There’s currently a huge stink about the so-called
“Paradise Papers” —
basically, a leak from a law firm called Appleby that specialises in
“offshore” activities, detailing the shennanigans of many of its clients.
Understandably, today, there’s a lot of anger in social media, particularly on
the left, about the tax evasion and tax avoidance that the BBC’s
Panorama current affairs programme
detailed in its latest episode. The thing is that a lot of the anger is
misplaced, and, to be perfectly blunt about it, a lot of people are being
manipulated by politicians greedy for more government cash into thinking that
this is about schools or hospitals closing versus tax revenue being
collected. Those same politicians don’t mention, of course, that they spend
taxpayers’ money on guns, bombs, five star hotels, art for their offices,
expensive office furniture and so on. I’m not necessarily opposed to those
things, I might add, but they’re a lot less popular with the public than
schools and hospitals, and so if you put yourself into the mindset of a
politician who would like extra money to spend on his or her personal
priorities (which may or may not include a fancy office chair, for instance;
or extra “trade envoys” so their chums can enjoy a few foreign junkets at
taxpayers’ expense), you’re always going to play the schools and hospitals
card here. You might, if you’re a political leftie, also go on about “cuts”
to peoples’ benefits — regardless of whether or not the current government
has cut benefits, some people are likely to be receiving less than they
were for whatever reason (rule changes, changes in personal circumstances,
etcetera), and those people will suck up your argument, even if it is
Another fact that isn’t often mentioned, unless you talk to an economist
anyway, is that there’s an underlying assumption that the money would be
better used if paid in taxes to government. A case in point here is Apple. I
won’t for one moment claim that I think that how Apple currently arranges its
tax affairs isn’t anything short of outrageous — though I have a different
view on it to the one being loudly expressed across the Internet today, which
I’ll go into below — but in purely objective terms, the goal here should be to
maximise the benefit to citizens, across all measures. So, for instance, one
could argue that Apple having a lot of cash benefits millions of people
because Apple spends a lot of that money on innovation, and that innovation
makes the lives of many millions of people, the world over, better. Yes, it
may also enrich Apple shareholders, directors and employees, but I’d argue
that’s a much smaller effect. On the other hand, if governments had
confiscated it as taxation, it’s quite unlikely they would choose to spend
it that way. Yes, some of them might spend some of the money on schools and
hospitals, or alleviating homelessness or poverty, but let’s be honest here —
quite a bit of it would instead be spent on things the public isn’t so keen
Note: I’m not trying to defend Apple here. Apple can do that itself. I’m
just trying to fill in some of the missing parts of this.
On Corporate Taxation
On the subject of Corporation Tax, which is what the fuss about Apple is all
about, and is also, actually, at the heart of some of the other tax avoidance
schemes that we’re talking about here, CT is just a bad tax, pure and simple.
The OECD even published a paper about taxation at one point showing that
Corporation Tax was the only widely deployed form of taxation that was
negatively correlated with growth. It’s also too easy to manipulate,
because it’s based on profit calculations — that is, companies can reduce it
by appearing on their profit and loss sheets to have spent money or to have
lost money on their assets through depreciation or other kinds of loss.
Additional confusion is caused to the public by the fact that companies only
exist within the legal jurisdiction in which they were incorporated. In a
very real sense, for instance, there is no such company as “Apple”. Rather,
there is Apple, Inc (which is in the United States), Apple Europe Limited
(in the United Kingdom), Apple Operations International (Ireland), Apple
Sales International (Ireland), Apple Distribution International (Ireland),
as well as a host of other entities. All of them are separate companies,
and therefore separate legal entities, though some may hold shares in others
and they likely share some directors too. The thing the public thinks of as
“Apple” is not, in a legal sense, real — but instead is projected by the
actions of a number of co-operating legal entities in various different
jurisdictions. You might say this is a sleight of hand, but it’s how the
world works because it’s how the laws passed by our politicians work.
The upshot of this fact is that it’s possible for (for instance) Apple, Inc
to pay money to Apple Operations International, which doesn’t change the
amount of money “Apple” (the ephemeral thing the public thinks of) has, but
does change things for tax purposes because Apple, Inc pays Corporation
Tax at the United States rate (high by global standards), while Apple
Operations International is taxed in Ireland. Of course, as the Paradise
Papers make clear, things are not quite that simple, and some other steps are
involved that reduce the Irish tax bill by, basically, paying money to another
company in Jersey. But you get the idea.
