Tax management » Tax Research UK

The 10 Cs of an efficient tax system

Jan 242012

An efficient taxation system has nine attributes with one over-riding characteristic to which they all contribute.

An efficient tax system is:

1. Comprehensive – in other words, it is broad based;
2. Complete – with as few loopholes as possible;
3. Comprehensible – it is as certain as is reasonably possible;
4. Compassionate – it takes into account the capacity to pay;
5. Compact – it is written as straightforwardly as possible;
6. Compliant with human rights;
7. Compensatory – it is perceived as fair and redistributes income and wealth as necessary to achieve this aim;
8. Complementary to social objectives;
9. Computable – the liability can be calculated with reasonable accuracy;

All of which facilitate the chance that it will be:

10. Competently managed.

In combination these are key attributes of a good tax system.

America with all of its greatness and its freedoms is, like democracy itself, the child of tax

Economics, Tax management, Uncategorized 2 Responses »

Jul 062011

David Cay Johnston, a top U.S. tax writer, has left Tax Analysts for Reuters, leaving with a superbly thoughtful piece entitled A Cosmic Visitor’s Take on Tax. He poses the question of what extraterrestrials would make of earth taxes, and comes up with something that everyone is urged to read. Written quite strongly from a U.S. perspective, it is full of quotable quotes and insights, some of which we’ll reproduce here.

First, credit where credit is due. From the end of the article:

“In my 44 years as a journalist, no set of editors I worked with have proved themselves to be as dedicated to open debate, and fearless, as the people at Tax Analysts.
. . .
My work has brought threats of ruinous litigation from highly paid bullies. The Tax Analysts editors never flinched. “

Hats off to them. Now onto the substance of the tax discussions. He puts the reader in the position of being a researcher from another planet, who has to identify the biggest common enterprises first, then work your way down.

What is the biggest human enterprise? Industry? Digital activity? Military? Healthcare? Food production? No, the biggest enterprise, by far, is tax. Tax accounts for close to 30 percent of economic activity in the United States, 40 percent or more in much of the modern world, and in some countries more than half the economy.

Indeed. (Some stats for OECD countries, for instance, are here.) He makes some well-founded observations, though without ascribing causation, such as this:

“The countries with the highest overall taxes tend to be better off and report the highest degree of happiness, but there is a global trend to reduce taxes.”

. . . and creates a nice visual image:

“Imagine your report back to the home planet includes hologram-type three-dimensional images of Earth, virtual globes with spikes and valleys to show the contours of economics. The world of wealth would include vast flat expanses — Africa, Siberia, large parts of Australia and Brazil — and lots of spikes at Bermuda, the Caymans, and cities like London, Beverly Hills, Calif., Zurich, and Monaco.
. . .
Lower Manhattan would be a sharp spike rising far above the planet, while vast areas of Appalachia, the South, Midwest, Rockies, and the western parts of New York state would be mostly flat.

then posits a similar, parallel hologram of where taxes are actually paid.

Even if the globe scales were proportional to global shares, the tax globe would not rise nearly so high in its spiked places.

The Caymans and Monaco would be spikes on the wealth globe, flat on the tax globe, although both would be flat on a third virtual globe showing population.

then a stirring historical look at his own country:

America with all of its greatness, its freedoms, and its potential, is, like democracy itself, the child of tax.

Two centuries of debate and thoughtful consideration by the ancient Greeks gave us the moral basis for progressive taxation and, in turn, the radical ideas that people could govern themselves and that just because a man had money he was not entitled to a larger voice in the body politic.

Seven years under a central government without the power to tax or regulate commerce destroyed the first American republic and created the need for the second, with its strong powers of tax and regulation.

We are abusing our child — which is to say we are abusing America — with all of the hate-filled, nonsensical, demagogic talk about tax that dominates one of our political parties and intimidates the other.
. . .
We spread tax illiteracy, with no regard for how it undermines America, the liberties of the people, and the very idea of self-governance. If you doubt that, just remember the total disconnect between what the Boston Tea Party was about and what modern Tea Partiers say is their cause.

