Aggressive tax avoidance: politician heal thyself

by George Hatjoullis


Irishcorporatetaxrate (Photo credit: Wikipedia)

There is a huge debate taking place at the moment about the tax practices of large corporations. The UK is a notable example and Margaret Hodge seems to be at the forefront of the crusade [it is worth googling Margaret Hodge and reading what comes up]. UK politicians are never slow to find a cause, especially if it dims the memory of what might be termed aggressive expense applications and presents them as angels in the pursuit of the common good. The debate may confuse many that have traditionally seen avoidance as within the law and hence acceptable and evasion as beyond the law. As always it is never that simple.

The demonized corporations are all acting within the law. However, the law in many jurisdictions allows the tax authorities to prohibit tax aggressive avoidance. It is this category of corporate tax behaviour that is under scrutiny. The precise definition of tax aggressive avoidance varies from jurisdiction to jurisdiction but in essence it relates to tax behaviour that, whilst technically legal, is against the spirit of the tax code and is clearly contrived to be solely for the purpose of tax avoidance and has no basis in reasonable or normal business practice. It is up to the tax authorities to determine when this is the case and any criticism of corporations by politicians is also a criticism of their own tax authorities.

One must sympathise with the tax authorities because they must interpret ,and challenge in court ,specific cases and can only do so within the legal framework set by lawmakers; the self-same politicians that are kicking up the fuss. It is a bit of a mess and not simply a matter of evil corporations not paying their dues.

The problem stems from the global nature of corporations and differential tax rates and practices across sovereign states, and even within the EU. Tax harmonisation within the so-called single market is some way off. The differential tax rates are deliberate actions by specific jurisdictions in order to attract certain types of inward investment. It is a decision made by politicians! Ireland has had a relatively low corporate tax structure for some time and some may recall Berlin used their need for a bail-out to put pressure on them to make it less generous.

These politically determined differential tax structures allow global corporations to arbitrage tax jurisdictions through transfer pricing and the judicious location of head offices. The transfer pricing is quite straightforward. Subsidiary A ‘charges’ subsidiary B for services through internal accounts and thus the revenue is booked in A. The location of head office, where accounts can be consolidated, is rarely simply a tax matter but it is also a consideration.

In the UK the political focus has been on household names that are largely US originated corporations. However, the same practices are found in UK originated corporations and these may well be depriving other jurisdictions of tax revenue. The UK is not being discriminated against or abused. It is experiencing what all nation states struggle with in a global corporate world.

The solution to the problem is fairly simple. First, harmonise corporate tax rates across sovereign states. Second, clarify the tax aggressive avoidance legislation and strengthen the hand of the tax authorities in implementation. If this does not happen it is a political failure and not because corporations are immoral or tax authorities too lenient. Politician heal thyself.

Postscript 31/01/2016

This subject continues to rumble on. Politician hypocrisy continues unabashed. This link from The Guardian speaks for itself. The same politicians that claim to champion the taxpayer quietly support the offshore tax haven and are not infrequently direct beneficiaries of same.