What is ‘tax avoidance’?

16 May

George Osborne says he’s dealing with tax avoidance. He is and he isn’t. It all depends what you mean by ‘tax avoidance’. As Richard Brooks demonstrates in his excellent book ‘The Great Tax Robbery’, the government has made some moves to clamp down on ‘tax avoidance’, but only understood on the very narrow definition according to which tax avoidance involves transactions that are ‘unintended and unexpected [by legislators].’

According to this definition, Phillip Green did not ‘avoid tax’ when he arranged matters so as not to pay a single penny of tax on his 1.2 billion dividend from Acardia (the company that owns Top Shop, Dorothy Perkins and British Home Stores) by putting the company in his wife’s name (she happens to be a resident of Monaco). According to this definition, Starbucks is not avoiding tax when it shifts profits outside the UK and so manages not to pay UK corporation tax. It is the corporate structures of Google, Amazon and Starbucks that the British public is angry about, and yet according to the government’s definitions, what these companies are doing does not count as ‘tax avoidance’.

Brooks points to a BBC survey finding that 84% think that ‘the government should crack down on tax avoidance by business operating in the UK,’ in which ‘tax avoidance’ was defined as ‘where people or businesses arrange their financial affairs to minimise the amount of tax they pay while remaining within the law.’ It seems that when the British public say they want action on ‘tax avoidance’, and when the government says it is taking action on ‘tax avoidance’, they mean different things. Indeed, the treasury’s relaxation of controlled foreign company laws, laws which try to restrict the shifting of profits to tax havens, positively encourage the tax-minimising corporate structures of companies like Google and Amazon.

And yet whilst the government’s definition of ‘tax avoidance’ is too narrow, the definition used by the BBC survey, which Brooks seems to favour, seems too broad. I arrange my financial affairs with a view to minimising – or at least lowering – my tax bill when I pay into an ISA or a pension, and yet intuitively this does not constitute tax avoidance. This is an important point, as it is a common ploy by the economic right to equate the actions of Green and Starbucks with the ordinary citizen’s use of an ISA, and in this way to dismiss all moral concern about tax avoidance. We need a definition that allows us to distinguish these cases.

I think the answer is startlingly simple. We should define ‘tax avoidance’ as ‘where people or businesses arrange their financial affairs to minimise the amount of tax they pay in an unethical manner.’ One unethical way of minimising your tax bill is by breaking the spirit of the law, and this kind of tax avoidance is to some degree covered by the government’s definition. But it is also unethical for a transnational corporation to arrange its affairs so that the sharing of taxable profits in each jurisdiction in which it operates grossly fails to reflect the economic activity in each of those jurisdictions.

Indeed I think there a good case can be made that any indulgence of ‘tax competition’ is unethical. Competition between companies can have good consequences, in terms of innovation or lower prices for consumers. But when countries compete with each other to attract big business and wealthy individuals by slashing their tax rates, the result is a race to the bottom in which less and less of a proportion of global profits goes to state-funded education, healthcare and public services. When ‘tax scabs’ like U2 Ltd or Gerard Depardiue indulge this process because they fancy a couple more million to play with, they are behaving abhorrently.

Of course, as with any moral matter, there are going to be tricky cases, and evaluating the moral status of any case will involve judgement. But that’s what civilisation is all about. And the vast majority of the public doesn’t seem to be having trouble regarding the ethical status of the tax affairs of transnationals discussed above. The important point is to see tax as a deeply important ethical issue. If you’re ever in doubt about that, read the recent African Progress Report, which finds that Africa loses more from profit shifting that they receive in foreign aid (the effect of tax dodging on the developing world is laid out in chapter 10 of Brooks’ book).

In the last few years the public has woken up to the moral significance of tax. If this is to put genuine pressure on government, we must expose the government’s overly narrow definition of ‘tax avoidance’, and move to a definition that actually covers the forms of tax-minimisation people care about.

