As the Tax Justice Network notes this morning in a blog from which, with their permission, the following is copied, the Financial Times is running an editorial today entitled a taxing world which is mostly very good.
First, though, after a brief exploration of the UK Uncut phenomenon ("the group has a point") there is something we'd disagree with. The FT says this:
Tax avoidance is legal and legitimate. Unlike tax evasion, it is not obviously immoral to exploit the tax code to pay the least that is legally required.
It is up to government to plug the leaks, the FT said. No. For starters, as we constantly argue, what is legal is not necessarily what is legitimate - slavery was legal once. And also remember the "golden rule" - who has the gold, makes the rules. Corporations punch loopholes into the tax code so that they can get out of paying tax. Other corporations then enter those holes. We have to hold these corporations' feet to the fire, as well as keeping government on its toes.
So far, so familiar. But then the FT gets onto something interesting. It first notes that the European Commission on Wednesday closes a commission looking at whether to go for country-by-country reporting - a concept pioneered by TJN's Senior Adviser Richard Murphy originally for the extractive industries, and now for all sectors. The FT seems supportive: publication is of this data is unlikely to prove too burdensome, it reckons (as does the World Bank, among many others). So far so good. But now get this.
Civil society groups think such reporting will unveil tax avoidance undermining developing countries’ tax revenues. In fact, the greater impact may be to expose the scandalous tax treatment of multinationals in the rich world.
Well, we think that the first point is probably the big one. But it's related to the second. And what exactly do they mean by "scandalous tax treatment?"
Multinational corporate taxation is largely a voluntary gesture these days, the FT notes, because of multinationals' ability to shift profits around the world's tax havens so that they realise their costs in the high-tax nations, and their profits where taxes are lowest. This harms governments at both ends of the cross-border investment: if, say, a U.S. corporation invests in Burkina Faso, then this so-called transfer pricing manipulation stiffs both Uncle Sam and the Burkinab?© government. This is one of the relatively rare agendas where citizens of rich and poor countries can fight in a shared common cause.
And then the FT says that the EU will soon propose what is known by the horrible name of formulary apportionment, by which states divide up multinationals’ tax base according a formula based on real economic activity. Under such a system, if you have a one-man booking office in Luxembourg, then only a miniscule part of your income will be "apportioned" there under the formula to take advantage of Luxembourg's zero tax exemptions. The rest would get taxed at proper rates, where the real stuff happens.
The prize is worth the effort — even if some states go ahead on their own.
This is exactly, exactly, as we have been arguing. It would have a massive impact. A large part of the tax haven business - not to mention the political cover that multinational corporations provide for their continued existence - would disappear. We think the editoral writer should now, as a precautionary measure, don a hard hat.
At a meeting on December 8th in Brussels, TJN's John Christensen outlined this proposal to an assembled grouping from non-governmental and official bodies, and one participant raised his hand up to complain, along the lines of:
we have only just started getting up to speed on all the other stuff you have been pushing. Now we have to get our heads around this one!
Well, we are sorry if it's a lot to take on board. It's a lot for us too. But this problem is complicated - there's no getting around it - and we have to push forwards. This agenda is a big one.
Interestingly, at that same meeting Christensen had a long conversation with an FT editorial writer - about exactly, exactly this. Coincidence? We like to think not.
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Hi, I know that you are copying a TJN blog but I guess you agree with much of the sentiment. I am puzzled by some of the reasoning, in particular the following.
” For starters, as we constantly argue, what is legal is not necessarily what is legitimate – slavery was legal once.” Which I guess means that there was a set of laws that governed a practice that provided for slavery and that set of laws is and was unjust or illegitimate. This is clearly true, there can readily be a moral override to a set of laws and the justification of the moral override provides the reasons why the law, in this case the laws relating to slavery, should not exist. “An unjust law is no law at all.” as St Augustine says in On Free Choice Of The Will, Book 1, § 5.
Given this reasoning as to why a set laws that are in existence may be illegitimate, what is rather puzzling is the following:
“Corporations punch loopholes into the tax code so that they can get out of paying tax.”
Now I assume that this is blog rhetoric but the sentiment that underlies the statement is, at least in part, in my words, something along these lines:
“Corporations take advantage of an aspect of tax law by making use of “loopholes” which are the gaps between different parts of the tax code laws (either the different laws in a country for example capital gains tax and income tax in the UK or the gaps between laws of different countries)”.
