Tax Research UK

The Guardian has concluded its Tax Gap series. In a closing editorial it said:

Denis Healey had his own definition of tax avoidance. It differed from outright evasion, he said, in only one respect: “the thickness of a prison wall”.

Professionals do not call it avoidance; they prefer tidy names such as “tax-efficient supply chain management”.

Yet Mr Healey’s observation remains in essence true. Whatever one’s choice of euphemism for the now near-epidemic engineering of minimal taxes, there is no mistaking the harm. In rich countries, the poor and the middle classes shoulder more of the burden of paying for essential services. In poor countries, governments are weakened. In an era in which strong, wise government is needed to contain market panic, tax avoidance just looks out of place. This is a truth to which politicians have belatedly tumbled. Barack Obama has railed against tax havens, while even Labour has commissioned (yet another) Treasury review into their use. At last, the tide appears to be turning. The public is not in a mood to look indulgently on ever more artificial ways of avoiding dues which the rest of us can’t duck.

I, unsurprisingly concur.

Perhaps equally unsurprisingly (given I was consulted on the issue) I concur with what the Guardian thinks might be done to tackle the issue:

Here are some things Messrs Brown and Darling need to consider: a General Anti-Avoidance Rule; country-by-country reporting; the removal of secrecy from all British-controlled tax havens, replaced with the requirement for offshore companies to publish accounts and beneficial ownerships; harmonisation of the corporation tax regime within the EU (this does not mean identical tax rates, but a common basis for assessing taxes); the employment of many more tax inspectors; the penalisation - if not prosecution - of big business tax avoiders plus the blacklisting from government contracts of accountancy firms that sell artificial tax avoidance schemes; amending the Companies Acts to require companies to publish (a) the actual annual payments of corporation tax to HMRC (b) the details of avoidance schemes they have disclosed to HMRC (c) a full list of subsidiaries appended to the annual report, regardless of length; amending of land registration law to require the disclosure of the beneficial owner of land and property; and the public listing in advance of pending tax tribunal cases.

Will Hutton addressed the issues like this:

Over the years I have had many heated arguments with “tax planners”. Always it gets to the same core point: the state has no right to have my cash. Big Government is a moral bad and, worse, will necessarily squander my money on ill-conceived projects creating welfare dependency - for that is what governments do. I can spend my money better than it can. I am the buccaneering libertarian fighting an important moral battle in avoiding tax.

It is this ideology, generated and fanned by American neoconservatives, that the tax avoider tells him or herself as they purchase or devise the latest scheme.

It is first cousin to the ideology that justified financial liberalisation: Big Government had no place telling financial institutions how to organise and regulate their affairs, because markets of private financiers will always tend to deliver efficient results.

Much of the “deregulated” business of the structured investment departments of our big banks - the epicentre of the credit crunch - was driven by tax avoidance, justified by an appeal to the same set of ideas.

The economic wreckage is now all around us. [And] it is only because of the derided state that we have even the semblance of a functioning financial system. We now know that capitalism without the state is inoperable.

[T]he scale of tax avoidance could be radically reduced. What is required is the will. Neoconservatism has collapsed. The western financial system is bust. The need for the state, and for international collaboration, is now evident to all. President Obama is keen to act. If we cannot slay tax avoidance now, we never will.

On the same theme the Guardian editorial concluded:

Where there is complexity and secrecy, we need transparency. For all the laudable aims of the corporate social responsibility movement, it has been ineffective at pushing businesses to pay their way. A fair tax system may need new means of enforcement, but the principle is an old one. It was outlined centuries ago by Adam Smith, who called on “subjects [to] … contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state”.

Perhaps the last word should go (as it did in the paper) to my Tax Justice Network colleague John Christensen:

“There are a significant minority of companies who agree that paying tax is a key part of corporate responsibility, if not the core corporate responsibility to society,” Christensen says. “Tax is where CSR begins.”

It is. That’s the argument, in a nutshell.

And it’s why, as we have, perforce, to build a new style of capitalism attitudes to tax will be transformed.