19 Responses to “What is ‘tax avoidance’?”

  1. Adrian May 16, 2013 at 10:25 am #

    I’m with you on the need to distinguish ISAs from transfer-pricing abuse, and with adopting a category of “unethical tax reduction”. It’s not exactly operationalised, but as you say we generally know dodgy conduct when we see it, and we generally get on even though there are always some hard cases and disagreements. But I think there would be serious rule-of-law concerns with having the government crack down on it under that description. We generally like the law to spell out what you’re not allowed to do in non-normative terms, as far as possible, because a prohibition on acting wrongly as such does leave *quite* a lot of scope for unpredictable post-hoc interpretation. Also (sadly) laws sometimes get administered by Tories. I don’t want someone who thinks tax avoidance is a kind of self-defence in charge of bringing Google to heel.

    Too, I can make a decent argument that ISA/401(k)-type schemes *are* unethical. They’re regressive—the subsidy rises in proportion to saveable income—and, as a replacement for defined-benefit schemes, they shift risk from entities that can bear it to people who can’t. But the government can hardly crack down on people taking advantage of its own subsidy schemes, can it?

    • conscienceandconsciousness May 16, 2013 at 11:41 am #

      Adrian: Thanks for your comment. I’m thinking of the definition of ‘tax avoidance’ I offer as a starting point; we then need to categorise the kinds of tax minimisation we take to be unethical. I suggest three in the piece: breaking the spirit of the law, profit shifting, and encouraging tax competition. Certainly the Tories won’t see the third as unethical, but we can start to make the argument that it is. I don’t think it’s unrealistic to hope that public pressure may make a government accept the second as unethical, and move towards dealing with it, ideally in the ways suggested by Tax Justice Network.

      It seems that you think ISAs may be a bad policy, but I’m not sure that makes those using them unethical.

      • Adrian May 16, 2013 at 3:27 pm #

        Ah, OK. Then I don’t disagree, though the action’s likely to be in the categorisation. I certainly agree that spirit-breaking can’t be the only kind of improper minimisation. Think of tax arbitrage, which exploits the differences between tax systems; possibly in a way that is consistent with the spirit of each, considered separately.

        Why isn’t taking advantage of a regressive subsidy like taking advantage of tax competition, or of relaxed CFC rules? You avoid contributing to your country in proportion to your capacity to do so.

  2. BobM May 16, 2013 at 7:34 pm #

    Philip

    If you can define “ethical” for tax purposes you will save us all a great deal of grief.

    Brooks’ two references in the book to the thinking of John Whiting, now an HMRC Board member, tell us what big-money will say about your ethics. On page 75 he is contemptuous of people “trying to raise the moral tone”.

    Horrid; but true…any thoughts?

    Rob

    • conscienceandconsciousness May 16, 2013 at 9:16 pm #

      Rob: I don’t think there is a distinctive concept of ‘ethical for tax purposes’. It’s simply that certain ways of minimising your tax bill are unethical, either because they cause harm (encouraging tax competition) or because they are unjust (shifting profits), or a mixture of the two. I’ve tried to identify three kinds of unethical tax planning in the post.

      I don’t see why it’s more strange to expect business to behave ethically with respect to tax, than it is to expect them to behave ethically in any other respect, e.g. the environment. Nobody thinks a business that causes terrible environmental damage didn’t do anything wrong if they didn’t break any laws. Why should attitudes be different when they do something wrong in respect to their tax affairs? It’s a question of cultural shift; it’s not a sacred rule of capitalism that business will always avoid tax. Not easy to change these things though…consumers and law makers have a crucial role to play as well of course…

      In any case, there are two distinct questions: (A) Are certain (most?) companies doing something wrong? (B) Can we do anything about it?