If so it is the lack or absence of tax law (i.e. the gaps between different parts of the tax code laws) applying to the arrangements that the corporation has entered into which provides the tax benefits that the corporation is seeking.
It is one matter to argue that a law that exists is unjust because it is not morally justifiable and therefore it is illegitimate but I would like to understand how this principle has any bearing on the absence or lack of a part of the tax law (that is a “loophole”).
In practical terms (and I provide this illustration because it is simple to understand, it is possible to provide more up to date examples but they would not be as simple although the principle would be the same) in 1960 was it illegitimate that there was no capital gains tax? As you know, the non existence of capital gains tax in 1960 provided a massive “loophole” for corporations to receive value on capital account tax free rather than on income account which would have been subject to tax.
I am struggling to see how an argument based on a law being illegitimate because it is immoral can be applied in any obvious way to a lack or absence of a part of the tax code. Are you able to enlighten me or will you declare that I have missed the point?
What strikes me as being very relevant is the leader writer when he says “What is immoral is for governments to leave unmended gaps in our tax systems that distort the economy and make bigger spending cuts necessary.”
The leader writer seems to share a common interest with you in stating that the cuts would be less if the tax system was more effective. You appear to be disagreeing with this position and seem to be providing reasons for the disagreement that are difficult to understand.
Further guidance would be appreciated.
@Augustine
If you haven’t got it by now I guess you never will
So I won’t bother to answer
But I’d ask you to note the legal action against E & Y – it seems predicated on legal action being deception none the less
Of course it may not succeed – but this concept you find so hard to understand is widely understood in the 21 century – if not in the space / time continuum in which you live
@Richard Murphy
Hi,
Firstly thanking for replying, I know that you are busy.
However, with grace I ask you about the reasoning you are using and without grace you retreat to a position in which you are most comfortable … refusing to discuss matters.
For an instant I thought you might be different this time. Remember I have not disagreed with you I am simply trying to make sense of the argument to which you subscribe, I cannot agree or disagree with you until I understand why you say what you do. I suspect the guy at the FT is correct in saying that it is morally inappropriate that the loopholes exist. It may also be morally inappropriate to make use of the loopholes but perhaps not for the reason you seem to accept (based on the slavery analogy).
I have noted the legal action against E&Y, my understanding was that it involved an allegation that E&Y had engaged in activity that amounts to deception or to use a phrase beloved of you, cheating. If so then E&Y have broken the law so I do not understand why you say “it seems predicated on legal action being deception none the less”.
I do not know whether you have read many of the academic (ie thoughtful, objective and peer reviewed) analyses of the Enron horror. If you have you will know that the approach taken by the authorities was not based what the individuals did was immoral (it was that as well) but on what they did was fraud, deception and cheating. The convictions were established even though many of the actions undertaken involved entering into arrangements that were legal (for example setting up a special purpose vehicle), the legality of the arrangement was, in a sense, altogether separate from the judgement of fraud etc. I suspect it is the same in the E&Y case, some of the activities undertaken will be considered legal but it is alleged that it is the manner in which those arrangement were undertaken and the use to which they were put that is at issue.
I will refrain from commenting in the near future and try to work out your reasoning (which I suspect has not been blind peer reviewed) on my own.
In the meantime, I wish you and your family a very happy and holy Christmas and an enjoyable New Year.
In omnibus caritas
Augustine
@Augustine
Hi Augustine (and other people I haven’t gotten around to replying to yet, but have asked questions about my views on law, tax avoidance etc)
It seems you (and others) want some clarification on some things, and are being particular about semantics regarding the law and how it relates to tax avoidance etc.
I have a question for you before I get into a big debate about any of this, which is, what do you think the purpose of laws, in particular in this case tax laws are?
For my part, I believe laws should be created to make society better,, without unfairly negatively impacting anyone else.
I think you need this ground work to be able to answer the questions in more detail about tax avoidance etc.
Please let me know if you agree with this or have another view, and I’ll try to reply accordingly.
