My post last Tuesday provoked a disgruntled email from a tax academic. “I do not feel qualified to say whether the Starbucks royalty is excessive or not,” wrote my correspondent. “I think that is HMRC’s job. Do you feel qualified to say it is excessive? If so, on what evidence?”
This is a fair question, although the post in question does not make this assertion (I did, after all, spend a decade crafting carefully worded allegations against companies with big legal budgets…). But it got me thinking about the stalemate that exists around corporate tax exposés such as the recent ones concerning Starbucks and Facebook, as well as some of the older ones, such as Google and Vodafone.
The thing is, I think there is a broad agreement among tax professionals – on whichever side of the debate – that practices such as those alleged in each of these cases are commonplace within multinational companies.I don’t think that there is an interesting debate on a technical level about the tax practices of each company, because the techniques are well established. This was what struck me about the letter in the FT that was the subject of my blog post.
The debate is really a normative one: it’s about the framing of the analysis, who is responsible for what, and what is the desired outcome. Here is an attempt at summarising the normative viewpoints:
- “The system is full of loopholes that allow companies to dodge tax. Companies deserve to be criticised for taking advantage of those loopholes, and governments and tax authorities should work harder to close them. These exposés play an important role in exposing the situation and pushing all of those actors to change it.”
- “There are real problems with the system, but this is an issue that requires a more fundamental shift in the way companies are taxed. There’s no point criticising companies for acting rationally within the framework set by the law.”
- “This is how the system is supposed to work. It may look wrong to the lay person, but that’s because they don’t appreciate the way a modern business is structured nor their obligation to minimise their tax liability. Yes, the tax system needs to keep pace with the development of more aggressive tax planning techniques, but it already does this. These attacks on companies are fundamentally misconceived.”
Having said that there is no technical debate about the mechanics of the arrangements in question, I should add a couple of riders. There are two things that I think campaigners, and occasionally the media, tend to do which perhaps undermine their case a little.
The first is to jump on every case that suits their argument – or in some cases, that is consistent with how they know companies tend to behave – without checking the facts. Not every allegation over the past few years has been entirely correct, beginning with the Guardian’s ill-fated report on Tesco, which kicked off the current wave of exposés even though it resulted in a painful lawsuit and a grudging apology (though not a complete vindication for Tesco). As my correspondent above correctly points out, it’s important to be clear about the limits of the evidence in each case.
The second mistake that I think campaigners make is not to clarify terms well enough. In particular, ‘tax avoidance’ has a very specific meaning to tax professionals, which is different to how it’s understood by the lay person. For most people, the important distinction is between illegal tax evasion and legal tax avoidance; to them, any tax practice that ‘smells bad’ fits into one of those two categories. But technically, to qualify as ‘tax avoidance’ a practice generally has to fall into a space bounded on one side by the letter of the law, and on the other side by the intention of parliament. I’m still not sure whether NGOs’ tendency to use ‘tax dodging’ as a vague term to get round the definitional (and legal) issues has helped or not.
The public discussion at the most popular level is never going to get much beyond “Starbucks is avoiding tax.” I don’t think that a serious debate would happen without that widespread public narrative to galvanise policymakers into action. But that serious debate should be different, it should about the principles that should underlay the taxation of multinational businesses, and whether or not the system as it stands really embodies those principles. That should be an interesting dialogue in which many stakeholders – including all three of those viewpoints set out above – have something interesting to say.
Totally agree with your conclusion. The recent flood of tax avoidance stories in the media appears to be met by increasingly stale responses from business (we’re not doing anything illegal so don’t pick on us); government (we’ll be cracking down on tax avoidance so don’t worry) – which tax justice campaigners need to move on.
That said, I’m not entirely convinced that campaigners (presumably for tax justice) are solely guilty about misusing the term avoidance. Some ‘campaigners’, like the Institute for Economic Affairs argue that avoidance is anything that lowers your tax bill:
“Avoidance involves taking action within the law to pay less tax. This can include saving in a pension fund or giving to charity. The government often deliberately provides these avoidance mechanisms as part of a conscious policy and it would be wholly unreasonable to suggest that it was immoral to use them.” http://www.iea.org.uk/blog/should-the-church-evade-the-issue-of-tax-avoidance
The confusion is also stoked by UK libel law, which means that evidence that spark accusations of tax evasion (such as Glencore’s tax dodging (!) in Zambia) is labelled avoidance: http://www.guardian.co.uk/business/2011/apr/17/glencore-denies-copper-tax-allegations?INTCMP=SRCH
I don’t see this issue being resolved anytime soon – but have been wondering if one option for (tax justice) campaigners is to talk more about tax ‘abuse’ – in a similar way to the current GAAR proposals.
This side-steps any attempt to define unacceptable/aggressive avoidance, but possibly puts the spotlight on the abusive loopholes in the international regulations.
It’s not going to be a panacea, but I wonder if it might help push things in the right (or at least new) direction?
“Tax abuse” is excellent. It captures outright tax evasion and tax avoidance that frustrates the intention of Parliament.
Extremely important update. An HMRC spokesperson today claimed they “are cracking down hard on tax dodging.”
Do these people not know the different between avoidance & evasion???
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