangement rule is not a loophole. It is a deliberate government policy. If you believe in democracy it is axiomatic that not all government policies will reflect one’s own views, so to describe the policy as a loophole is ridiculous.

The fourth proposal is to review all corporate tax incentives to check whether they provide tangible benefits to the economy, society and the environment, which justify their costs in foregone tax. I have no problem with that. Indeed, I think that the purpose of the tax system should be solely to raise the money needed to meet government expenditure. Tax incentives – such as for gifts to charities – are fundamentally wrong because they complicate the tax system and help only those in a taxable position.

Finally ActionAid wants to ring-fence HMRC’s budget, tighten rules for tax advisers and increase the penalties for tax avoidance schemes. I think there is a lot of room for efficiency savings within HMRC, so ring-fencing its budget seems odd to me. As a tax advisor, I do not have a clue what O’Sullivan wants tightened against me. The various professional bodies of which I am a member expect me to act with integrity. In a climate where government policy itself seems itself to be regarded by some people as encouraging tax avoidance, I cannot see what else the professions can do.

I do not know what extra penalties ActionAid want for tax avoidance. The penalties, together with interest and surcharges on overdue tax, can already be substantial. No one has ever produced a robust definition of tax avoidance, so I do not know who ActionAid wants to penalise. I do know that a great many people – the middle classes, not the ultra-rich – are facing severe financial problems because they genuinely believed that by entering into a tax-efficient investment they would support the British film industry, only to find several years later that HMRC regarded that investment as tax avoidance. I am sure they will be interested to learn that ActionAid believes they have not been penalised heavily enough.

WHAT DO ACTIONAID WANT?

In April’s economia essay, ActionAid called for: Ensure that British tax rules do not incentivise tax avoidance by British companies in developing countries, chiefly by reforming the Controlled Foreign Companies rules so that they apply to all profits shifted into tax havens, not just those shifted from the UK.

Require multinational companies to publish reports of their turnover, profits, taxes paid and other data on a country-by-country basis.

Curb the avoidance of tax on profits earned in substance in the UK by multinationals based elsewhere; our proposal is similar to the Diverted Profits Tax, but without the loophole included in the latter for “loan arrangements”.

Review all corporate tax incentives to check whether they provide tangible benefits to the economy, society and the environment which justify their costs in foregone tax.

Ring-fence HMRC’s budget, tighten rules for tax advisers and increase the penalties for tax avoidance schemes which are successfully challenged by HMRC.

About the Author

Robert Maas

Tax Consultant +44 (0)20 7309 3800