@Adam Hehir
Good questions
@Augustine
Let me reiterate: I will not be wasting my time on debating with you for a number of reasons
a) Neither of us will change our minds
b) I have said all that needs to be said
c) Someone who adopts the moniker, style and argument of one of the dodgiest, most harmful and frankly most fantastic in the sense off deluded theologians to live is not worth wile engaging with. To suggest I must adhere to such logic is just fanciful
So, no there won’t be a debate
[…] was the reason for the creation of country-by-country reporting — endorsed by the FT yesterday — because we believe it will help ensure that the right amount of tax is paid in developing […]
@Adam Hehir
Dear Adam
Thanks for your reply and question. Apologies in advance for the length of my response but I am more than happy to respond because these matters are so important.
You ask about the purpose of tax law. Tax law has many purposes, there are the tax laws that deal with how the tax system is to be administered but I will not consider these further. Instead I will concentrate on the tax laws that impose liabilities and provide reliefs. The purpose of these laws is many but in simple terms such tax laws form a complex system that have the following main purposes:
1. raise funds to pay for much needed public goods such as health, education, security etc
2. raise funds to assist in the redistribution of the wealth created by the nation (there is not space to consider the relationship between, nation, country, residents, citizens, members of the community etc so I just use “nation” as a neutral term), there are still far too many less well off people in the UK and reditribution of wealth is important and generally accepted as a good thing (the level of redistribution is another matter of course)
3. encouraging and even rewarding certain types of behaviour. Green cars are encouraged through the benefit in kind tax system, investment in certain green technologies are encouraged through the capital allowance system, entrepreneurial activity is encouraged through the capital gains tax system, employment is encouraged through parts of the corporation tax system.
When devising a tax system regard must also be had to such matters as fairness, clarity, a measure of certainty, matters associated with rule of law principles.
In order to achieve these aims, legislation that imposes a tax liability is introduced that broadly takes the form of “Arrangements of Type A will be subject to tax”, and for these purposes “arrangements” can be a transaction an activity a process etc etc.
The purpose my previous post was as follows.
It is generally accepted that if a conclusion is reached then you can seek to assess the acceptability of the foundation on which the conclusion is based and the way in which the conclusion relates to the foundation. In formal terms you can aske whether the premises are true and whether the argument is valid.
Now I can understand, based on the example of slavery that was used, that if a set of tax laws is introduced that imposes a tax liability on arragements of Type A, it is possible to say that such a law is illegitimate because it lacks moral foundation. An example of a recent tax law that came close to this was the changes to the 10p tax rate which would have penalised the least well off in our society. The outrage that followed this proposal was based on fairness,the new imposition of tax was unfair on the least well off, the imposition of the additional tax was morally unjust etc. Adjustments were made to nullify the effect of this unfair law. There was a “moral reason” to abandon this type of tax. I agree with such a position and the premises on which the conclusion is based are grounded in fairness and morality.
But that was not the purpose of my previous post. I could not understand how the reasoning that identified a law as not fair and not legitimate could be applied to an absence of law. The FT leader seemed to be correct not the reasoning of TJN.
Take the example of a new set of tax law that seeks to tax arrangements of Type B. Parliament has reason for taxing such arrangements and the law is duly passed. If I enter into an arrangement of Type C which is not an Arrangement of Type B then should I pay tax? The reasoning of TJN seemed to be saying that it is illegitimate that arrangements of Type C are not taxed and the justification for saying this was that some laws are illegitimate hence the reference to slavery. This is what I could not follow. TJN, based on the analogy of slavery law, seemed to be saying that a law that did not exist (arrangements of Type C should be taxed) was illegitimate. I asked for clarification but Richard responded in a not untypical manner.
In contrast, the FT leader writer was saying that when the law was introduced to tax arrangements of Type B is should have been introduced in such a manner that it taxed arrangements of Type B and arrangements of Type C and the moral failing is one attaching to Parliament.
You refer to semantics regarding the law. That is not my concern at all. I can, if you wish, link all of what I have written so far to actual behaviour by potential tax payers not to the words of legislation but such a discussion has to move beyond example after example and also address the principles.
If we look at the principles then we have the following analysis:
Imagine a set of tax laws are introduced that are intended to impose a tax charge on arrangements of Type B.
A potential tax payer enters into an arrangement of Type B. A liability to taxation crystallises.