Now, you might say, as Donald Trump does, that this is all outrageous, that
Apple is a U.S. company, and that the billions it has “stashed away” outside
of the United States should have been taxable at 35% in the United States and
that Something Must Be Done. Or, you might say, as some here in the United
Kingdom do, that Apple makes a lot of money here, but doesn’t seem to pay very
much tax here, and so some of those billions are “ours” in some sense. But
that simply isn’t how the law works.
Nor, and I’m going to be controversial here, is that how we should want it
to work. Let me take another example. Imagine you operate a delivery and
warehousing company in the United Kingdom, whereby overseas suppliers can pay
you to stock goods for them and deliver them to addresses in the United
Kingdom. Now imagine that there is a website that sells goods of all types,
all shapes and all sizes, and that that website does so in the United Kingdom
by hiring your delivery company to hold stock and deliver goods; in other
territories they do much the same thing, but with different delivery and
warehousing companies. Clearly both the delivery company and the website
company will be able to calculate a profit figure (essentially sales minus
costs), and so Corporation Tax will be paid at UK rate on the profit made by
the delivery company and at some other rate depending on where the website
company is incorporated on its profits. Now, let’s say the website company
can choose where it incorporates — after all, it’s a website and the Internet
is everywhere. So let’s pick somewhere with low tax rates. Luxembourg, say.
Now, the delivery and warehousing company is free to charge whatever it
pleases. Obviously if it goes too high, it will lose the website company’s
business, and if it goes too low, it will lose money and eventually go out of
business, so there are limits, both low and high. Moreover, the high limit,
according to standard economic theory, will tend towards the low limit as the
level of competition increases — assuming perfect competition, the delivery
and warehousing company will be making a profit of £0 on its operations.
All of this is fine and dandy, and nobody would question the right of the
owners of the distribution company to operate at the lowest possible cost and
even to make no profit at all if that’s what they wish to do. It’s their
company, and there is no innate requirement that a company run at a profit
(they could even choose to fund its operations by constantly shoveling money
at it, though that strategy can’t last indefinitely as the owners will
eventually run out).
I’m sure some people can see where I’m going with the situation I just
described. So let’s cut to the chase. Let’s call the UK company “Amazon UK
Limited”, and let’s call the website company “Amazon EU SARL”. Just, you
know, for sake of argument. And since corporate ownership is rarely
straightforward, let’s say the two companies share some directors and
shareholders. We might even imagine (though this isn’t how it happened in
Amazon’s case) that the website company might eventually decide to simply buy
the distribution and warehousing company (in which case, the two separate
companies still exist — it’s just that one owns the other). Why does this
make it unreasonable for the distribution and warehousing company to run at
zero profit all of a sudden? It was fine before I gave them both similar
sounding names, and before they had shared directors/shareholders. Why is it
suddenly not OK now?
“Nobody would run a business for zero profit”, I hear you say. Are you sure?
What about a family business where the owners are employed by the business?
Running at zero profit in that case might make sense — subject to tax
legislation not making it much worse to pay salary rather than dividend.
The fact is that “multinational” companies are largely a fiction — legally
speaking, they are really groups of national companies that happen to
co-operate for whatever reason, often but probably not always because they
have the same (or overlapping) ownership or directors. Each of these separate
legal entities is separately taxable, in the jurisdiction in which it exists,
on its profits, and there’s little you can do to prevent them from paying one
another for services, intellectual property licensing and so on, thereby
reducing the profit in one jurisdiction and increasing it in another. There
are some rules governing payments between companies with shared ownership,
so for instance you can’t have company A sell parts to company B at hugely
inflated prices in order to reduce profits at company B and increase them at
company A, but of course it’s very difficult to prove a value for intellectual
property, especially things like brand names, so this is something of a losing
battle for tax authorities as long as corporations’ accountants are on the
A final nail in the coffin for Corporation Tax is that while the intent is
that it should fall on the owners of corporations, in practice some fraction
is, for understandable reasons, borne by their customers and employees
instead, in the form of higher prices and lower wages respectively.
