As successive layers of tax law pile up, gaps and overlaps appear in the structure. These provide opportunities for tax avoidance.

Tax ethics: a step towards a fairer tax system

by George Bull

It’s said that every nation deserves a tax system that looks as though it was designed to be that way. The problem we have at the moment is that the UK system does not. Instead, it reflects the piecemeal outworking of political policy-making over the decades. Chancellors of the Exchequer do not just use the tax system for its primary purpose of providing revenue to finance necessary Government expenditure. They just cannot resist also using it to attempt to influence personal and business behaviours and redistribute wealth to gain favour in the polls. As successive layers of tax law pile up, gaps and overlaps appear in the structure. These provide opportunities for tax avoidance.

Many countries follow a well-established principle of taxation, ie that there is no obligation to pay the maximum amount of tax due. Even the US Patriot Act does not require that! Tax systems generally permit a business or an individual to take reasonable steps to organise their tax affairs to avoid having to pay the maximum.

Added to that general principle, which in the UK is supported by the courts, are the specific reliefs and allowances intended to encourage financial transactions which are perceived to be social ‘goods’ – for example, charitable giving or investing in small, more risky businesses with a view to creating economic activity and jobs. Of course, there have to be limits and the UK courts have made it very clear that tax avoidance which relies on wholly artificial transactions will be struck down. That principle has been bolstered by a lengthy code of anti-avoidance legislation.

The UK government has competed with others to attract multinational businesses to the UK. This competition, sometimes labelled as a ‘race to the bottom’, has not only seen the reduction of corporation tax rates but also the introduction of more benign tax regimes for intellectual property and the profits of overseas subsidiaries, to name but two. Furthermore, there are specific rules that enable profits to be moved between jurisdictions, not only reflecting the commercial realities of multinational operations but also introducing the possibility of shifting profits from high-tax to low-tax jurisdictions. The recent announcement by Starbucks, confirming the shifting of profits from the UK to the Netherlands in response to favourable tax treatment there, illustrates this. Of course, sovereign nations are looking for their payback too. In the case of the Netherlands, it seems that they required Starbucks to site their European coffee roasting and grinding plant there. So while the Netherlands may have offered a favourable tax package to lure Starbucks to its jurisdiction, economic activity and jobs will have been generated by the substantial coffee operation. As an aside to this, and to introduce a point to which I return below, it also emerged that Starbucks’ main source of coffee beans for the Netherlands plant is that well-known coffee-growing nation Switzerland! The global operations of multinationals are indeed of labyrinthine complexity. In many companies few if any people will have a complete picture of the whole.

Returning to the international theme, individuals or businesses facing double taxation (ie being taxed on the same income or gains in more than one country) lobby hard to have the burden reduced. In response to this, most countries now have a series of sophisticated agreements with other countries which are intended to specifically reduce double taxation. These, too, are important components in the tax mitigation strategies of multinational corporations and mobile businesses.

But it’s not only companies that exert influence on tax authorities. As an example of individual influence in this area, one has to look no further than Usain Bolt and the pressure that he and others have put on the UK tax authorities to escape taxation in respect of appearances at this year’s London Diamond League event at the Olympic Stadium. It is an interesting reflection on human nature that multinational corporations and bankers are quickly taken to task by the general public for perceived tax abuses, but the media will often turn a blind eye to the arrangements of popular sports personalities.

Pausing to recap, and setting aside tax evasion (which is illegal and may result in prosecution and even a prison sentence if detected) and abusive tax avoidance, it is becoming clear that much tax avoidance runs along conduits specifically created by the tax authorities in sovereign nations. Is this acceptable? Here we enter an area of shifting sands, where the landscape seems to be constantly changing and with thick fog descending to obscure the traveller’s view.

Even the simple precept of rendering unto Caesar that which is Caesar’s loses its clarity when Caesar has so manifestly made a complete mess of designing his tax system.

So what about the ethical and moral position? Leaving aside evasion and wholly artificial avoidance, many contend that, where the rule of law is supreme, ethics and morals have no place: any argument between the tax authorities and the taxpayer can ultimately be resolved by the courts according to the letter of law. Others, however – wealthy individuals and businesses alike – recognise a responsibility to their nation and to their fellow citizens. They will draw a line in the sand which – in the interests of social responsibility – they will not cross. For individuals, this can be a matter of personal choice and belief. For businesses, there is a growing recognition that good ethics make for good business.

How might this play out in practice? Large corporations will often say that they have no choice but to maximise shareholder value in a sustainable way. Tax, they argue, is a cost which has to be managed as actively as any other business expense. It is easier for shareholders in small and medium-sized enterprises – and for family business in particular – to adopt an ethical position that does not use tax mitigation techniques to boost shareholder returns. It is not exactly a case of ‘small is beautiful’ (small can be a very difficult place to be in the twenty-first century) but it certainly reminds us that big is definitely not best when it comes to making a positive social impact.

Here we come up hard against the current predicament. In a nutshell, after years of tinkering with the tax system to specifically encourage multinational businesses, MPs have woken with a jolt to the harsh realisation that they have got to exactly the wrong place, but arguably for some of the right reasons. This has produced vigorous responses from MPs, who are inclined to blame everyone but themselves for the wave of tax avoidance which is currently reducing UK tax revenues. So what should MPs do now?

On the basis that, as our elected representatives, we might reasonably expect MPs to create a tax system which reflects the diverse but not irreconcilable will of the British electorate, I suggest that they should actively create an environment in which individuals and businesses that chose to adopt an ethical tax path do not find their positions untenable and their businesses failing, through unfair tax competition. I have been involved in taxation for 36 years so I know this is not easy to achieve; it will require international cooperation to make any worthwhile progress. With that in mind, the recent OECD proposal to draw up proposals to address this problem is greatly to be welcomed.

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George Bull heads Baker Tilly’s Professional Practices Group and is primarily involved in providing leading-edge business and taxation advice to the legal profession. George is closely involved with the reform of the legal profession in England and Wales and is one of the driving forces behind Baker Tilly’s widely recognised report ‘Climate Change – Forecasting the Impact of the Legal Services Act’. George regularly broadcasts, lectures and writes on all aspects of professional practices and taxation.