If the potential tax payer satifies the liability he is compliant. If he does not satisfy the liability with intent then he is probably evading tax in a legal sense and is morally suspect too.
A potential tax payer enters into an arrangement that he believes is not of Type B.
If the potential tax payer is incorrect in his thinking and the arrangement he in fact enters into is one of Type B a tax liability crystallises etc. What the courts have been doing for the last 40 years or so is becoming more sophisticated in determining whether the actual arrangement entered into is one that is a Type B arrangement or not. For example if the tax payer splits the arrangement up into different steps, the courts can consider it a whole. If the tax payer introduces what are in effect “red herrings” into the arrangement the court will ignore them in order to find the description of the actual arrangement that is acceptable to the court and the court can then ascertain whether it is to Type B or not. This type of behaviour could be called failed tax avoidance planning and is a pain because of the resources etc devoted to it but might be a necessary cost of a democratic society.
If however the actual arrangement is one that is definitely not of Type B, then no liability to tax will crystallise. Now what can be said of this behaviour? HMRC would say: “well we introduced legislation to tax arrangements of Type B, you have not entered into an arrangement of Type B so you should not be taxed” HMRC might go on to say “We wish we have thought of arrangements of Type C and if we had we would have included those in the new tax legislation, but we did not so if we want arrangements of Type C to be taxed we will have to introduce new legislation”
What I do not fully appreciate, is the reasoning why a potential tax payer should not either enter into arrangements of Type C (that is, not an arrangement of Type B). I think the reasoning is: “you should not enter into arrangements of Type C because it is immoral to enter into arrangements of Type C” This is the reason I asked Richard about capital gains tax. This tax did not exist in 1960. If I entered into an arrangement that was on capital account in 1960 I would not have paid tax. Enter into the same arrangement in 1970 and I would pay tax. Would my actions have been immoral in 1960? I do not understand the reasoning and asked for help …. none was forthcoming.
In this response I have been open and tried to be clear. Are you able to provide clarification or will you provide a Richard response?
Kind regards and Happy Christmas
Augustine
[…] was the reason for the creation of country-by-country reporting — endorsed by the FT yesterday — because we believe it will help ensure that the right amount of tax is paid in developing […]
You seem to broadly agree (in many more words) that laws and tax legislation are made to make society better. We have decided, as a society that people should be taxed when they receive income, whether it is type A, B or C. This has a net gain for society, for the reasons you mention above, wealth distribution etc.
If there is a hole in tax law, such as you can have income in form C, which currently is not subject to a form of taxation, this seems to be contrary to what we have said above, ie, that tax on income is good for society.
It follows, if there is a hole in tax law, that is therefore bad for society, this can come from one of two ways. Corrpution or incompetence. Corruption if special interest groups lobby to set up the tax code to allow the loopholes they then exploit at a cost to society, or incompetence in that the hole has not been noticed creating a cost to society.
I think we agree on legitimate tax planning, to use Richard’s earlier definition seperating it from tax avoidance here http://www.taxresearch.org.uk/Blog/2010/12/20/tax-avoidance-tax-compliance-and-tax-cheats/ . Such as using ISA’s, or investing in green technology for capital allowance purposes as you mention above. What do these two, and other tax planning strategies have in common? They are clear, unambiguous, generally available to many, and don’t require an army of taxation specialists to realise.
So to reach my conclusion, if you need to spend a significant amount on taxation specialists to find arrangement Type C, utilise every loophole you can find, some of which are clearly not meant to exist due to their hidden nature, also bare in mind some of these loopholes don’t even exist and are invalid as seen after going through the court system. And all of this at a detrimental cost to society through people not paying taxes where some income in whatever form has been realised, with the increased costs of going to court, extra resources needed for HMRC etc. With all these negative costs to society of course someone should not enter into transaction Type C and it is very immoral. If it is not clearly spelt out in the tax code for the benefit of society and therefore exists due to incompetence or corruption don’t do it!
Honestly, the greed that exists in these multi million pound, multi national, care for no one but themselves with no regard for the world around them companies disgusts me.
@Augustine
And merry christmans to you too.
@Adam Hehir
Dear Adam
Thanks for the response and best wishes.
You say: “We have decided, as a society that people should be taxed when they receive income, whether it is type A, B or C.”
