“Whose side are the professions on?”

Summary

A short series of thoughts on today’s Public Accounts Committee hearing on tax avoidance featuring Google, Ernst and Young and HMRC, along with the Goldman Sachs ruling.

There were two things in the news today on all things tax avoidance. The first was the Public Accounts Committee hearing on tax avoidance – Google’s UK executives being hauled back before the powerful select committee of MPs. The second was the High Court judgement on HMRC’s tax deal with Goldman Sachs, which the judge ruled in HMRC’s favour against a legal challenge brought by UKUncut’s legal arm.

Previous blogposts on tax avoidance

I’ve blogged before on this subject, in particular at:

Browsing through Twitter on the #PAC hashtag today, I’ve noticed that opinion has become polarised. Tax professionals have come out against the Public Accounts Committee, while activists have come out in favour.

Richard Murphy’s take on today’s proceedings makes for interesting reading. I’m particularly interested in the final points that he makes – 3) and 4), in which I broadly agree with him. The risk that tax professionals face is that their public profile is beginning to look like they are the apologists for the tax-avoiding super-wealthy. HMRC on the other hand continues to have sand kicked in its face, even though there are growing numbers who want HMRC to take a stronger stance against tax avoidance by the super-wealthy.

“Hang on Pooffles, isn’t it the job of tax professionals to reduce the tax burden of their clients? So long as that is legal, what’s the problem?”

Depends how big a world view you are taking it from. From a narrow world view, it’s a perfectly understandable and rational thing to do: taking the law as is, and trying to use it in a manner that benefits you. The two problems are:

  1. Tax avoidance is a very murky area, not helped by the 14,000 pages of tax code the UK currently has
  2. People are looking at headline numbers – things like total profits, shareholder dividends, executive remuneration and (given the economic context of austerity) are not liking what they see.

Thus what’s coming out on Twitter seems to be:

  • tax professionals on one side tearing their hair out when an MP on the Public Accounts Committee is seen to make some basic errors of interpreting that tax code
  • activists tearing their hair out because those appearing before them seem utterly ignorant of the wider social context of these headline figures.

So the question then is: How do you reconcile the two? (Can you reconcile the two?)

“Let’s put that in the ‘too difficult to deal with’ tray”

I gave Treasury an absolute kicking in an earlier blogpost in the section with the above title. Treasury has got to take the initiative to simplify the tax code significantly. At the same time, it needs to avoid the risk of simplifying it in favour of those who, in my opinion already have too much. (The super-wealthy). I recognise though that this is a very  ‘Political’ point, and that people with different dispositions may disagree.

If The Treasury won’t take the initiative on this, then the onus falls onto Parliament. There is only so long MPs can haul firms before them to be harangued. I believe we’ve already passed that point, and that Margaret Hodge (Chair of the Public Accounts Committee) has got to set in train by whatever means, a process that does the job that Treasury seems unwilling or unable to do. This also means engaging with tax professionals too.

“But Pooffles! What about my clients? Won’t someone think about the poor little rich people?!?!”

I jest – tax professionals are not simply there to see how much they can screw the taxman for on behalf of their offshore clients. Amongst other things, they take some of the burden off of small businesses when it comes to managing tax. The time spent having to manage tax issues is money not spent focussing on improving things like customer services, or products.

The problem at the moment seems to be that in criticising politicians, tax professionals are seen in the eyes of the public to be defending the super-wealthy and tax-avoiding corporations. What I’d like to see coming from the world of tax professionals are some solutions: solutions that, in the eyes of the public are seen to be socially just. Because if bigger dents can be made in the amount of money lost to tax avoidance can be made, it might have an impact on the cuts to public services and/or reduce the tax burden on the rest of us.

What about HMRC? Are they not off the hook?

Turning around HMRC is like turning around a super-tanker. What to do about them is something I’ll leave to someone more familiar with the inner workings of the organisation. But the status quo is unsustainable.

6 thoughts on ““Whose side are the professions on?”

  1. “Tax professionals on one side tearing their hair out when an MP on the Public Accounts Committee is seen to make some basic errors of interpreting that tax code”

    I absolutely agree with this, as a tax professional, although I’m not sure it goes far enough. To use the language of tax penalties: it seems as though Hodge isn’t making just careless mistakes, it looks more as though she’s failing to take reasonable care in what she’s doing and is possibly deliberately trying to get a result she knows is incorrect. By saying she won’t reveal the information she bases her allegations on, she’s almost getting into “deliberate and concealed”, which is where HMRC really throw the book at you penalty-wise, and consider putting you on the “managing deliberate defaulters” list.

    If she were simply misunderstanding things I wouldn’t mind so much, but I’ve yet to see her actually change her opinion on anything as a result of someone answering a question she’s asked – even if she lets them finish before interrupting. If she isn’t open to discussion, why is she on a committee?