What should we do instead? Well, CT is a non-starter. It doesn’t work in a
globalised world, it isn’t an efficient tax, it’s poorly understood by the
public (which causes resentment when they hear that e.g. Amazon isn’t “paying
its fair share”), forces governments to get involved in and to legislate about
the calculation of corporations’ profits and is just, in general, not a good
But let’s think for a moment; the goal here was to impose a tax on the owners
of the corporation. How do those owners benefit from a corporation’s profits?
Well, in two ways:
Through appreciation in the value of their shares.
Through dividend payments and other distributions.
In the former case, we tax the rise in value when they sell the shares.
Currently in the United Kingdom, this would be covered by Capital Gains Tax,
which is levied at a lower rate than Income Tax, which may or may not be
desirable (it’s notionally to encourage investment in businesses). We might
consider instead taxing at Income Tax rates, but taking into account inflation
when calculating the taxable gain, if any.
In the latter case, these are often taxed through Income Tax, though presently
here in the UK we have some special rules for dividends that make them a
little more tax efficient. We could abolish those and instead tax them as
ordinary income — the original justification for the different treatment was
that the money had already been subject to Corporation Tax and that taxing it
twice was, essentially, double taxation.
The elephant in the room here is probably overseas distributions or capital
gains, and the solution there is quite straightforward: a withholding tax.
So, for instance, if a company pays a dividend to an entity (a person or a
company) that is outside of the United Kingdom, a UK company should apply
income tax at full rate to that money at source. That tax could then be
claimed back by the foreign entity if it can show that it has been taxed on
the money. There are variations we could consider (for instance, perhaps at most
the amount paid in tax in the foreign jurisdiction could be claimed back, even
if the UK payment was higher), but the central idea is that you make it
impossible to take the money out without paying some tax on it.
Corporation Tax is negatively correlated with growth.
Corporation Tax should fall on the owners (typically shareholders) of
corporations, but in practice is partially borne by customers and
Corporation Tax is based on profits, and as such is easy to manipulate,
particularly for “multinationals”.
To try to prevent manipulation, the rules have become increasingly complex
in many jurisdictions — for instance, banning “depreciation” (here in the
UK we have “capital allowances” instead), attempting to regulate the prices
of “intra-company” transfers (i.e. sales between related legal entities) to
prevent “profit-shifting” and so on. This complexity is good for
accountants and lawyers, but it’s very bad for smaller businesses (and
therefore bad for competition, and thereby consumers) and makes it more
likely that loopholes are inadvertently introduced.
The notion that businesses will “play fair” is a nonsense. Big businesses,
in particular, have every incentive not to; they have adequate funds and
staff to challenge the tax authorities, and the sums involved can be
colossal. They can also afford to employ the best and brightest — wages in
public service are typically more restricted, and worse, if someone is
really good, business may eventually poach them. On the other hand,
small businesses are more likely to play fair because they don’t have those
resources and want to concentrate on their business, so treating everyone
the same way is likely to be advantageous to big business (whether you’re
going to come down hard on everyone or not).
On Personal Taxation
It is often asserted that it is “immoral” not to pay your “fair share” of
tax. But what is your fair share? Let’s think about that for a moment.
Let’s start by assuming that we all agree that everyone should pay some
tax. Not everyone thinks that, and there are details like whether the very
poor should pay any tax at all, but we’ll take it as given that, in principle,
we should pay some tax.
So, how much tax should you pay? Should it be based on your income? Or on
your wealth? What if your income varies substantially from year to year? Is
it fair to tax someone who earns £70,000 one year, but will only earn £20,000
the next, in the same way as someone who earns £70,000 every year? What if
you have no income but are very wealthy? How does that change if your wealth
is illiquid (maybe you own a large country house, or even a small house
somewhere expensive like London)? And when we decide what to tax, at what
rate should we set the tax? 13%? 35%? 50%? Higher? Should the tax rate
increase (or decrease) with the overall amount? Why? Should anyone be exempt
from tax for any reason? Should there be an amount you can earn or hold
before you start having to pay tax? How should this interact with things
like benefits or indeed voting rights?