  3. James Benson May 17, 2013 at 7:57 pm #

    Interesting but problematic. Is it even true that tax competition causes harm? Low corporate tax rates set by a country is clearly intended to attract business to that country. That will give rise to economic activity and other taxes as a result of the business coming to that country (incremental employment taxes, VAT, payments to suppliers among many other things). If these outweigh the loss in corporate taxes (likely if you look at the make up of tax collection as corporate taxes are dwarfed by other taxes) then the government in question (democratically elected) has more to spend. So the equation is either no ecomomic activity (because the business goes elsewhere) and so NO taxes, or the economic activity and some corporate tax but a whole lot of other taxes and other benefits. There doesn’t seem to be an equation that gives more economic activity and more corporate tax when a company is deciding where to locate.

    Why are companies not allowed to respond to incentives but you are when you take out an ISA? It’s like putting chocolates in front of a child and blaming the child for taking one.

    Also if it’s as easy to write a definition and provide a list of examples why not stick it in the legislation in the first place?

    • conscienceandconsciousness May 18, 2013 at 9:26 am #

      James
      Of course an individual country can increase tax intake by attracting business by undercutting the tax rates of another country. But globally the proportion of profits going to states is lowered. My claim is that it is unethical for individuals and transnationals to encourage this process which results in, at a global level, less and less of a proportion of profits going to state funded education, health care and public services.

      My central claim is that there’s nothing necessarily wrong with action to lower one’s tax bill. It’s unethical if it has bad or unjust consequences, I don’t think paying into an ISA has bad or unjust consequences, whilst encouraging tax competition, or shifting profits, does.

      I never said any of this was easy. Ethics is hard. My simple definition of tax avoidance is meant as a starting point for trying to work out (A) exactly which forms of tax-minimisation are unethical, (B) how best to try to stop/lessen these unethical practices, both my legislation and by trying to pressure people and companies do what they ought to do.

      • James Benson May 19, 2013 at 9:05 am #

        I think we can agree that there has been a trend of reducing corporate tax rates over the last few years. However at a global level tax revenues as a percentage of GDP has increased according to the World Bank figures. So on average States have been raising more revenue as a proportion of the overall economy not less. So if democratically elected national Governments choose to tax corporate profits more lightly than other things how can it be unethical for MNCs to take advantage of this in a world of increasing tax revenues? Governments are free to choose how they raise revenue and from what sources and we elect them on the basis of their policies. I just don’t see MNC responding to incentives specifically designed to attract them by democratically elected Governments as being unethical and that’s the issue with your definition of tax avoidance. Who decides?

        Also why is tax any different to a whole host of Government incentives like grants, subsidies, training etc. if MNCs are not allowed to consider tax then they should also ignore things like grants too which are designed to attract them (which come out of the public purse too reducing spend in other areas). If that’s the case we are starting to go down the route of the free market ideologies where the state doesn’t interfere at all in the market. I suspect this is the exact opposite of your point of view.

  4. conscienceandconsciousness May 18, 2013 at 9:41 am #

    Adrian – Thanks for the example of tax arbitrage. Interesting point about the ethics of ISAs. I’ll have to think more about it. But I don’t think one has a duty to pay as much tax as possible. I think tax minimisation is unethical when it is unjust or has bad consequences. But perhaps you can make a case that paying into ISAs has bad consequences…wil give it some thought…

  5. robert mountain May 19, 2013 at 1:19 pm #

    Philip

    I don’t see any evidence that Multinationals/big-money behave any more ethically in in regard to non-tax matters than they do regarding tax. The particular problem with tax is that it bites [or not] on financial arrangements of extraordinary flexibility, and turns on conventions of extraordinary artificiality.
    Marina Hyde’s recent piece on Google
    http://www.guardian.co.uk/commentisfree/2013/may/17/dont-be-fooled-by-googles-babyfacery?INTCMP=SRCH
    makes the point that these guys are not interested in ethics.

    The biggest problem in our local, corporate, law is that it prioritises “shareholder value” [in practice, maximisation of remuneration for directors] over everything else. Trade unions made an awful error in rejecting Barbara Castle’s In Place of Strife proposals, that would have introduced a corporatist approach to business direction.

