Tax avoidance is legal. Tax evasion is
illegal. That much is clear and undisputed. But, as the row over the tax
policies of companies such as Starbucks, Google and Apple has shown, this
distinction no longer provides a sharp dividing line between fiscal propriety
and impropriety. That line has become more than blurred; it has become a vast
grey area awash with ethical controversies and accusations, public indignation,
political point-scoring, mutual recriminations and fundamental conflicts of
interests and duties.
The current, official line seems to be that
there is a category of ‘tax planning’ behaviour lying between legal avoidance
and illegal evasion that complies with the letter of tax law, but violates the
spirit, which is to say the intent of the tax authority concerned.
Some tax planning is not only acceptable – it
is desirable. When a corporate taxpayer brings forward investment, for example,
to take advantage of a temporary accelerated depreciation provision, it is behaving
as the government intends. But so-called ‘aggressive’ tax planning, as some tax
authorities call it, such as routing profits on sales in one jurisdiction (such
as the UK) through a lower-tax jurisdiction (such as Ireland) is morally, if
not legally wrong. The argument here is that it is unfair to deprive customers
in the country where sales are made of tax revenues associated with those
sales, by artificially re-routing taxable earnings elsewhere.
There are two problems with this
argument.
The first is that it ignores the duty of
company managers to their shareholders to maximise shareholder value. The
managers of a firm operating in several tax jurisdictions who failed to make the
most of differences between those jurisdictions in rates and allowances would
be failing in their fiduciary duty to shareholders, many of whom will be
pensioners and savers, to maximise ‘total shareholder returns’ (dividends +
capital gains).
This is not, or not only, vested interests
masquerading as a moral principle. The duty managers have to shareholders is
real and part of the contract between directors and investors. A CEO who takes
a high moral line and forswears use of anything other than the most pacific and
proper tax planning would be in breach of contract and at risk of summary
dismissal.
The second problem with the assertion that it
is immoral to engage in ‘aggressive’ tax planning, particularly when it is
asserted by ministers and civil servants, is that governments are themselves deeply
implicated in the growth of aggressive tax avoidance. Their feverish efforts to
develop tax systems that are ‘competitive’ in the global market for foreign investment
has led to intense ‘tax competition’, as governments around the world vie with
one another to attract, or retain foreign capital with low head-line tax rates
and extended ‘tax holidays’ for foreign investors.
It borders on the disingenuous for
governments and tax authorities that have, by engaging in tax competition,
created the opportunity for aggressive tax planning, then to take a high moral
tone with firms that exploit that opportunity. If governments don’t like the
way that companies are legally avoiding taxes, they should either tighten tax
law, abandon direct taxation of profits altogether, or change the basis of
corporate income tax.
An interesting suggestion by Michael Devereux
of the Saïd Business School (Financial
Times, May 23, 2013) is to switch the basis of corporation tax from where
profits are earned, to where sales are made. He proposes the adoption of VAT’s
‘destination principle’. The profits of multinational companies would be taxed
on the basis of sales to UK residents. Imports would be taxed; exports would be
exempt.
In the absence of such a switch to a more
rational, less avoidable basis of company taxation, governments will continue
to paper over the cracks in their tax systems by insisting that multinational companies
have a moral duty to subordinate the interests of their shareholders to those
of tax payers in the countries in which they operate.
Email us at: info@cceg.org.uk
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