Alastair’s Place

Software development, Cocoa, Objective-C, life. Stuff like that.

The Paradise Papers

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 basically untrue.

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 on.

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 ball.

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 idea.

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:

  1. Through appreciation in the value of their shares.

  2. 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 employees.

  • 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 you’re wondering).

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.