I am on BBC Radio 4's The Today Programme this morning at 8.30 (ish) to discuss the role of the Big 4 firms of accountants in tax havens and in international tax avoidance.
Let me reiterate what tax avoidance is. It is getting round tax law to obtain an advantage parliament did not intend. So it is not paying money into a pension within allowed limits or subscribing for an ISA. Parliament intends those reliefs. It is instead finding loopholes and discrepancies in and between tax and accounting laws either in the UK or between the UK and other places so that income falls out of the UK tax net.
It is, of course, often said that tax avoidance is legal. I dispute that. Correctly it is not illegal. But nor is it sanctioned by parliament. It is in a grey area where the law is in doubt, and very often the application of law is, in the absence of a general anti-avoidance provision, also in doubt. That is precisely why this is a moral issue. When the application of law is uncertain, and it can be, morality has to take its place as a guiding principle as to right action. The inclusion of morality in tax debate is appropriate for precisely this reason.
So what has this to do with the Big 4, tax havens and tax avoidance? I think there are three key issues.
The first is that many of the uncertainties that tax avoidance seeks to exploit relate to tax havens and their law. There is clear intent in the case of the behaviour of far too many multinational companies to exploit tax havens, or secrecy jurisdictions as I prefer to call them, to gain a tax advantage. The fact that they are secret only adds to their appeal: this behaviour in the grey zone between what is certainly legal and that which is illegal is something few want to draw attention to. Secrecy provides a convenient cover for that. But the use of these places by multinational companies would not be possible if their subsidiaries that exist in those tax havens that record the transactions they route through them (note that 'through them' because nothing much ever really happens in a tax haven bar a little bit of legal dealing and some book-keeping) could not be audited in those tax havens by the Big 4 firms that also audit their group accounts, albeit that those transactions will almost certainly be hidden from view in those accounts. As such the presence of the Big 4 in every major tax haven is vital if multinational companies are to tax avoid using these places, and it is no surprise then that the Tax Justice Network's Financial Secrecy Index project has found that the Big 4 are, almost without exception present in all the major and a great many of the minor tax havens, even when the local populations of these places clearly could not justify their presence. The implication is obvious: for their own gain these firms are in tax havens to permit tax avoidance by multinational companies that undermines the tax revenues of this country and other countries, to the cost of us all.
Secondly, it is important to note that the presence of these firms in tax havens is not neutral. Around the world I have seen partners from these firms defending the tax haven status of the places where they work, advocating new laws and new legal structures that make it ever easier for them to sell their services from these places, and defending the low (or often no) tax that tax havens offer. The role of PWC in creating Jersey's zero/ten tax regime is just one of many examples. Never do I hear these firms demanding accountability for their clients in these locations. And this advocacy of secrecy and low tax is vital. Many of these places are small. Candidly their parliaments would have, at best, the status of a small district council in the UK and broadly speaking they attract similar sorts of candidates. Now I have the greatest of respect for local councillors: many do a great job, but my point is that vey few have experience of international finance and its needs, even in places like the Channel Islands or BVI. In that case they pass the laws they are presented with by the local financial services community. As leading figures in those communities the Big 4 are not, therefore, neutral in this process: they also create the tax environment in which tax avoidance takes place. And I seriously hope they do not deny this: such environments do not happen by chance; they are created by human endeavour and the Big 4 have supplied a lot of that endeavour. In other words, they do not just facilitate tax avoidance, they create the environment in which it occurs.
Which brings me to my third point, which is that the Big 4 are in that case moral agents in this situation and are not merely acting within the demands of the market. They are definitely helping create and promote a market for tax avoidance. Whenever, for example, you see them promoting "cost effective supply chain management" (as they all do) you can be sure they are talking about the use of tax havens mixed with careful transfer pricing to ensure some profits slip out of the UK or some other place. But in doing that they are seeking to alter who pays tax and how much tax is paid. And as a result of their size and impact this has major implications. The tax burden is undoubtedly shifted from capital onto labour as a result; that is inevitable. The philosophy is simple. Like it or not that means that the Big 4 embrace Leona Helmsley's idea that only the little people should pay tax. Second, it also means they endorse the fundamentally anti-democratic idea that tax havens could and should be used to limit the size of democratically elected government's activities. Indeed, by providing the opportunity for large multinational companies to say "we'll leave if you don't do what we want" they directly facilitate that process of attempted blackmail.
