The FT argues this morning that Margaret Hodge should not investigate the Vodafone tax case even though I estimate that £12 billion will be lost to the UK. They say:
However, Ms Hodge has shown herself to be dogged in taking on tax loopholes and if this case involves a “loophole” in UK law, she will probably investigate it wholeheartedly. For her, this might be another case of one rule for individuals and another for big companies. I have a lot of respect for the aims of Ms Hodge's campaigning on tax. But the Vodafone example seems to offer less powerful ammunition, for at least two reasons.
First, it might strike some observers as inconsistent to criticise companies for not paying enough tax on UK-based sales (for example Starbucks and Amazon), while also slamming UK companies for not paying tax on the sale of foreign-based assets such as Vodafone's stake in US-based Verizon Wireless. These obviously refer to different economic activities but the principle of territoriality is supposedly established in UK corporate law.
Second, while it does not make companies blameless, the SSE is a near-perfect example of the deliberate strategy followed by successive governments to create an attractive tax environment for multinationals and their holding companies. Whether you think the hypothetical tax outcome of the Vodafone deal is right or wrong, it would be no accident. Rather, it would be exactly the type of deal that those behind the loophole imagined.
Those arguments are wrong. Firstly, the principle of territoriality is only just, right now, established in UK law and as such it is completely appropriate for the UK House of Commons to review whether it is working or not, and advise change if it isn't (for which there is prima facie evidence).
Second, it's fair to ask if we want to have tax law that allows multinational corporations to exploit the UK.
And third, and as important, the process of law setting which gave rise to these choices needs to be reviewed because they were the result of consultations in which, for all practical purposes, big business was asked what law it wanted and got it, and that appears wholly inconsistent with the democratic process and appears to undermine the whole way in which law should be set in this country.
Those are three big questions needing answers in my opinion and would give Margaret Hodge more than enough to do, and report upon.
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And there’s little doubt (in my mind at least) that those from the political arena who facilitated these nice little dodges will be handsomely rewarded for their wholly antisocial endeavours when they retire from politics. This does suggest the problem is politics itself and so there won’t be a political solution. I wonder what else there is?
It is being reported that the SSE exemption was approved by a Government in which Mrs Hodge was a Minister and tbs she voted for it.
Does this suggest politicians and MPs do not really understand tax? Would you support the recent suggestion from the Lords Economic Affairs Committee to set up an all party scrutiny Committee?
When the facts change people should change their minds
yes, I do support a properly funded scrutiny committee
I stress, properly funded
But what facts have changed other than one group has made a big profit (which shouldn’t be surprising) that has hit the headlines?
I suspect the real issue is whether MP’s really understood the implications of the legislation when they voted on it and realised that this would happen. It seems obvious to me as an accountant that this is an inevitable consequence but many MP’s are not exactly financial wizards.
To my mind the question is whether parliament is happy that this type of gain is not taxed, and at a high level that boils down to whether exempting these gains and foregoing the tax is compensated by additional investment in the UK. Any review should look at that with the benefit of hindsight – something we’re bad at in the UK …
I think hindsight reviews are rarely done? It’s all very well putting forward regulatory impact assessments when legislation is introduced but we’re not very good at looking to see if the assumptions and expectations cited in the RIA’s actually come to fruition.
This is ridiculous
Hindsight reviews can, of course, be done
And it is precisely why the questions I suggested need to be asked
And of course the facts have changed
Haven’t you noticed the recession and the impact it ha had on tax revenues?
I’m sorry, but I find your resonse very hard to fathom unless you wish the country to continue hitting its head against a wall for that seems to be the prescription you’re advocating
Ah … I see what you mean now by change of facts. So what you really want is that because of the recession, government should look for ways of raising tax revenues and maybe this is one way of doing it. Fair enough.
I still think it is up to government to decide whether or not they want to tax such gains for the reasons stated. It is up to them to decide (hopefully for valid reasons, but as stated elsewhere I have doubts on their competence to do that) on what the tax base should be – i.e. what should or should not be taxed. After that the amount of revenue they want to raise is merely a function of the tax rates to be imposed.
I do actually realise hindsight reviews should be done, but do they do it? I think not. And how can you make decisions on tax and the economy without knowing if your previous decisions delivered what you expected? I would strongly advocate hindsight reviews.
I am in two minds in this instance as to whether or not it is ‘fair’ that Vodafone pays no UK tax on this deal. I think in the end it depends on your view as to territoriality and where gains should be taxed. I can see arguments both ways here, so for me the jury is out at the moment.
I thought the company that sold the Verizon shares was Dutch based and was the original purchaser of the shares in 1999?
So you think the PAC should be looking at how we can a tax Dutch company on a transaction that wouldn’t attract tax even if it had been undertaken by a UK company due to SSE?
If the sale had been at a loss, would you be urging the PAC to investigate to see if tax relief was due to Vodafone UK?