My goal here is to make you think. This isn’t simple. It isn’t like the
question of whether you should cheat on your wife (you shouldn’t, in case
So what we’ve chosen to do, at least in most countries, is as follows: we
elect people, who form a government. They, in conjunction with some kind of
assembly, debate the matter and come up with a set of rules, which they pass
as legislation. The legislation answers the above questions, at least as far
as that country is concerned.
That is, the amount of tax you should pay is defined by the law. If the law
says you should only pay £1 in tax, then that is what you should pay. There
is no “moral” case for paying more than that amount. Paying less than that
amount is evasion, and that is both illegal and wrong — because it’s unfair
that everyone else has to comply with the law and you don’t.
“But tax avoiders…” I hear you say. Well, what is tax avoidance? Tax
avoidance is really just where you notice that the law says you could pay less
tax than someone else thinks you should. Note: it isn’t paying less tax than
you owe; it’s really just where the amount of tax you owe is surprising for
some reason. Now, aggressive tax avoidance can involve doing all kinds of
things that you wouldn’t ordinarily have done (typically this involves
companies owning things that you would normally have owned yourself; loans
being made where none were necessary; low tax rate investments like pensions
investing in assets you sell to them, and so on), solely to leave you in a
position where the law says you owe little or nothing in tax. The UK, in
common with other jurisdictions, has passed legislation to prevent that,
namely the General Anti-Abuse Rule (or GAAR).
I’m in two minds about GAAR. On the one hand, I’m not really a fan of
aggressive tax avoidance; yes, it’s legal, but I think where it’s obvious that
you’re using the law in a manner different to that which Parliament intended,
there’s an ethical problem with that. I won’t do it, even sometimes in cases
where my accountant is convinced I should. And I’ve been offered avoidance
schemes, which I’ve turned down. On the other hand, it essentially amounts to
allowing the tax authorities to decide that the law doesn’t matter, and what
does matter is their view of how much you should pay. I’m no fan of that
either, and while there are checks and balances in place, my view is simple:
it’s up to Parliament to get the law right in the first place.
Much of the aggressive avoidance is caused by Parliament complicating the tax
system for political reasons. There are many examples; my favourite recent
example was the legislation passed to make the UK an attractive place to make
films. This was intentionally designed to provide tax breaks for investors,
but many of the various vehicles that accountants and tax planners constructed
to take advantage of the tax break have fallen foul of GAAR, it seems because
someone didn’t realise the massive tax advantage they’d handed out. Yes,
there were loans involved — but honestly, that’s quite normal — if you know
you’re going to make a profit on your investment, you might well take out a
loan in order to make a bigger investment than you could out of your own
capital. The problem here was that in doing that, the investors were entitled
to a much larger tax break, and could write off in some cases very large
amounts of tax. I don’t think you can really argue that this wasn’t what
Parliament intended; if it didn’t intend that, then those responsible for the
legislation were spectacularly inept. And, I might add, an unfortunate
consequence is that there were many much less wealthy people who became
involved and for whom the tax consequences are dire, because the penalties
being imposed are based on the total investment, including the money they
borrowed, which was often many times the amount they put in themselves. Nor
was this “wheeze” failing to result in films — the vehicles in question were
responsible for a number of blockbusters, so the tax break certainly
encouraged precisely what the government wanted it to. Basically, I’m no fan
of Jimmy Carr, and I wouldn’t have invested in the scheme he did, but I’m a
little uneasy about saying that people who did were doing anything other than
what Parliament intended.
But even simple things like deliberately imposing high marginal rates on
“wealthier” individuals create the scope for avoidance. Why? Because you’ve
increased the value to those individuals of not paying that money in tax.
That can make it worthwhile to do something unusual that wouldn’t ordinarily
be viable because of the extra cost — like paying yourself
through a limited company (as, it turned out, even civil servants and BBC
staff were doing).
So what should we do? Well, the tax system needs to be fair, but we need to
recognise that it’s just as unfair to confiscate very large portions of a rich
person’s income as it is to do the same to a poorer person, but that, unlike
poorer folk, the very rich are in a position to do something about it. Thus,
we should resist the “soak the rich” mentality of the hard left, while
nevertheless making sure that the matter of calculating the tax that is due is
as simple as possible so that there is little room for manoeuvre. So we should
also resist the urge of some to craft all kinds of exemptions, special
schemes and complicated rules to encourage this and discourage that.