There’s plenty more in there, but we’ll finish this blog with this note:

“Tax is not a pleasant subject and never will be. Neither are the responsibilities of child care, like calming bedtime fears about imagined monsters lurking in the shadows. Parents who perform these duties, showing their love by their actions, make for productive adults, while those who shirk the unpleasant realities of parenting often discover what a nightmare a child can grow up to become.”

More for our quotations page. We look forward to a productive stint from this great (and Pulitzer-winning) tax journalist in his new career at Reuters.

NB: Reposted from Tax Justice Network blog with permission

A possible ministerial code of conduct to perceptions of prevent conflicts of interest on taxation

Ethics, HMRC, Tax management Comments Off

Jun 302011

I have mentioned the fact that I was in exchange with Conservative MPs at yesterday’s hearing of the Treasury Select Committee.

Such was the time they spent questioning me we did not have time to discuss what might be done about the risk of perception of conflicts of intrest on the part of treasury ministers on tax matters. As a result I sent the following letter to the chair of the Committee in question this afternoon (who I do know, hence the slight note of familiarity):

George Mudie MP

The House of Commons

London

SW1A 0AA

30 June 2011

Dear George

Treasury Sub-Committee inquiry into the administration and effectiveness of HMRC

Follow yesterday’s hearing of the above committee and the evidence I gave I would like to follow up on one point that was discussed.

As you will recall, some members of the Committee appeared surprise at the comments I made about the unfortunate coincidence in timing between the announcement of a settlement of Vodafone’s long running dispute with H M Revenue & Customs, the fact that the settlement was for approximately £1 billion less than the sum provided for such settlement by the company in its accounts, the fact that the settlement appeared unusual in the way it was managed according to reports made by other parties in the media and George Osborne’s subsequent visit, little more than a week later, to India during the course of which according to other third party reports he intervened on Vodafone’s behalf in its tax dispute with the Indian government.

I in turn was surprised to the reaction to my observation, which as I hope I made amply clear, did not imply impropriety on any part but did suggest that communication on this issue had not been as well managed as might have been possible and that as a consequence there was risk that the reputation of the UK’s tax system for impartial, apolitical and equitable treatment of all tax payers had been put at risk, whether correctly or not. I consider that risk to be unfortunate, to say the least.

Due to the intensity and duration of the questioning of me on this issue we did not have time to discuss what might be done to prevent repetition of what I consider to be an unfortunate episode and I am writing now to make the suggestion I might have made if that time had been available.

It seems to me that as a principle of good governance for the tax system of the UK a very clear code of conduct for those who hold ministerial appointment as well as those who might be considered for ministerial office within the Treasury is essential if damage to the reputation of the tax system through repetition of such an incident is to be avoided. I would suggest that the necessary code of conduct might be as follows:

No Treasury minister shall at any time be seen to engage with or be seen to endorse the activities of any company that has a taxation dispute outstanding with H M Revenue & Customs that might with reasonable probability in the opinion of H M Revenue & Customs result in litigation, with that authority having the responsibility of advising the Treasury of the identity of such companies without in any way disclosing the details of the matters under dispute
No person shall be appointed to a ministerial post if they shall within the period of two years before appointment to that office have received funding from any company that has a taxation dispute outstanding with H M Revenue & Customs that might with reasonable probability in the opinion of H M Revenue & Customs result in litigation, with that authority having the responsibility of advising the Treasury of the identity of such companies without in any way disclosing the details of the matters under dispute. Funding for these purposes shall include the payment of a salary or payment for advice as well as the funding of the potential appointees political campaigning, either directly or indirectly through the offices of the Party that they represent, and whether paid directly to them or provided indirectly through the provision of services for his or her office.
Ministers shall not be seen to engage in the taxation affairs of a company in a jurisdiction other than the United Kingdom for fear that it shall be presumed that they might take the same interest in its affairs within the United Kingdom
No person who is engaged by any company that has a taxation dispute outstanding with H M Revenue & Customs that might with reasonable probability in the opinion of H M Revenue & Customs result in litigation, with that authority having the responsibility of advising the Treasury of the identity of such companies without in any way disclosing the details of the matters under dispute, be appointed to advise any treasury minister on any matter relating to any aspect of taxation.