    I can see why activists are tearing their hair out too, but I have yet to find anyone come up with a position that Google et al ought to be in. They complain that not enough tax is paid, but seem to be at a loss to say what the correct position should be – because, I suspect, the simple fact is that the cross-border allocation rules work in ways which aren’t immediately intuitive, especially given changes in business methods. The most definite pronouncements seem to come from Richard Murphy, but he does it by ripping up the rules as they are and saying people should use a Unitary Tax system instead. Now that may be a more sensible regime to apply, but there’s no way a company can (or ought to) actually apply it given that it’s not actually in force. And I’m not sure it works as a model for international taxation, given that the way he applies his rules they only seem to operate to bring profit into the UK, never to move it out.

    My main beef with the current situation is that many people who don’t like the effect the rules currently give are attacking companies which are able to benefit from those rules, rather than seeking to change the rules themselves. This is particularly odd for Hodge, who as an MP ought to be in a position to do something about it (although in the Big 4 PAC hearing she seemed to suggest that MPs have no role in the production of legislation – has she not read her job description? Though Mike Truman’s recent article in Taxation is bang on, in my view) rather than just berating people.

    “Tax professionals are not simply there to see how much they can screw the taxman for on behalf of their offshore clients. Amongst other things, they take some of the burden off of small businesses when it comes to managing tax. The time spent having to manage tax issues is money not spent focussing on improving things like customer services, or products.”

    Speaking of job descriptions – yes, that sounds about right for me🙂 Tax is unreasonably complicated for SMEs, and I try to help clients sleep at night rather than worrying about it. The actual amount due is less of a concern, most of the time.

  2. “My main beef with the current situation is that many people who don’t like the effect the rules currently give are attacking companies which are able to benefit from those rules, rather than seeking to change the rules themselves.”

    But if there is a hole in a law, then the ethical position is NOT to exploit it, even where you legally can. To draw a deliberately extreme parallel (though one that directly effects me, which is why it pops to mind), disabled people are currently not protected against hate crime to the same degree that racism and homophobia are considered illegal – you can quite legally incite hatred against disabled people in a way that would get you banged up if it was directed at a racial or LGBT group – but the fact it isn’t actually illegal doesn’t mean it is reasonable to exploit that hole in the law.

    The problem ordinary people have with the tax professionals running the affairs of big business, and the managers who enable them, is that they seem to hold the position that anything which isn’t forbidden is mandatory (as long as you can avoid some tax by it), and that ‘ethics’ is something that only applies to the little people. Margaret Hodge may not be an expert on the tax code, but she’s plugged directly into how the man in the street feels about these things.

    Holes in the law may need to be plugged, but companies who deliberately seek out and exploit those holes as a matter of corporate policy are a problem in their own right.

    1. The problem is that it’s not “holes in the law”, it’s just that different things get treated differently. Doing A is not necessarily avoidance of B.

      If you’re a multinational business that wants to sell things to people in Europe, you can set up anywhere in Europe you like to do so – especially if you’re an internet business that will only be interacting with people through their PCs anyway. If you choose to set up in the UK then you’ll be taxed in the UK, but if you set up in Ireland you’ll be taxed there. If the UK charges you more than Ireland does in tax, why would you choose to go there?

      To me, it’s a bit like Waitrose complaining that people are shopping in Aldi because it’s cheaper, even though they live closer to Waitrose. They’re paying for their shopping, but they’re paying less than they might do and none of it goes to their local shop. They’re clearly avoiding Waitrose’s prices because they walk past it on the way to Aldi – surely this is wrong?

      I know it’s not a perfect analogy, but the point is that the UK is not particularly entitled to say “if you did something else we’d get more money, so that’s what you should have done”.

      1. “If you’re a multinational business that wants to sell things to people in Europe, you can set up anywhere in Europe you like to do so”

        True, but if I buy something from Amazon UK then the transaction takes place on my PC (I don’t know where the relevant Amazon computer physically is, but the staff putting stuff into it are undoubtedly British), payment is done in the UK, fulfillment is done in the UK, and the goods are more often than not sourced in the UK, yet Amazon pays tax out of some tiny little backstreet office in Luxembourg. That’s a corporate structure designed solely to avoid tax, not for any sound business reason.

        Or if we pick the Starbucks case, I buy a cup of coffee on the High Street, but then half the profits are creamed off for the intellectual property of Starbucks UK buying coffee from Starbucks NL, and the rest goes for the intellectual property of Starbucks US allowing Starbucks UK to use the company’s own name. I happen to think intellectual property is important, but this is a blatant misuse of it as a profit exporting mechanism in order to avoid local taxation.

        Or take the Google case, staff in the UK sell advertising to be delivered to people using Google on PCs in the UK, but a tax fiddle says ‘no, technically we didn’t complete the sale in the UK, we did it in Ireland’.

        Or the Apple case, $70Bn funnelled into Ireland, much of it without paying tax _anywhere_? With corporate executives going before Congress to baldly state that unless they cut corporation tax in half they’ll never see anything of that money?

