I've already shown how disastrous George Osborne's reaction to the latest round of corporate inversions in the UK would be, but let's give him credit where it is due: he has noticed there is an issue to deal with; he's just come up with a hopelessly inappropriate solution. In saying so it is however beholden upon me to offer an alternative opinion. This is the first blog in which I do so: it won't be the last.

Let's be clear, this problem can be tackled. After all, what we're facing here is a situation of blatant and aggressive tax avoidance driven by tax competition. Now tax competition comes in two major forms, of which there are though, I admit some sub-varieties which need not bother us too much for now.

The first form is what might be called real tax competition. This is about the location of real jobs in real factories making real things. Of course it's not really tax competition at all; it's tax being used as part of fiscal economic policy to encourage full or at least active employment in an economy. You might think that the Left might like this as it appears to be Keynesian. Actually, I don't have much enthusiasm for it. Keynesian fiscal management is meant to be short term, aimed at public works as counter-cyclical economic stimulation to create a multiplier effect, and is not meant to be straightforward business subsidy which reallocates resources within the market inefficiently, as this form of competition tends to do. So I don't have much taste for it, but at least you can see a positive motive and potential outcome.

The second form of competition has no such benefit, unless you consider robbing the least well off to pay the rich to be social welfare enhancing (and not many would). This competition is wholly artificial and is for reallocation of the tax base. It comes in two broad forms. One is competition for head office locations because for all the reasons that the UK knows well, and which are motivating its new anti-avoidance legislation, head offices bring the opportunity to tax income streams arising outside the place in which they those head offices are located. It is this activity that Ireland pursues, in the process also providing opportunity for redesignation of passive investment income into what looks like active income (although I suspect it rarely is). The second variety is that practiced by secrecy jurisdictions / tax havens that blatantly promote the relocation of passive investment style income to their domain where it is subject to little or no tax but does give rise to some local fees whilst supporting an expatriate population of secrecy providers from the banking, accountancy and legal communities.

The corporate inversions we're seeing exploit both these forms of abusive tax competition. Jersey offers the country of incorporation even though nothing of consequence will happen there. Their role is to give a tax free corporate structure with low regulation. Ireland gives a tax residency for that Jersey structure where Controlled Foreign Company rules won't be pursued, not least because the company in question is not Irish incorporated and so can flee at any minute and as such cannot be captured by a CFC regime. Ireland gets some corporate tax income as a result though (but maybe not much).

But in neither location or case does anything really happen. No jobs or management are going to be moved from London. The companies in question are going to continue on the London Stock Exchange. They've made this abundantly clear. This is just financial engineering of what are in effect passive income streams of dividends that are now to be routed through a different location. In that case one would expect a CFC regime to come into play.

So could it? That's my first question. I think it possible that CFC rules could be used here, and that the UK should be bold on this issue. First it could pass anti-inversion legislation. It could, in similar fashion to the US legislation on this issue passed in 2004 and used to tackle inversions to Bermuda, say that if there is a relocation of a parent company to a low tax jurisdiction (a ratio of effective tax rates seeming to provide the appropriate basis of definition here) that assuming (using the US precedent) that there were more than 80% shareholders in common before and after the inversion (and loans of stock and matching rules on purchases and reacquisitions would be needed as inevitable anti-avoidance measures) then it must be possible to deem the new corporation under the control of the old corporation and therefore apply CFC rules to the new company which is, very obviously and as a matter of fact under the control of the old one which has taken all the necessary steps to create it.

I know there are possible conflicts with EU rules on capital mobility but I'm not convinced they would work or that the European Court of Justice would strike this down given its current mood and its distaste for artificial transactions that are seen to undermine the domestic tax base in the post Halifax era of its decision making. In addition, no one can claim that these inversions relate to anything but passive income. Even under Cadbury Schweppes there must be real prospect that they could be ruled legal as a result.

And, of course, it would take a long time to find out. In the meantime the harm would have been stopped.

So that's option 1. I should also give credit for the idea: I was with Reuven Avi-Yonah, one of the world's greatest tax brains when I was in Montreal last week. We were both key-note speakers at the conference I was attending and we took the chance to chew the cud on this issue. The opinions I offer here are mine but Reuven is a guru on inversion issues. It was a real privilege to have the chance to discuss it with him.