I think that if such a code had been followed some of the unfortunate consequences of this matter, innocent as each individual party might have thought their actions to be, could have been avoided and that would have been to the considerable advantage of the reputation of the UK’s taxation system for even-handed impartiality. As such I hope the committee might give consideration to this suggestion that would enhance, in my opinion, the effectiveness of H M Revenue & Customs.

Yours sincerely

I’m not confident that the matter will be addressed, bit something has to prevent George Osborne making serious errors of judgement again.

Why are the Tories so keen to protect Osborne?

Conservatives, HMRC, Tax management, Uncategorized 13 Responses »

Jun 302011

I couldn’t have imagined how sensitive the Tories are about George Osborne and how keen they are to protect him.

I made what I thought was a perfectly clear point before the Treasury Select Committee yesterday when I said that the timing of the announcement of the Vodafone tax deal almost a year ago just a week before Osborne went to India, during the course of which visit he both promoted the company and reportedly intervened on its behalf with regard to its Indian tax affairs, was unfortunate when that settlement was £1 billion less than the company had provided in its accounts , especially in the light of questions raised about the way in which the deal was reached raised by others in the media, and not me, and the Tory members on the committee went ballistic.

As I made clear, I was not suggesting impropriety by anyone. I was not suggesting Osborne intervened in this case. I was not suggesting Vodafone got anything but a good deal (and come on, let’s be realistic if you’d been asked to pay about £1 billion less than you expected then I think you might think you’d got a good deal) and I wasn’t suggesting anyone in HMRC had acted incorrectly, although questions about why some of this tax was paid in instalments and without interest apparently being due were again fair questions for the committee to ask – but not to me because I can’t explain them.

What I was saying was that in combination all those facts gave rise to doubt in some people’s minds about whether the UK’s tax system was being managed equitably, and if that had happened then it was bad news for the prospects of upholding the reputation of the Revenue in applying tax law impartially in the UK.

I think that fair: things can all be done properly and still smell wrong – and if there is risk of that then special care is needed to ensure that matters are approrpiately handled. If that wasn’t done in this case that was an error – but a political and a management error (and I was not saying anything else) and candidly it was one that reasonably competent people should have been able to predict and avoid.

And yes, as I said, the whole issue is not helped by the fact that far too much attention is given to the unusual and distinct role of Dave Hartnett in both the management of this deal (if others reports are to be believed) and the Revenue in general and that is because of two things. First there are far too few people on the HMRC board who really know about tax and who have worked in HMRC. That leads to far too much reliance on Hartnett. And second, candidly, the role of the HMRC non-execs is far from clear and their capacity to infleunce for the good is unknown, and that needs to change.

None of that seemed to placate the Tories, although Labour and Lib Dems seemed pretty unflustered by all this.

So why are the Tories so keen to protect their man given the relatively modest nature of the suggestion made – which has certainly made by others before now? Why are they so sensitive? I don’t know.

But I do know that the reaction seemed like overkill.

NB 1 : For the record – when I was asked if I thought Vodafone had paid the right tax I said ‘I don’t know’. That’s because I don’t. Not because I think they did pay the right tax. I don’t know because I was not party to the information that led others to say a higher sum may have been due – although I presume that they said that in good faith. But ‘don’t know’ in this case means ‘I don’t know’ and nothing more. So don’t spin it.

NB 2: Jesse Norman MP (a Tory) suggested that the right interpretation of the series of events was that everything should be seen to be being managed well with nothing to hide. Well, maybe, but no one has ever seemed to see it that way before, but I note it, for the record. All things are possible.

NB 3: I will add a blog on my follow up actions to this session shortly.

If the Uk wants good tax legislation than parliament has to invest in it

HMRC, Tax management 2 Responses »

May 052011

Another reflection from yesterday’s discussion at the House of Lords.

There was another area of surprising unanimity between the CIOT and me. The CIOT argued that there was a serious problem with the opposition, back bench MPs and the House of Lords having to scrabble around amongst a few willing advisers (me included) to secure opinion on tax policy and law.

Ian Menzies-Conacher of the CIOT sang the praises of the US Senate system where its tax committee have a permanent staff with considerable experience to advise on a bipartisan basis.