        In each case the business has been structured not for operating efficiency, but solely to avoid tax. Tax avoidance has become blatant, it had become something tax experts slap themselves on the back for. Each of these companies will have a corporate social responsibility policy, Google’s is famously ‘don’t do evil’, but if you do all this business within a country, and weasel your way out of contributing to that society by paying tax, then are you doing good, or doing evil?

      2. With Amazon, there’s a debate to be had about where the transaction should be treated as taking place, yes. But that debate’s been gone through once already, and the result was that the system was set up in such a way that Amazon can choose to sell out of Luxembourg. Any system will give results that some people object to, and I struggle to see a way that’s better (Unitary Taxation seems to beg the question, so far as I can tell, as well as being so subjective and complex as to become unfair; taxing by customer location is just too complex).

        I agree that choosing to operate out of Luxembourg is a decision made in order to avoid tax; but I think that avoiding tax is a sound business decision. It can be more or less aggressive, but I think that as Amazon’s structure follows the internationally-agreed rules, it’s not all that aggressive. The rules could be better – I personally think that the exclusions from permanent establishment are too black and white, and should be watered down to “things that are not normally PEs but might be” rather than” things that are not PEs” – but Amazon is following them.

        Looking at the royalty rates for Starbucks I find it very hard to agree with you – 4.7% is 0.3% less than what a lot of people would regard at the low end of normal. “Half the profits” is in any case a dubious comparative to use, especially where the profits are low due to some unfortunate business decisions. “Is the rate objectively reasonable?” is a much better one – and (based on the limited information I have) II see no reason to think otherwise.

        With Google I think that they may have overstretched themselves. The line between marketing and selling is very fine, and the blurriness between policy and practice is quite wide, and so I suspect that they might easily have come up with a great idea that they’re not actually pulling off in practice – unlike Amazon, who seem to be managing their structure. But I’m sure there’ll be some detailed investigations by HMRC…

        Apple’s “not resident anywhere” is a bit of a misnomer, as the income is still taxable in various places. But that’s again a creature of the law, specifically in this case the way the US treats offshore profits (very differently from how it does individual income tax – I struggle to see the policy justification for the difference, which is possibly why I can find both ways of doing it objectionable).

        At the end of the day, though, I consider that avoiding tax is a business efficiency. I use “avoiding tax” very broadly: to me it covers ISAs and R&D tax credits as well as international structuring. I see it as a spectrum, from sanctioned to acceptable to aggressive (and then to abusive), but it’s all tax avoidance. Tax is a cost of doing business, and all sane businesspeople try to avoid incurring costs that don’t bring a benefit.

        As long as income is taxable somewhere, and the distribution is reasonable, I’m happy. The factors I don’t currently like are 1) that nil tax jurisdictions distort things too much, and 2) that IP gets shifted around far too freely, with the alleged capital value of future income streams seeming to be very low. Apply withholding tax or CFC rules to the former, and a variety of Marren v Ingles rules (or maybe Assets Transferred Abroad anti-avoidance) to the latter, and things would get much simpler. In my view😉

  3. This isn’t intended confrontationally Poofles, but I think the idea of “taking sides” is one of the biggest problems here.

    Both taxation and morality are painted in shades of grey and are very rarely truly black or white. Making sweeping assumptions about either, and trying to draw up sides, is not going to serve the public’s interests at all.

    For starters, I wouldn’t know which side to pick. I have always disliked artificial schemes (and think they usually fail within the law anyway) and don’t think they are moral (though I would not describe as immoral those that do use them, but that’s off-topic), but I couldn’t “side” with the polarised views of Margaret Hodge either.

    As much as Margaret Hodge might have gauged public opinion, she has not gauged the facts of the situation correctly or the issues of law in question.

    I have only looked at Starbucks tax position in any depth and I couldn’t see the case for her calling for a boycott or singling them out after any special treatment. In brief, the Reuters’ report, the source of most of the accusations, does not once reference how Starbucks are doing anything out of the intention of the law, which I’m sure you appreciate is the key test by most definitions of tax avoidance.

    Contributing to the rhetoric doesn’t help. What we actually need to do is to understand the reasoning behind some of the laws we currently have. Transfer pricing is much maligned and far from perfect, but without it the defence against tax avoidance would be far worse. And under other systems, there may be too little discretion to produce a genuinely fair result. Or too much discretion.

    That’s the sort of discussion we need about tax. But singling out individuals who obey the law as it currently stands is counter-productive. The public have got bogged down in facts of specific cases rather than the legal principles. And really what else are businesses that must comply with the law as it stands today supposed to do with regards to international intra-group transactions?

    That conversation about fairness does happen, but it doesn’t happen prominently in the media because the public aren’t really that interested in the minutiae of such things.

    And neither are some campaigners, in my opinion. Certain campaigners have a solution they wish to see implemented and aren’t really interested in seeing people properly think things through for themselves. And, in fairness, many people don’t want to have to properly think through something as enthralling a matter as taxation.

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