We (that is you or I or Richard etc) do not decide, Parliament does. In my response I make it clear that for some reason Parliament in effect does not decide to tax arrangements of Type C. Just as capital gains were not taxed in 1960 but are now.
Is it that you, Adam (not Parliament), think that arrangements of Type C should be taxed (even if Parliament has not introduced part of the tax code to tax arrangements of Type C) and that is the end of the matter? If so, thank God, Parliament, the judges and HMRC do not think like you.
As for the ordinary person and tax planning as opposed to MNCs. Many hundreds of thousands of ordinary working people have taken advantage of a tax avoidance arrangement that you might have heard of which is in effect a Type C arrangement. Until the Labour Government was prompted to change the tax law many families took advantage of a salary sacrifice arrangement under which an individual would sacrifice part of his or her cash salary entitlement and in return receive vouchers which were exchangeable for child care services. This opportunity was welcomed by police officers, factory workers, office workers, the list goes on. There was so much demand for this tax avoidance arrangement that the government introduced tax law that made provision for a similar child care voucher arrangement which offered similar tax benefits.
In addition many hundreds of thousands of ordinary working employees are currently giving up an entitlement to part of their cash salary and instead having additional contributions made to their pension funds. This is to their advantage and is another case of a Type C arrangement or what can readily be called a loophole.
Do you find the behaviour of these ordinary working employees immoral? Is the behaviour in which they engage illegitimate? This benefits many hundreds of thousands of ordinary working people and HMRC does not choose to put forward legislation to prevent it happening.
You also say: “some of these loopholes don’t even exist and are invalid as seen after going through the court system.” I agree with you, I mentioned this using the example of the potential tax payer entering into an arrangement which he believes is not a Type B arrangement but in fact is a Type B arrangement.
Finally: “If it is not clearly spelt out in the tax code for the benefit of society and therefore exists due to incompetence or corruption don’t do it!” Two comments; your view would suggest that in 1960 the tax law should have made clear that if a UK resident makes a capital gain it will not be subject to tax because the tax code at that time did not make this clear all UK residents that actually made a capital gain were immoral. The tax law did not say this therefore every person who made a capital gain was immoral. That is a very peculiar view on the nature of tax law and of law in general.
Secondly, remember what I was saying in my original response to Richard was that the guy at the FT might have been correct and TJN arguments incorrect. To gloss your words, if the Type C arrangement offers advantages then that is because the tax code is incompetent (which is was the FT guy said). If anybody engages in behaviour which seeks a tax benefit and the behaviour is corrupt then that is unacceptable both legally and morally.
Remember my original comment on Richard’s blog was to in order to understand the reasoning behind TJN’s position. Your views on the salary sacrifice arrangement would be of interest. As for Richard, you will see his views on one of the most important Doctors of the Church and his statement that I will not change my mind. I hope that my mind seeks to settle on the best conclusions which are based on sound premises and valid arguments.
Oh well, it is the season of good will to all.
Kind regards
Augustine
I’ve made it quite clear, that I think any income, even type C should be taxed as income, unless it has been specifically decided not to, as it is conferred to have a benefit to society. If it is not taxed as income, and it is not in the benefit of society, then that is a failing of parliament due to either incompetence or corruption as I made clear. You say “for some reason Parliament in effect does not decide to tax arrangements of Type C”, that is incorrect – for many of these arrangements it has not been specifically decided that they will not be taxed, it is a slip up, a mistake. If they have specifically decided not to tax an arrangement, as with ISA’s, then it should have a benefit to society. This is black and white.
It is quite easy to write a tax law that says, any income should be taxed, unless it falls within an exception that is deemed good to society. A clear catch all, that means income from type C is taxed. This benefits us all. This would be a good thing. It keeps the playing field level. It would reduce wasteful expenditure for both the company, paying money to accountants and lawyers, and save the country money, in the form of less court costs etc. This is a clear benefit to society. Why are you arguing against this?
Trying to compare salary sacrifice schemes, to some of the avoidance carried on by MNCs is plainly wrong as they are fundamentally different. One is designed specifically to give a benefit to society, one is a mistake. These schemes for employees have been introduced, as with green capital allowances for companies, as it has or is believed to have a benefit to society. That’s great, assuming there is a benefit to society, if there is no benefit to society it is just another bad tax law created due to incompetence.
