Events | 2009.02.11
Anne Redston: Backdoor fictions of corporate tax avoidance
There is nothing new about tax avoidance. Most Georgian houses have blind windows, bricked up to avoid window taxes. And almost a millennium ago, in what could be seen as a blatant but dramatic tax avoidance device, Lady Godiva rode naked through Coventry to shelter its citizens from the Heregeld.
But tax minimisation methods have radically changed. Today they are facilitated by instant communication, sophisticated corporate structures and financial wizardry. Global marketing pushes up the price of intangible assets such as brands and patents. Around the world people pay vast sums in royalties and rights: routing such payments to low tax jurisdictions has become a tax planning commonplace. And it is simple. Brands and patents - unlike factories and shipyards - are incorporeal assets, with no natural home; they can be moved from place to place as easily as a Tardis.
Some argue that tolerating tax avoidance is a price worth paying for the presence of global businesses in Britain. But there is, of course, no necessary correlation between a company\'s appetite for tax avoidance and its delivery of wider social or economic goods.
Others contend that avoiding corporate taxes doesn\'t really count, because companies aren\'t real people. If companies avoid tax, they say, this simply pushes up the value of shareholders\' investment. And since the extra value will be taxed as either dividends or capital gains, corporate tax avoidance is really just a form of tax deferral.
This is a seductive but misleading argument. First, and most obviously, not all company shareholders are UK tax resident. If shareholders live in a tax haven, shifting income from companies to individuals does not defer tax, it eliminates it. Second, corporate taxes cannot be looked at in isolation; they are part of the national fiscal fabric. If there were no UK corporation tax, other taxes would increase to compensate. In the current model, stripping out part of the expected corporate tax take puts a strain on the rest of the fiscal system.
But does avoidance bring backdoor benefits? Pension funds are some of the biggest shareholders in UK companies, so does reducing corporate tax benefit pensioners? It is of course true that pension funds invest in the stock market. But it is a stretch to believe tax planning feeds through to higher pensions. For most people, this simply isn\'t the case.
Those on old-fashioned final salary pension schemes receive the same pension whatever the investment return. Those on state pensions depend directly on future tax revenues, and so are disadvantaged by avoidance. In the case of with-profits pension funds, the sum an individual receives on retirement depends on the discretion of the insurer - there is no direct relationship with increases in the fund.
When it comes to unit-linked pension funds, however, value does directly reflect underlying investments, and it is thus true that holders might benefit from tax avoidance. But even here there are problems. The company could spend the increased revenue on other goodies, such as bigger offices or better bonuses. And even if lower taxes do translate into higher profits, this doesn\'t automatically increase the company share price. As anyone who has lost money in the recent downturn knows, a company\'s after-tax profit is just one of many factors affecting the price of its shares.
It is simply disingenuous, therefore, to see tax planning as providing backdoor help for tomorrow\'s pensioners. It is of course legitimate to advocate the abolition of corporate taxes, and perfectly valid to argue that UK rates are anti-competitive in a global market. But this isn\'t what avoidance is about. Tax avoidance means taking a unilateral decision to minimise your company\'s tax.
The recent economic crisis has significantly increased the financial strain on Britain. We now need an honest, robust and open discussion about how we are taxed. It is difficult to conduct this debate if key facts are hidden, as they inevitably are in avoidance schemes.
When Lady Godiva rode through Coventry, people closed their windows and stayed indoors. But the time for turning a blind eye to avoidance has long gone: we now need greater tax transparency.
• Anne Redston is visiting professor of law at King\'s College, London anne.redston@kcl.ac.uk
Cif editor\'s note: This article will be open to comments on the day of publication. To follow all the developments in the Tax Gap series, read our tax blog .
For more information, please visit
http://www.guardian.co.uk/commentisfree/2009/feb/05/comment-tax-avoidance
Instagram is adding automatic in-app text translation - The Verge views: 1524
Here’s a ‘Brand-New’ Massive Multilingual Dataset for Machine Translation views: 1517