I similarly sang the praises of the Senate Committee on Investigations which has done great work on the US tax gap and tax haven abuse.

I think it was astonishing, but welcome, that we both came to the table with the same argument.

And we also agreed that since the UK Treasury took control of tax policy there has been a loss of clarity in UK tax thinking. It’s a simple fact that economists have almost no clue about tax. You only have to look at the rubbish that th ESRC and others pay for and which comes from the Oxford Centre for Business Taxation to realise just how ill informed most neoliberal economists are on any issue relating to tax (largely because they are pre-conditioned to loath it, and so have no objectivity on the subject). And it is this thinking that has had the upper hand in recent years in the UK Treasury.

It’s time for HMRC to take back control of UK tax policy.

It’s time too (as I said) that the government begins to say that tax is a really good thing, which it believes in, and which it thinks everyone should pay for the benefits it brings to all in society.

And that means that it should be willing to invest in the process of getting the best tax law we can have. But right now, regrettably, and as I think all present agreed, that isn’t happening.

Dawn Primarolo, the unlikely anti-tax avoidance hero of the day

GAntiP, HMRC, Tax avoidance, Tax management 7 Responses »

May 052011

Dawn Primarolo was the unlikely hero of yesterday’s hearing before the House of Lords.

The subject of a GAAR or General Anti-Avoidance Principle as I’d prefer came up, partly in its own right and partly in the context of the need to tackle the abuse going on in Employee Benefit Trusts (or Tax Cheating Arrangements, as I was happy to call them).

I pointed out that one of the best days in recent taxation history was that in December 2004 when Dawn Primarolo stood in the Commons and said whatever attempts were made thereafter to avoid the obligation to apply tax and national insurance to payment of remuneration arising from an employment they would be blocked by legislation and that legislation would be back-dated to December 2004.

At the time the tax profession howled in protest. This was unreasonable they said. This was retrospective legislation they cried. And this was an abuse of the right a person had to abuse tax law they implied.

But yesterday John Whiting agreed with me: Primarolo’s statement may have appeared to be retrospective legislation at the time, but it straightforwardly worked where nothing else had. In the face of knowing that any attempt to abuse the law would be stopped, retrospectively, people stopped trying to abuse PAYE regulations. And NIC abuse died out for some time.

Until that is Employee Benefit Trusts came along.

And it was John Whiting who wondered out loud why a) the Primarolo principle was not being applied to Employee Benefit Trusts because there seems no reason why it should not be b) it had seemed to be forgotten, which he thought an error c) (and I think this came out of our exchanges) it was not now influencing the current debate on the GAAR because the evidence was emphatic – it works.

The moral: principles based attacks on tax abuse work.

It’s an important lesson to note.

Consultation on tax is meaningless when you only ask one side for comment

Tax management 4 Responses »

May 042011

I’m appearing before the House of Lords Economic Affairs Finance Bill sub-Committee this afternoon to respond to questions on the government’s new approach to taxation policy, anti-avoidance, disguised remuneration and corporation tax reform. I have only submitted written evidence on the latter, which will be published later, but I’ll certainly be offering comment on all these issues.

In particular I expect to have a lot to say on the government’s proposed changes in the way in which tax legislation is developed. I have some experience in tax consultation processes, having spent a lot more time in the Treasury over the last few years then this blog has ever implied. And I candidly think that the proposals to increase consultation are anti-democratic and will result in significant bias in UK tax legislation.

There are three reasons. First, to be consulted you need to be have the time available to take part without being paid. Only the rich and their agents can do that. Second, consultation focusses on the means and not the ends of tax law – and so distracts from the fact that the current ends of tax reform are to reduce taxes on wealth and high income and shift them to the lower paid. Third, this is a democracy. Outsourcing tax thinking to the Big 4 accountants and their friends is yet another act that undermines the democratic process.

So what can be done? Well, again three things. First, if there is to be consultation then it must be broadly representative and positively seek to be so. If necessary that means that payment must be made to those taking part. Second, parliament must have resources to commission its own reviews of legislation. thirdly, consultation must be on the ends and not just the means of tax law.