But all that leads to questions on ethics, and the appropriate response. I question these firms ethics. I question their commitment to society when they clearly seek to undermine it. I question their commitment to democracy when they are willing to work around laws. And I definitely question their commitment to social and distributive justice.
All of which then leads to a series of further questions. If this is the case why then do we afford these firms such status? And why do we allow them such influence? Why, perhaps most especially, do we allow them to set the rules for accounting disclosure that currently let them and their clients hide what they are doing from public view, which greatly assists its perpetuation? But most of all, if these firms work so hard to undermine the government's income why do we grant them government contracts? And isn't that one immediate way to impact this behaviour on their part?
Of course, not all of that may come up in a couple of minutes on air. But those are the issues I want to discuss. Now all I have to do is get to the studio on time.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Amen to your position on the so-called legality of tax avoidance schemes. You can also highlight the importance of HMRC’s discretion. HMRC, not Parliament or the Judiciary, decides which tax return to challenge and which to litigate. So when HMRC enters into sweetheart deals (eg Hartnett) or simply lacks the resources to investigate a tax return the company goes away shouting we’ve not been investigated by HMRC or HMRC are happy with our return so it’s all legal. This explains why Starbucks charged 6% on royalties for years and then HMRC challenged it and it was reduced to 4.7%. Basically HMRC, not the court or Parliament, determines what is legal!
The PwC lady did very well.
Not what I heard
But you can disagree
Jim are you DEAF…go back to the todat podcast on BBCIplayer and LISTEN again ..carefully..
Regards
And here are the results:
Murphy 4 Big Four 0 !
Actually, it was the referee that completed the rout. The last question from Evan Davis was devastating: “you’re a very bright person, will you end your career proud of what you have done?”. But an absolutely fair one.
Evan Davis has totally understood what the issue is; the question is, what took him so long?
a question to which she gave a full and convincing answer – Evan should hang his head in shame.
Pardon?
i think the debate swung both ways to be honest. Some poor examples were used on both sides to demonstrate a point. the thing about the BVI not having a tax authority to “agree” a position was a complete red herring and did not serve to inform the audience at all. We all know that if a UK company is paying a royalty to BVI (and therefore seeking a tax deduction in the UK to reduce its tax) its the UK HMRC that would mount the challenge and not the recipient (a challenge that they already have sufficient powers to do under the TP regs – whether they choose or have the manpower to do so is a different question which RM has addressed previously (and well) on his blogs).
Personally I feel we should be very careful about introducing “morality” into the debate. The UK is now going to have one of the lowest CT rates in the EU and, by design, the UK is trying to make itself the “new” Luxembourg/ireland/netherlands.
When we have business either migrating here or transfer pricing their profits here, are we going to be similarly outraged on behalf of Germany, France, Greece etc? No we are not, as all we are interested in is our own deficit.
Witness Cameron and Boris welcome and encourage wealthy French individuals to the UK with open arms (so they can avoid 75% tax in France) – isnt this hypocritical?
I do not approve of our new tax competition
It is immoral
I wonder when you will ever be allowed the last word.
Well that interview was fascinating. The PwC spokesperson seemed to harbour no misgivings from a morality perspective given the pride she expressed in her closing remarks, I suspect many readers to this blog would take a very different moral stance. Given she didn’t appear morally bankrupt, it would seem that when it comes to tax there isn’t an objective morality. So applying a moral element to the debate just means that tax matters would become highly subjective (and therefore increases unfairness) as ther are lots of views out there on what’s right and wrong. So doesn’t this boil down to getting governments, as democratically elected bodies, to build a better system rather than the alternative of shaming businesses (often on scant evidence) that are largely following the rules laid down?
I heard amorality from PWC
Your logic do not follow from that
In the absence of a universally accepted moral standard on the tax debate then amorality is entirely reasonable. That’s why we have detailed tax laws rather than just a tax rate.