Richard Murphy CSR, Corporation Tax, Tax Havens, Tax Justice Network, Tax avoidance

The FT has reported:

Some of the largest companies in the US, including General Electric, Wal-Mart and PepsiCo, were expected on Monday to launch a drive to improve ethical standards in business in an attempt to stem the decline in corporate America’s public standing. The move by 17 companies, with nearly $1,000bn in sales, to commit to key principles of good business conduct comes as the financial crisis and recession are fuelling a political and public backlash against the corporate world.

The huge problems faced by companies, such as banks and carmakers, that are run by highly paid executives have exacerbated anger among ordinary Americans who have seen their living standards deteriorate due to the economic slowdown.

Under the agreement, from the Ethisphere Institute, companies will sign up to four principles of ethical behaviour: legal compliance, including not paying bribes; transparency; avoiding conflict of interests and increasing accountability.

I’ve searched the Ethisphere site and I’m struggling: I can’t find any serious mention of tax, and I can’t find it as a criteria for ethical behaviour.

These compnaies had better believe it: don;t pay your tax and people won’t take your ethics seriously. It’s just not possible.

And unless you report country by country that you’ve paid your tax they won’t believe you either. This is what corporate responsibility is really about: making the payments you owe to the communities in which you work.

Richard Murphy Accounting, CSR, Ethics, IFRS 8

The Sunday Times has reported that:

A partner at one the world’s biggest accountancy firms said: “By buying stolen data, tax authorities have encouraged anyone in a bank in Liechtenstein, Monaco or any other tax haven to sell private banking records for cash.

“Ethically and legally that is surely a highly questionable way to proceed.”

Not half as questionably as selling the corruption services in the first place, I say.

And let’s remember, all the Big 4 are in Liechtenstein, and there’s not a single ethical reason I can think of for them to be there.

Richard Murphy Accounting, CSR, Ethics, Liechtenstein

Neasa MacErlean had an interesting review of the next round of tax changes likely in the UK in the Observer today. She was kind enough to quote some of my thoughts, but more interesting was a comment from BDO’s senior tax partner Stephen Herring. He is reported to have said:

that a cut in corporation tax ‘is virtually inevitable’ and could be funded by a rise in VAT.

His justification is that the UK’s VAT rate of 17.5 per cent is among the lowest in the EU - and would still be among the lowest if it went up to 18 or 18.5 per cent.

Does he have any perception of justice?

Does he have any awareness of the regressive impact of VAT?

Does he care?

Am I surprised that I was interviewed last week about the impact on recruitment of the poor impression the accounting profession has in society or that this morning I had a mail from a guy wanting to find social purpose in his work as an accountant, and who certainly hasn’t got it at his Big 4 firm?

No, I’m not. The senior echelons of this profession and the big firms seem to care about just one thing: their cash and the ability of their largest clients to provide it, whatever the social cost. It’s not pretty. It can’t last.

Richard Murphy Accounting, CSR, Ethics, Tax management

This apology is correct.

It became obvious the Guardian got this story wrong, at least in part, after it was published. I’m afraid there was a logic flaw in it, and this outcome was inevitable for that technical reason. Although some thought otherwise, I did not advise in detail on his story before publication.

But let’s be clear about the following:

1) Tescos avoided tax.

2) This apology does not end the possibility of legal action.

3) I believe Tescos did avoid corporation tax, and largely for the reasons I have noted in this blog, although that too I would amend now, a little. I stress, this blog is based on evidence different from that available to the Guardian when they wrote their article.

I applaud the Guardian editorial today. It is brave, defiant and appropriate.

I think Tescos have made themselves foolish in taking this action. They have sought to defend the indefensible. In doing so they have made themselves look more than ever like bullies and abusers of the liberties and obligations that underpin society.

I am also confident that there is more to come as yet on this story. When it does appear Tescos might rue having taken on this fight.

In the meantime, what is clear is that a fault-line is developing in what is considered tax avoidance. The City believes that if no tax is due after they have undertaken their shenanigans then there could not have been avoidance. This is what I have already called the ‘Philip Green’ defence. It is summarised as ‘no tax was due, so how could it have been avoided?’ The reality is that it is the shenanigans to ensure no tax is due that constitute the avoidance.