If you rad my article on the loss my concerns are obvious
Why make stuff up instead?
I have no time for aggressive tax avoidance and Vodafone have pursued that approach before, but this time there is no loophole being exploited, no ingenious avoidance device being created. They are complying with both the letter and spirit of the law. So by all means challenge the use of dodgy avoidance tactics, but don’t suggest that politicians investigate individual deals.
The last thing we need is politicians taking up the role of tax inspectors. Especially Margaret Hodge who said “I don’t understand how anyone can justify such a massive windfall without handing a fair share to the Exchequer.” Are we going to let politicians decide what the Exchequer’s fair share should be on every big business transaction – that way lies madness methinks.
The questions you raise are all valid and worthy of a proper debate, but the answer to the question put by the FT is: no the PAC should not investigate Vodafone. I am sure they are capable of investigating why they created any number laws and tax rules that may seem odd to us.
Please read what I wrote
Your response ignores what I said
I did not say the PAC should investigate Vodafone per se – except in the headline – which is fair – instead I suggested there were three questions it gave rise to that needed investigation
Is it really so hard to read the piece before commenting?
But maybe you really give it away by showing that you don’t want politicians investigating tax. Why not? If they can’t ask such questions do we have a democracy?
I did read the piece and if you had read mine you would see I agree that your questions were valid but not an investigation of an individual transaction by politicians. That is not their role. They should be creating the laws based on sound evidence, but I know only too well that evidence is often the last thing they want to hear.
The curious thing is that I share your overall view on the abuse of the tax system, but I think targeted attacks are better than scattergun ones.
But I was asking for a targeted investigation – but not of a tax case – more of a tax law
he PAC should be all over Vodafone like a rash.
Vodafone has history of tax dodging.
If the UK state can carve out a share of the windfall from the Verizon sale, then it could make more entrepreneurial use of the funds recovered.
Assuming Vodafone does as it has indicated return a huge sum to shareholders, then given that the vast majority is likely to be received by institutional investors, very little tax will be paid on the distribution and most will be reinvested in the stock market. Helping to pumping up a nice bubble there rather than being invested in innovative infrastructure projects providing a real legacy for our children and grandchildren!
In this case as stated elsewhere, Vodafone isn’t really using a loophole. Government decided not to tax such gains and this is one of the results.
You might attack the residence of the Netherlands holding company to try to move the gain into the UK tax net, but as stated in many places the gain would be covered by the SSE anyway so there’s no point in them pursuing that line. The lack of tax on this is wholly down to decisions by the government(s).
I would expect Vodafone to have made the Dutch residence pretty bullet proof anyway – they have enough resource to do that.
I have no doubt they have been involved in tax avoidance but this doesn’t seem to be one of those instances.
Yes it is
Big business avoided tax by lobbying for this change
And that’s what I have asked to be investigated, quite fairly
Big business is getting the laws made it wants. I assume I think fairly this is because by not paying taxes there’s plenty of money to split with the crooked politicans they conspire with to make the relevant law. The electorate, having comparitively little to offer the career politician by way of reward, doesn’t get a look-in. Suggesting nothing’s wrong because no laws have been broken entirely nisses the point.
Margaret Hodge said on Radio 4 this morning that she was particularly concerned about big business lobbying for this tax change and that was what she would be investigating.
Margaret is an attentive listener
As I recall, the SSE was put out to public consultation. Not just consultation to big business. Everyone had their opportunity to raise their views at the time. If the government of the day chose to prefer one set of views over the other, and Parliament chose to legislate it, isn’t that hwo democracy works? There’s nothing to stop Parliament looking to re-examine whether they did the right thing, but they should look in the mirror if they want to criticise the original process. I agree with Verth’s other comments that the tax base (rather than rates) shouldn’t generally be dictated by how much money governments need to raise at any particular time. It should be developed conceptually, reviewed to see whether it delivers the outcomes that were desired or has unintended consequences, but not changed unless there’s good reason. Budgetary needs could be a reason, but would need to be weighed against the importance of long term certainty in the system. That, however, would be a different, and more rational debate than the one that Margaret Hodge is currently leading.
Look at how consultation works and who comments and you will see the CBI in the mirror
Do you also agree that the PAC should investigate the inheritance tax loophole known as “business property relief”, whereby certain assets qualify for 100% exemption from inheritance tax?
Yes
And if the gain was taxable presumably there is a good chance that Vodafone wouldn’t sell as it changes the economics on whether they sell or hold Verizon. If they decided to hold (likely) there still wouldn’t be any UK tax as there’s no disposal. How is that a good result for the UK?
Maybe the continuing income stream would have been better for Vodafone – not least because it is now a takeover target
How does that help the UK?
Non taxation may have induced a misallocation of economic resources that is decidedly sub-optimal for the UK
Non-taxation usually does deliver such distortions