    The biggest problem with UK tax has been the surrender of the entire political establishment to big-money’s low-tax mantras; and the emasculation of the Revenue, so that enforcement of manifestly archaic rules is now undertaken by an under-resourced and demoralised subdivision of George Osborne’s Treasury.

    The latest PAC hearing, featuring Mr Brittin of Google, and his E&Y adviser, is still available on BBC Democracy Live, and is worth a view.

    I recommend Richard Murphy’s blog for the latest news and suggestions on the way forward.

    Rob

    • conscienceandconsciousness May 20, 2013 at 1:35 pm #

      James
      Could you let me know where the World Bank figures you mention are? I think we’d need to look out how that breaks down into different states/different kinds of tax before we can learn any lessons. But I think we can agree that the more wealthy individuals/transnationals shop around for the best tax deal, the more pressure is put on governments to lower tax rates, which results in less money than there would otherwise be for education/healthcare/public services. By shopping around for the best deal, you’re contributing to a process that makes the world a worse place than it would otherwise be, and I think that’s bad.

      I think it’s important to distinguish the obligations of mobile citizens/transnationals with respect to tax competition from the obligations of states with respect to tax competition; the latter are more complex. It’s understandable that states would lower their tax rates if the alternative is their economy suffering. However, I think the states leading the downward pressure on corporation tax rates are not behaving as they ought. You talk about states being free to do what they want, but the actions of tax havens limit the freedom of governments all round the world to set their tax rates as they choose. Overall, I think states have much more to gain if they co-operate rather than compete.

      With regards to your final concern, the problem is not that countries are competing for business, but that they’re doing so by cutting tax rates. For one thing, tax competition is just bad capitalism, in that we want investment to go to where it’s going to be most productive, not where the tax rates are lowest. I never said these matters are straightforward, and there are going to be grey areas and complex cases, as with any ethical issue. But I think there’s a reasonably clear distinction between specific targeting government action to improve industry, and beggar thy neighbour tax slashing.

      • James Benson May 22, 2013 at 12:10 pm #

        Here you go:
        http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS/countries?display=graph

        There is also a breakdown by country in the table section.

        I don’t think that it is the tax havens that lead to a downward pressure on rates in developed countries. Tax havens don’t have the infrastructure to out compete a developed country. You don’t set up manufacturing operations in Guernsey for instance or have Apple setting up in Guernsey as it simply does not have 3,000 people that could do what is needed.

        The UK is more in competition from other developed countries like Ireland for example. I think there’s little doubt that if the UK had the corporate tax policies it now does most of the companies in the news would be based here rather than Ireland. So taking Apple as an example the UK would have 3,000 more jobs and the spending of those individuals and the spend on suppliers etc plus the extra tax it would have in terms of PAYE etc plus a bit of additional corporation tax.

        So I would say the Government may come to the conclusion that in its own self interest it would rather have all these benefits rather than nothing at all for the sake of cutting its corporate tax rate, especially as it is clear that it can raise revenue more easily form other sources. Governments make choices all the time on what (and how much) is taxable and what isn’t, and there’s nothing sacrosanct about corporation tax. So it is an entirely rational policy choice by democratically elected Governments and they don’t have to be coerced into it. It’s national economics.

      • James Benson May 22, 2013 at 12:58 pm #

        Here’s the OECD figures also which give a longer historical trend and can be broken down by tax type.

        http://stats.oecd.org/Index.aspx?QueryId=21699

        These clearly show that UK corporate tax receipts as a percentage of GDP have actually gone up (not down) since the 1960s/1970s despite headline rates falling. So this evidence doesn’t support your contention that tax competition is putting pressure on corporate tax receipts as the headline rate trends downwards as the opposite seems to be true (nevermind overall tax revenues which have also increased since the mid-1960s).