Regarding capital gains in the 60s. There was an unintended gap, due to incompetence of the regulations at the time, which people took advantage of knowing they received a benefit without being taxed on it. It is not surprising people took advantage of it, it probably did not even occur to some people that in the future there would have been tax to pay as they are not all specialists, but it was bad for society on the whole, and yes, that makes the behaviour immoral. This stands up to scrutiny easily – if you do something that is bad on the whole to society it is immoral, same with keeping slaves, to use the earlier example.
If you seek an unintended advantage from the failings of an incompetant tax code that is bad for society and is immoral. If there is a specific loophole, designed to give a net benefit to society, that is fine. I don’t see how anyone can disagree with this.
@Adam Hehir
Dear Adam,
Thanks for your very full response.
I now more fully understand your position.
I would point out something to you however, just so that are not mislead by anything I have written on this point.
“One is designed specifically to give a benefit to society, one is a mistake. These schemes for employees have been introduced, as with green capital allowances for companies, as it has or is believed to have a benefit to society.”
Salary sacrifice into pension plans has not been introduced it is a gap or loophole in the legislation that ordinary workers are taking advantage of as was the salary sacrifice into child care vouchers before the change in the law. HMRC are doing nothing about it but that is not the same as Parliament identifying a gap which ordinary people can take advantage of.
To the extent that such gaps are there and should not be there it is the incompetence of the legislators that is at fault. This is what the FT guy was saying.
I now think I understand your position which is possibly something along these lines:
…yes it is the incompetency of Parliament to have left a gap and if a gap has been left and the gap is identified any attempt to utilise the opportunity presented by the gap or any actual utilisation of the gap is immoral. Only gaps that have been identified and recognised as a gap by Parliament and blessed as a gap can be utilised by potential tax payers as it is only such gaps that are moral …
Is this a fair summary of your position?
Fine, if that is what you believe, you will need to change far more than tax law. That is not the way the UK society at present organises a system of law. But discussion of such possible changes are almost certainly not for this blog.
Enjoy Christmas
Kind regards
Augustine
You say “you will need to change far more than tax law”. I’m fully aware of that. I also believe any law that doesn’t confer a benefit to society is a bad law, be it tax legislation or any other type, and yes that means there are very many bad laws out there. Would you agree with that or have any examples to the contrary?
You also say “Salary sacrifice into pension plans has not been introduced it is a gap or loophole in the legislation”. Fair point, however I would note that again there is a difference between this and some of the avoidance carried on by MNCs, in that this seems to confer a benefit to society. If it doesn’t then it is a bad law. It seems here, there was a gap made through incompetence, that has had an accidental positive effect. Though it would probably make sense to ratify the procedure, making it official so there can be a more widespread use, although I think you may have said something like this actually happened.
Your summary of my position seems to be correct, other than utilising a gap, where a benefit to society is realised is not immoral.
Finally you say “That is not the way the UK society at present organises a system of law.” I think a general law should be brought in, whereby it states no new laws should be created unless it has a benefit to society. Would you agree that that is a good idea?
It’s christmas eve now so I may not respond, for a while if you do, so merry christmas.
Adam
@Adam Hehir
Dear Adam
Thanks for your reply.
I would be very happy if no law was created unless it has a benefit to society.
There would of course then be a discussion of what was of benefit to society, how to decide between alternatives, the extent of society (what about unborn future generations that may never exist), the effect on other societies etc. All very interesting stuff going to the heart of equity and justice and the idea of a “life well lived” by one and all. It would part of an ongoing tradition of thought and debate that has existed for thousands of years.
Such matters are of great interest to me and prompt me to ask the questions of Richard and the TJN that I do. It is far better to smooth out inconsistencies and contradictions than let them remain and that is what is required in order to maintain a sustainable position.
Enjoy Christmas and thanks once again for your replies.
Kind regards
Augustine
[…] Lambert at the CBI had a letter in the FT this week in response to their first rate editorial on tax shortly before Christmas. He said: Your editorial “A taxing world” (December 22) made the […]
[…] Lambert at the CBI had a letter in the FT this week in response to their first rate editorial on tax shortly before Christmas. He said: Your editorial “A taxing world” (December 22) made the […]