Is Tax Avoidance inevitable?
Is tax avoidance by big business something we just have to put up with?
I believe not, though I cannot pretend to have all the answers, or that it would be easy implementing the necessary changes, but I do not believe the commonly-held mantra that “fancy lawyers and accountants will always find ways around it”. Tax avoidance by big business follows a standard pattern based on a few principles and is not “rocket science”.
1) VAT . Tax avoidance by the likes of Amazon is predicated on the basis that tax for Business to Customer transactions across international borders is taxed according to where the business sending the goods is based. Business to Business transactions, on the other hand, are taxed according to where the business receiving the goods is based.
Therefore, if you are a business buying steel girders from the USA the value of those goods is determined by UK Customs and a charge of 20% is levied on the business receiving the goods in the UK.
However, when you buy goods from Amazon based in, say, Luxembourg, there is no requirement to charge VAT. In the pre-internet age you would most likely have gone to an import/export dealer or shop to buy something from overseas and hence the imported goods would be subject to business to business rules with a VAT charge levied when the goods arrived at port in the UK. However, with the internet one can cut out the middle man and order direct from a supplier in another country.
The rules on business to customer transaction need to change to being the same as business to business. This might require credit card companies and banks to arrange a charge of 20% every time something was purchased from a business based in another country. If the goods were non-vatable (such as books) then the charge could be made and refunded once it has been proven that this was the case. Under this system Amazon would effectively have VAT levied wherever in the world they chose to locate their supplying business.
2) Transfer Pricing. This is when a multi-national business moves money around its different subsidiaries in different countries. The aim is to minimise the profit declared in high tax countries and maximise it in low tax countries. This can be done in a few ways:
- Issue a loan from the subsidiary in the low tax country to the subsidiary in the high tax one and charge interest on it. This interest is tax deductible in the high tax country thus reducing profits there and increasing profit in the low tax country when the loan interest is paid over. This is usually allowable up to a couple of percentage points over the bank base rate of the country.
- Overcharging for goods. If a business requires a supply of goods, such as coffee, then an operation can be set up in a low tax country to supply coffee to the businesses in the high tax country but at an inflated price, resulting in higher costs and lower profits in the high tax country and money flowing to the operation in the low tax country.
- Issuing a ‘Management Charge’ to the high tax operation for the running costs of a head office set up in the low tax country. These charges rarely seem to be subject to any great scrutiny. Often they may be £2 million for the running of a post office box and registered office in another country which is absurd.
I would suggest that all such practises are made illegal. Interest on loan should not be tax deductible if not issued by an “arms length” or unconnected organisation. This would include a bank that was largely owned by the company receiving the loan. And the company would have to prove that it was an “arms length” financial institution so that if it was registered in, say, the Cayman Islands, where company ownership in kept secret, then it would be assumed to be a connected organisation unless the company could prove otherwise by revealing the bank’s ownership. And any attempt between two people pretending not to know each other arranging a loan between themselves would be firmly in the realms of illegal tax evasion which can be clamped down on with the threat of a lengthy prison sentence.
The price charged between companies for goods should only be allowable at a market price that can be clearly determined. If there is no market for something highly specialised then a fair and appropriate accounting value must be the only allowable cost that can be charged to the other branch of the company.
Management charges should be outlawed without a clear evidence-based analysis of what the management charge is paying for. Invoices showing running costs must be presented to allow management charges to be tax deductible at all.
And finally, the burden of proof should be squarely on companies to show that items are tax deductible rather than the Inland Revenue having to prove that they are not. Big businesses pay corporation tax in advance and this level of tax paid must carry an up-front assumption that items will not be tax deductible if there is any doubt.
The aim is to ensure that income earned in Britain is taxed in Britain at the full rate, but that income from businesses based in the UK that is derived abroad is taxed at whatever rate the foreign country decrees. That way there wouldn't be a disincentive against being based in Britain as foreign income can be retained by the multi-national's headquarters. Perhaps a lower tax on profits derived from exports could further encourage mobile and multi-national businesses to base themselves here.
In order to deal with the "rich people will simply move abroad issue" we should end non-domiciled status whereby a British citizen can stay out of the country for 9 months a year in order to avoid paying UK income tax. In additional, profits earned in Britain should be subject to a tax at the UK tax levels before the money leaves the country (this argument is largely nonsense anyway as it is impossible, even in the internet age, to run most businesses remotely)
It will take a brave government to introduce these measures because big business is a powerful lobbying group and political donor but for the sake of fairness such measures must be introduced. It is currently ridiculous how easily multi-national companies can avoid tax, but with a few changes the situation could be substantially changed, and without putting off companies from putting their operations in the UK.