  6. conscienceandconsciousness May 20, 2013 at 2:48 pm #

    Rob: I agree with most of this, and thanks for the recommendations. To some degree the corporate responsibility wing of a company can apply pressure to behave more ethically, and it would be good if ethical tax policy could be seen as part of corporate social responsibility. And to some degree I think consumer pressure can have influence. But, sure, I agree it’s very hard to make corporations as we know them now behave more ethically. My post was first and foremost a philosophical exercise of working out what’s wrong with tax avoidance. But of course, as it says on Marx’s grave, it’s more important to work out how to get rid of the bad stuff….hard innit…

    • conscienceandconsciousness May 24, 2013 at 8:37 am #

      James:
      Thanks for the figures. To refute my view about the harm of tax competition, you would need to make a case not just that tax receipts are not falling, but that they are higher than they would otherwise have been if tax shopping were lessened/were not taking place. Yes, big corporations can’t really base their economic activity in a small tax haven; the problem is that their economic activity takes place elsewhere, but profits are shifted to the tax havens.

      Moreover, you’re still not distinguishing between the ethical obligations of states and the ethical obligations of mobile individuals/corporations. We can have a debate about whether or not it’s rational/ethical for a given state to lower tax rates (it seems to me that overall states have much more to gain if they co-operate to eliminate tax competition, instead of competing). But what is more straightforwardly unethical is mobile individuals/corporations putting downward pressure on global tax rates by tax shopping.

      • James Benson May 25, 2013 at 8:53 am #

        Why don’t you have to show that mobile companies/individuals are putting presure on governments to lower rates? It is your assertion but is it actually true? That seems central to your claim and you have provided no evidence of this. It could easily be rational thing for governments to do (see Tesco analogy) and they don’t need to be under pressure to do it.

  7. James Benson May 25, 2013 at 8:45 am #

    A question for you then. Lets assume Tesco come into a small town and intentionally lowers its prices on key items sold by all the other shops in the town whilst holding its prices on other items. Slowly one by one all the independent shops are put out of business and people lose their livelihoods and the town is full of empty shops. Now who do you blame? Is it Tesco or is it the shoppers who responded to the low prices?

    • Bobm May 25, 2013 at 4:49 pm #

      James

      I would blame central government for its ongoing indifference/subservience to the power of big money, and its ongoing impoverishment of local government/opinion.

      We are all familiar with the general incapacity of local people/authorities to resist endless, one-way bet planning appeals by the likes of Tesco. In some cases wealthy small towns can and do see off Tesco and co. There are small towns near me that fit the bill. But, by and large, once Tesco have got their foot in the door small businesses lose out, as you note.

      The assumption is that this is good news for “the consumer”. But it isn’t. A monopoly/cartel supplier selling, typically, from a single or handful of locations is ultimately bad news for all; most particularly for the car-less, bus pass-less poor.

      Rob

  8. conscienceandconsciousness May 27, 2013 at 10:38 am #

    James;
    Nice analogy. I certainly think consumers have some kind of reason to avoid big chains if at all possible. But I’m not sure I’d go so far as to say it’s an obligation, as ought implies can, and there may be limited options for many people. Of course there may be similar situations where it is permissible, or at least understandable, that a company tax shops, for example, if the alternative is going under. But the behaviour, say, of U2 and Gerard Depardieu lacks any such justification. They’re just arranging their affairs to make themselves richer, without caring about the consequences. There are no doubt many different situations, and judgement about the permissibiliy of tax shopping will be straightforward in some cases and less clear in others. In any case, perhaps the more important thing is to explore the negative consequences of certain behaviour, rather than worry about whether or not people and companies are blameworthy for their actions.

    I certainly don’t take myself to have a given a full and complete defence of the harm of tax competition. I don’t think enough research has been done to distinguish intrinsic disincentives to invest (those which would remain if there were no tax competition) from extrinsic disincentives to invest (those which are caused by tax competition). But it’s hard to believe that there is not a reasonably significant difference between the two, and a corresponding restriction on the freedom of states to set tax rates (caused by tax competition).

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