Simplification should be the order of the day.
Personally I’m in favour of a flat tax at, say, 35%, with a large personal
allowance to cover basic living costs, which can be combined with someone
else’s so that a household with one person earning £X pays the same in taxes
as a household with two people earning, between them, £X. At the same time,
I’d abolish National Insurance, which is far too complicated and is
contributing to the business of people unnecessarily being paid through
companies, I’d get rid of Capital Gains Tax as a special case (but allow
inflation to be used to reduce gains, and the same on savings in the bank, so
that you don’t get taxed on inflation), and I’d get rid of the special
treatment of dividends too. Similarly, VCTs, EIS, ISAs and all the other
complications, I’d probably look to abolish — I’d rather people invested
because they had money I hadn’t taken off them, instead of investing in order
to prevent me taking money away from them which is what those schemes do — and
at the same time I’d be looking carefully at the benefit system to see how it
could be reformed (I find the universal basic income to be an interesting
suggestion in this area, though I’m not sure how it would work in practice).
“Evasion” is where you don’t pay the tax the law says you should. That’s
wrong, pure and simple.
“Avoidance” is where the law says you need to pay an amount of tax that
somebody finds surpisingly low for some reason. It isn’t illegal, and if
something is at fault, it’s the law. You should focus your anger about
this on the politicians who get to choose what the law says, not on those
people who pay less tax than you think they might otherwise.
Aggressive avoidance is already tackled in many places through a General
Anti-Abuse Rule (GAAR). These are problematic, though, because they
effectively allow a body to decide that the law itself doesn’t matter as
much as their opinion. I’m not a huge fan of GAAR overall — I’d rather
the underlying law didn’t provide opportunities that create a need for it.
If someone starts bleating about “schools and hospitals”, you’re being
manipulated. Governments spend money on lots of things you probably don’t
approve of, in addition to the schools and hospitals everyone likes. The
notion that tax avoidance or even evasion is responsible for school
closures is nonsense, even at the outside estimates of the amount of tax
that is avoided or evaded every year.
It’s also worth being a little more sceptical about some of the more
outspoken voices you may hear in the media on this. Margaret Hodge, for
instance, the current chair of the Public Accounts Committee appears to have a very large holding in Stemcor,
much of it held in trusts. The facts and figures in that letter are
disputed — both Hodge and Stemcor used the word “libellous” in their response
— but the fact is that Stemcor is owned by and controlled by the
Oppenheimer family, of which Hodge is a member, and there is certainly
some evidence that it engages in the kind of tax planning of which Hodge has been so publicly critical.
Panorama made a point of mentioning Lewis Hamilton’s jet, on which he
apparently hasn’t paid any VAT in spite of it allegedly being used for
personal use, as opposed to merely business use. I’m sure he isn’t the only
one doing this, I might add — it’s just that Panorama singled him out.
Now, again, this is more complicated than it seems on the face of it. If I
were Lewis or his accountant or lawyer, I’d probably point out that much of
what Lewis does, including posting pictures of himself on Instagram (or wherever)
having a very nice time apparently on holiday, could be construed as
“business”, in that Lewis Hamilton is, himself, a brand (in the same way as,
for instance, David Beckham). That, and the itinerant nature of Formula 1,
makes it quite difficult to separate personal use of his aeroplane from
business use, and I imagine that’s what the Isle of Man’s tax officials had in
mind when they allowed him to pay no VAT on its import into the European
Union. It’s also, as I understand it, not unusual to discount a small amount
of business use on some items, though the rules are very complicated and I
don’t know how it applies to aeroplanes in practice, and it may well be that
the Isle of Man got it wrong when they did this.
I’m not sure VAT avoidance or VAT is really in-scope for this piece, as it
only formed a minor part of the information coming out from the Paradise Papers,
so I’m not going to talk more about it here.
As always with these things, I’d say it’s a good idea to be more sceptical
about what you read or hear in the media. Rather than blaming “the rich” or
“corporations” for the problem of tax avoidance, you should look to your
politicians. They, not the rich and not the corporations, are responsible for
setting the law, and a lot of this is caused by baroque legislation made for
political purposes and a failure to grasp the nettle of tax simplification.