Until that happens we’ll get the outcome noted by EU aid coalition Eurodad in a mail they sent me the other day:

As you may know, this year the EC extended the mandate of and expert group dealing with transfer pricing matters until March 2015, the EU Joint Transfer Pricing Forum (JTPF) which:

a) assists and advises the European Commission on transfer pricing tax matters;

b) works within the framework of the OECD Transfer Pricing Guidelines.

In February, DG Taxud opened a call for applications for non-governmental members for the expert group. Eurodad put forward an application (see below), however, the call for applications resulted in the selection of 16 members ALL from the private sector, including the big four. The group has one rep from each EU member state, plus 16 reps from the private sector. Affiliations for the latter are as it follows:

- CMS Bureau Francis Lefebvre (chairperson)

- Volvo

- Unilever

- Fiat

- BAE Systems PLC

- OMV AG

- Deloitte

- Andersen Legal

- Nokia

- GK International Tax Consulting

- Royal Dutch Shell

- LVMH MoetHennessy Louis Vuitton

- Berkshire Hathaway

- Ernst & Young

- KPMG

- PwC

- Sanofi-aventis

For more information, click here.

That’s not consultation. That’s law creation by business for the benefit of business. And at the very least that’s anti-democratic, n

The UK is to give up its right to set its tax rates – and let Switzerland do it for it

Conservatives, HMRC, Switzerland, Tax avoidance, Tax evasion, Tax management 7 Responses »

May 032011

The FT reported today that the UK is to shortly sign a new tax deal with Switzerland. As it said:

Britons with billions of pounds hidden in Switzerland will pay tax at 50 per cent under a groundbreaking deal that will legitimise their undeclared assets, according to a source familiar with negotiations between the Swiss and British governments.

The agreement, which is expected to be announced this month, marks a shift in emphasis in the international crackdown on tax havens. Over the past two years, the focus has been on lifting bank secrecy and exposing evaders.

Under the deal, £3bn is expected to be raised over the course of this parliament and investors will also pay a one-off retrospective levy in recognition of past unpaid tax.

I’ve been talking to some people about this. I think that the FT has got this story very wrong.

First, if a 50% tax rate is applied anyone who is not a 50% taxpayer in the UK will either a) tax their move out of Switzerland and suffer the lower withholding rate of 35% available in places like Jersey or b) give up secrecy and declare their tax personally in the UK and so save money. Either way the Swiss lose out and their banking secrecy is compromised so there’s no way they’ll agree a 50% withholding rate.

Alternatively, I gather the Swiss think that withholding rates applicable in the UK should be used and argue that whatever this rate is that should settle the full tax bill due on the Swiss source income so that they do not have to tell the UK’s HMRC who was paid and the recipients need not declare the income on their tax returns so that their right to Swiss banking secrecy is not compromised.

But that would mean the UK would have to agree that the de facto top rate of tax on investment income would now be 20% or every higher rate taxpayer would win by closing their UK deposit accounts and shifting them to Switzerland – after which HMRC would be entirely dependent ion the goodwill and probity of the Swiss for returning any tax that might be due – with all the accounts in question being off limits for any UK tax investigation for evermore henceforth.

Now, as I said of this deal when it was first announced last October:

In a quite astonishing move it seems that the UK has today announced it is to give up British tax sovereignty and has granted power to determine UK taxes to Switzerland instead.

As I explained then:

In other words … the UK has … done the following:

1) Granted Switzerland the right to set the effective higher rate of tax on investment income in the UK;

2) Granted Swiss banks an everlasting competitive advantage over UK banks – because it will pay all higher rate tax payers to bank in Switzerland henceforth;

3) Denied the UK tax authority the right to make enquiries of their own choosing about the tax affairs of a British person – the Swiss now being granted the right to decide how many enquiries may be made and whether they are appropriate or not.

4) Granted criminal immunity to Swiss bakers who sell tax evasion – so allowing them to commit ongoing crime in the UK.

In the process the UK is:

a) Promoting tax evasion by its citizens

b) Promoting Geneva and Zurich over London

c) Abandoning its right to tax

d) Abandoning its rights to enforce its laws

e) Alienating the OECD

f) Abandoning the fights against tax havens.

That’s not melodramatic: that’s what’s this announcement implies.