Amorality does not exist on this issue
Immorality does
Richard. I think the second and third paragraphs of this blog are perhaps the best, most concise summaries you’ve given of what’s rotten about the whole avoidance topic. I’ve cut and pasted them into a Word document and when anyone asks me to explain my position I’ll cite this. Just off to listen to Today slot. Seems it went well.
Hear the clip now (before its put out on iPlayer) in the Today programme’s running order page at time 08:37
http://news.bbc.co.uk/today/hi/today/newsid_9775000/9775475.stm
Welcome home…
http://www.insidehousing.co.uk/tenancies/landlord-acquires-shipping-containers-for-housing/6524889.article
Good article and points all made clearly. Which is why I am aghast that for the second time in as many months Newsnight ran a story on tax avoidance [by Starbucks,Amazon et al] on Monday night with Paxman in the chair hosting a studio discussion after the short film. For the second time the young lady who appeared in the previous Newsnight item on ‘avoidance’ was in the hot seat along with Giles Fraser. Opposing was a ‘head of Tax’ [or something similar]at KPMG and Mark Littlewood of the IEA think tank. The latter is a smooth operator who knows his stuff and basically though Giles Fraser was passionate in his opposition to the offending company tax strategies he was by his own admission not able to comment on the actual methods used by such companies. The lady who was on the same side of the argument as Fraser unfortunately fared little better. She was shrill but didn’t seem able to critique the avoidance scams beyond complaining that the rest of society was under siege and these companies were not paying their share. Whilst that was correct no one watching would have any idea whether the ‘transfer pricing’ was legitimate or not. Paxman looked bemused at it all and frankly Mark Littlewood was the winner by default simply because he was concise and she was not able to deal with his points at all beyond repeating her earlier comments. Surely there is someone better able [I mean a woman who they seem to want] to front these debates which Newsnight keep paying lip service to? I did email immediately after the programme to state that they should indeed use someone with a thorough understanding of accounting practices as it pertains to multi nationals rather than the well meaning but clearly overwhelmed young lady in question. I did ask why on earth they didn’t use yourself since you would be better able to explain the issues clearly and provide a more coherent counter argument to the likes of Littlewood and KPMG but I am frankly frustrated at Newsnight’s amateurish attempts to present these discussions due to their dogmatic notions of equal opportunities for the sexes.
“It is getting round tax law to obtain an advantage parliament did not intend.”
Richard,
Why did you write the above when you know that it is not true!!!, parliament did intend making it legal to “obtain an advantage”, you like I and many others know this to be true as it has gone on for many, many years, nothing had, has or will be done to stop it, as time will tell. Those who serve us in parliament do not serve us, never have done, they are there to serve themselves. Being an MP is a no more then a very lucrative career move for them!.
Resoectfully I wrote exactly what I meant
A question Richard. How did Starbucks, “get round the tax law to obtain a tax advantage parliament did not intend”?
Let me explain the difficulty I’m having. They clearly followed the UK transfer pricing rules as laid down and got the position agreed upon review with HMRC (before the story broke). It seems to me this is just regular compliance and you wouldn’t plan your transfer price on the basis that HMRC wouldn’t pick it up as that would be tax evasion pure and simple. Also if they knowingly didn’t follow the UK TP rules (or priced outside a likely acceptable range) then surely that is also tax evasion too (not tax avoidance) but everyone is at pains to say what they did is entirely legal. So, by your own definition, doesn’t this imply that they were not tax avoiding in the first place. I just can’t see what tax rules they got around here as they clearly followed the TP rules. It would be good if you provide a full response as I’m keen to understand what I’m missing on this.
The answers to all those questions are readily available already
the feeling that you have appeared here to waste my time is grwoing with every comment you post
A bit evasive Richard. I’m a bit confused now too.
As well as losing out on tax revenue due to transfer pricing, do we ever benefit from it?
If so, what do you believe the net effect to be?
People don’t tend to transfer price into what are thought to be higher tax states – like the UK, France, Germany etc
So the answer is we’re bound to be a net loser
“When the application of law is uncertain, and it can be, morality has to take its place as a guiding principle as to right action.”
Whose morality?
Who defines what is the “right” action?
I am a very moral person (by my own standards) – can it be me?
Excellent.