And this debate will not go away, whether Tescos like it or not, and their conduct will now remain a feature of that debate, again whether they like it or not because what has been proven beyond doubt by this case, so far, is that they thought themselves quite justified in seeking to subvert the will of the UK Parliament through the use of complex offshore structures which had no purpose but to subvert that will. That is not and never will be the action of a responsible corporation.

I believe that indisputable, although Tescos might not agree.

Richard Murphy CSR, Ethics, Tax Havens, Tax avoidance, Tax compliance

I offer this from the Guardian diary, which seems an apt comment on Tesco’s CSR:

We thank reader John Hill for his sighting of a Tesco lorry that bore an adapted version of the company’s slogan. “Every little helps”

[T]has a very different meaning with the first and last letters obscured.

Richard Murphy CSR

The December edition of Finance Magazine in Ireland, sponsored by KPMG had an article entitled ‘Is Tax on Your Board’s Agenda’ in it. Written by Liam Lynch, a tax partner at KPMG it includes this classic:

The ‘moral’ agenda

Alongside these developments, a worrying tendency seems to have emerged among external stakeholders to make ‘moral’ judgements about tax planning and to expect companies to manage their tax affairs in a ‘moral’ way. The ‘fairness’ of corporations’ tax policy is frequently questioned by tax authorities, pressure groups and media.

It continues:

Let’s be clear about this. Tax is a cost to business. As with any other cost, the board members owe their shareholders a duty to manage that cost by the legal means afforded to them. Where a company’s tax philosophy is heavily influenced by a duty to shareholders, the focus should be on responsible management of tax cost. Again the starting point should be board level decisions on how the risk needs to be managed.

It seems to have become fashionable to use terms such as ‘aggressive tax planning’ and ‘unacceptable tax minimisation’ synonymously with ‘tax avoidance’, whilst arguing that such practices demonstrate a lack of morality in tax matters. However there is no agreement on what constitutes morality either within or outside the sphere of tax. We cannot therefore have recourse to such a term in determining whether planning of tax affairs has crossed some illusory line. It is in the interests of some parties that lines are blurred in the perception of the difference between legal tax avoidance and illegal tax evasion. However, we must rely on the rule of law to protect the rights of both taxpayers and exchequers alike. Otherwise we will have to deal with such questions as to whether we should pay tax if it funds something we consider immoral. That is surely something we wish to avoid.

Ah, so there we have it. It’s an amoral world in which only the law gives us guidance on what we may or may not do.

What a bizarre logic. How utterly wrong.

How profoundly in conflict with the whole ethos of corporate social responsibility.

How, if I might say so, morally bankrupt.

At the end of the day, how profoundly unprofessional.

That’s KPMG for you.

Richard Murphy Accounting, CSR, Ethics, KPMG, Tax avoidance

John Christensen of the Tax Justice Network had this letter in the Guardian this morning:

Tesco claims in its corporate responsibility statement that it uses its size and success to be “a force for good” in the communities where it operates. Its aggressive tax planning (Tesco’s £1bn tax avoiding plan - move to the Cayman Islands, February 27) reveals the exact opposite. Tax avoidance harms communities by depriving them of the benefit of the wealth created by business. When Tesco talks about operating as “tax-efficiently as possible” it demonstrates a lack of corporate responsibility and commitment to the communities which sustain its profits.

Aggressive tax planning through offshore structures also provides the big supermarket groups with a financial advantage that is not available to their smaller competitors, further tilting the playing field away from fair and competitive markets. Public concern about the market dominance of major companies like Tesco needs urgently to take account of the astonishing subsidies they receive through their tax planning.

John Christensen
International secretariat director, Tax Justice Network

Precisely.

