By Roy Saunders
This article was published in International Taxation, Vol 8, Issue 2, Feb 2013
David Cameron’s “smell the coffee” wake-up call on all tax avoiders at the Davos World Economic Forum is politically clever but commercially naive. The media has fuelled an indiscriminate attack on international companies which fully comply with the law, identifying them with individuals who enter into dodgy tax avoidance schemes and those who completely break the law by non-declaration of their assets and income. Although Mr Cameron is entirely correct in stating that companies should pay their fair share of tax, assuming they are profitable in accordance with generally accepted accounting principles, in my view he should not have sullied his message by including in his statement reference to ‘automatic information exchanges catching people who are illegally evading tax’. Tarnishing law abiding companies with the image public have of tax evaders does nothing to help Britain’s position in the European Union as a country ‘open to business’.
The furore created over the insignificant tax revenue from Starbucks, Google and Amazon is primarily a result of inter-company arrangements which a multinational enters into to produce what they perceive as the appropriate return for risks undertaken by specific companies. In other words, global profits are apportioned according to what are called ‘transfer pricing’ concepts in relation to such internal arrangements, and clearly a company will attempt to maximise its earnings where the tax rates are the lowest. It is a requirement of the tax administrations of each country that they review the transfer pricing arrangements and ensure that the risk and reward ratio is appropriate. The fact that HMRC in the UK has allowed a globally profitable company such as Starbucks to have very significant trading activities in the UK but reflect no accounting profit on which tax is based, is a very costly error which David Cameron should have explained to the British public. Since this appears to stem from an overcharge of royalty income from Starbucks Luxembourg to Starbucks UK, which HMRC should have clearly reviewed and which they could have amended to reach an acceptable rate both to the UK Exchequer and to Starbucks is something for which perhaps he could have apologised on behalf of his tax administration.
Let me be very clear in this distinction. Tax evasion, non-declaration of assets and income is a crime and should be punished accordingly The aggressive tax avoidance mentioned by Mr Cameron certainly does raise ethical issues, but HMRC and the courts have adequate legal remedies to negate any benefits claimed, and indeed impose penalties for non-compliance on the basis of incorrect tax returns having been submitted. In this age of self-assessment, penalties for entering into schemes which the law never intended to permit, should be heavily penalised. Most of these schemes would have been laughed at by our European counterparts where semantics do not create loopholes unintended by tax law, but where the substance of the law is taken more seriously than its form. Many eminent, law abiding tax barristers, well versed in the practice of semantics, may be considered at fault here in encouraging, and sometimes creating, such schemes.
None of this is apt for today’s business world, and should not be referred to in the same breath. What is apt is the encouragement of a partnership between government and law abiding taxpayers which openly reviews the methods by which taxable income is arrived at, this being the forerunner to calculating the amount of tax due. This is in accordance with rates set by government, so that Mr Cameron’s ambition to be a low tax Conservative may be accomplished without depleting revenues raised for the Exchequer. This partnership will not be encouraged if businesses have complied with the law, but are seen to be viewed in the same vein as those who flout the law and indeed criminals who evade taxes.