The incidence of corporation tax is largely on employees and customers. Therefore its application is uncertain, even secretive. It is consequently an immoral stealth tax. I demand we scrap it.
The state has the right to decide on that morality using a power called democracy
A General Anti-Tax Avoidance Principle would enforce that
Perhaps we could avoid the ‘Osbourne’ word of immorality and settle for the word ETHICS instead. Less open to spurious arguement I think. Might also make people understand there is a choice between good and abusive behaviour. Living in hopes!
How could we level the playing field for independent coffee shops?
I know – all UK independent coffee shops can use my offices in Leichtenstein and Dublin.
All they have to do is tell me the price per cup at which they sell their coffee, e.g. £2.80.
The Dublin office will buy coffee beans at world prices, say, 50p per cup but charge the retailer £1.60 a cup. “They are exceptionally good beans”.
To stop Dublin paying any of the 10% Irish Corporation Tax, the Leichtenstein office will charge Dublin £1.10 a cup for the Intellectual Property rights to use the logo on the sacks, so Dublin pays no tax as it makes no profits (Buys at 0.50, sells at £1.60 with £1.10 logo use charge).
Leichtenstein office then charges the retailer £1.20 a cup to use the logo too, so the retailer pays no tax because his costs (£1.60 + £1.20) equal the price he charges, so no profit there to tax.
Should we become the Big 4 for the independents? Seems pretty straightforward to me. 🙂
Further to previous comment …
Oh – I forgot to mention that the income received by the two offshore subsidiaries can be repatriated without paying any tax, as under the Double Taxation Treaty funds that have been taxed once then can’t be taxed again.
It seems to me that there are 3 pillars to tax avoidance:
1) appear to be paying someone else when you’re actually paying yourself;
2) soak up any profits by making Intellectual Property charges (for logos and the like); and
3) repatriate the “payments” without incurring tax because under the Double Taxation agreements if you’ve already paid tax in one jurisdiction then you can’t pay tax again.
Payments shown inside the box in the diagram below are effectively to yourself and usefully remove any profit that could be taxable, especially if you get advice (from the Big 4?) on how to arrange your offshore holding company and offshore subsidiaries, and how to do internal pricing.
How you negotiate with HMRC to get them to agree that these internal prices are “reasonable” I have no idea.
Repatriates 2.30 already “taxed”
^ in Dublin & Liechtenstein
| |
|—————————–^———————-| |
| Dublin | Liechtenstein receives | |
0.50 <— — > 1.10 | |
| & | | |
| receives | & | |
| 1.60 | 1.20 | |
|—–^———————-^———————-| |
| Shop pays 1.60 & 1.20 “costs” | |
| Receives 2.80 from customer | |
2.80 > — > | |
| | |
| & 2.30 < ——–<———-
| already “taxed” |
| elsewhere |
—————————————————
Assumes Parent company is CoffeeCup (Bermuda) Ltd – the outside edge of the box
Subsidiary 1 CoffeeCup (Ireland) Ltd
Subsidiary 2 CoffeeCup (Liechtenstein) Ltd
Subsidiary 3 CoffeeCup (Oxford) Ltd
£2.30 per cup received in Liechtenstein charged at low tax offshore rate.
No tax paid in either Ireland or at UK shop as no profits were made there.
Is this how it’s done, Richard?
Diagram online at:
http://imageshack.us/a/img580/9012/paynotaxcoffeeshops2012.jpg
Picture worth a thousand words?
I’ve also seen this trick used in Personal Finance.
Hiding an existing business profit using a self-imposed extraneous or excessive business cost which is apparently paid to someone else, to reduce tax and also create profit at another separate profit centre, is also a wheeze used for Director’s Pensions.
Say you owned and operated an insurance business from an office in the High Street.
You might be advised to buy the building that the office occupies and put it as an asset in your Director’s Pension.
Then you charge the insurance business an exorbitant rent, far higher than that paid to the previous landlord.
This higher cost will reduce the profits of the insurance business and thereby the tax bill too.
And the proceeds will go directly to fund your retirement.
Re-directing funds directly out of the business as a business cost paid apparently to someone else, but ultimately for your own personal enhancement inside a tax-free vehicle – your pension.