Richard Murphy CSR, Economics, Tax Havens, Tax Justice Network, Tax avoidance

If you search Google blogs for Tescos tax tonight you’ll find this:

Tesco’s tax scheme: It’s not big and it’s not clever

29 Feb 2008
Tesco’s tax avoidance scheme dwarfs tax losses from income shifting, Simon Sweetman says “It’s not big and it’s not clever”. Which of course is counter-intuitive, because Tesco is very big and very clever. But recent revelations show …

AccountingWEB.co.uk Tax Zone - http://www.accountingweb.co.uk/tax

But if you follow the link you’ll find this:

The page cannot be found - 404 error
Sorry, the page you are seeking may have been moved,removed, or is temporarily unavailable.

As usual, Simon had written a good story. And the problem is not that AccountingWEB is down; it is not. It says only one thing to me: I smell Tescos’ lawyers at work. Polly Toynbee has suggested as such in the Guardian.

I find that amazing: the point the Guardian made is of massive significance. This is that three British organisations, Tescos, British Land and the British Airways pension scheme entered into a complex tax planning scheme using Cayman Islands structures, the reason for which could only have been tax saving. In the process they ensured that the economic reality of the transaction they were undertaking was not reflected in the tax treatment that they have in combination sought to apply to it.

There is no other explanation for the structure used. I can put it as bluntly as that. It was designed to save tax. Tescos was an intended beneficiary of that fact.

And now they are seeking to hide that fact by muzzling the press. Even though they claim all they did was legal and it was their duty to do it.

I think that is even more sickening than the original abuse.

Richard Murphy CSR, Ethics, Tax Havens, Tax avoidance

The Guardian has published some good old fashioned investigative reporting on Tescos today. As it says:

Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1bn of tax on profits from the sale of its UK properties.

The complex new structures uncovered by a six-month Guardian investigation include a string of Cayman Island companies, each named after a different colour, from aqua to violet. These are being used by the supermarket giant as it proceeds with its announced programme to sell and lease back £6bn worth of its UK stores.

The stores are being sold to external investors providing Tesco with a big one-off gain which, ordinarily, would be liable to tax, while allowing it to remain in the stores and pay rent to the new owners.

Ian Griffiths and Felicity Lawrence who wrote this are two first rate journalists. I know how long they worked on this story. But what really gets me about this are the broader issues. In its CSR statements Tescos says:

One of our most important values is to treat people how we would like to be treated. We try to achieve this by being a good employer and by playing our part in local communities. People tell us that they want use to use our size and success to be a force for good.

Paying tax in the place where you make your profit is the best way any business can support its local community. Tescos is not doing that. It is seeking to avoid its corporate responsibility to the UK in this respect. That is the only justification for its use of a Cayman structure.

Tescos cannot argue, as it does in the Guardian, that it has:

a duty to organise its affairs in a tax-efficient manner.

That is not true. Section 172 of the Companies Act 2006 says:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the
company for the benefit t of its members as a whole, and in doing so have regard (amongst other matters) to

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

Nothing in there says a company has a duty to be ‘tax efficient’ (which is simply a euphemism for tax avoiding). Indeed, since it is abundantly clear that this decision is:

a) Not taken in good faith, or Tescos would not have worked so hard and for so long to stop the Guardian publishing it story (as I believe they did);

b) not in the best interests of their employees, who would clearly benefit from the tax being paid in the UK;

c) Is not beneficial to having a good business reputation and is inconsistent with a high standard of conduct, especially in light of current opinion on the use of tax havens;

d) increases long term risk for shareholders who no longer have control of the prime assets the company uses, which are instead now controlled through opaque structures;

and as such it is easy to argue that the deal fails the tests in the Companies Act, let alone any CSR measure.

So let’s be clear what is really going on here: Tescos is using abusive structures to increase profits at the expense of the UK taxpayer who form the vast majority of their customers to enhance the well being of the senior management first of all and the wealthiest in society who own their shares second (pensioners included by the way: almost all with private pensions are by definition in that wealthiest grouping) at cost to the rest of society at large.

Nothing Tesco can do can redeem that and make them seem like a responsible company: they’re not. This is corporate fiddling. It cannot be described any other way.

Richard Murphy CSR, Ethics, Tax avoidance