FOLLOW THE MONEY

“Nothing is certain except Death and Taxes” observed Benjamin Franklin and our seriously rich are much concerned with avoiding both. The Bill Gates Foundation, among others, finances cryogenics, research into the human algorithm and other challenges to mortality. A quest is under way to ensure that at least US billionaires can live forever (perish the thought!), while poor Joe Public accepts his limit these days of 4 score years and ten before he shuffles off his mortal coil.

Simultaneously an enormous industry is dedicated to tax avoidance in all its guises, harnessing the ingenuity of an army of smart lawyers and clever accountants. It will take some very slick genetic engineering to eliminate the defiant gene rebelling against paying any tax whatsoever, but taxes have to be raised somehow (but not from the super-rich, they seem to say). HMRC has smart people too and increasingly the ethical basis of tax avoidance is being questioned. To what extent is avoidance legitimate?

Bermuda, Paradise for tax avoidance

The problem has swollen greatly in the last 30 years as businesses becomes more global and electronic systems move billions at the blink of an eye. Maggie Thatcher and Geoffrey Howe dismantled Exchange Control in 1979, the deadweight preventing the development of the UK’s global economic ambitions. The 2007 Crisis and its dismal aftermath demonstrated how financial businesses could wildly misuse their freedoms but the intervening 28 years had allowed corporate and individuals’ incomes and their portfolios to be managed in a free-booting “tax-efficient” manner.

The time-honoured reaction to criticism of tax-dodging is to make the distinction between illegal tax evasion and legal tax avoidance. Evasion is usually a criminal offence but taxpayers clearly have the right to minimise their tax liabilities within the law and avoid unnecessary expense. And yet…….while avoidance may be allowable in a legal sense, there are legitimate issues over its present scale, the damage it does and its fairness within our society.

The scale of tax avoidance is truly eye-watering. American academics estimate that the equivalent of 10% of global GDP is held offshore by rich individuals via faceless corporate entities. The precise figures are hard to quantify accurately but the UK’s tax authority, HMRC, puts their country’s tax loss from legal avoidance at £35bn plus £6bn if illegal evasion is included.

HMRC fights bravely against this tsunami of shady dealing but it is outgunned by opponents with huge resources. Domestically there are some successes with loopholes being closed at every budget, but new ones are soon prised open. Legal judgements have been delivered helping the tax collectors notably the Ramsay principle (1982) when the House of Lords ruled that where a succession of preordained steps artificially delivers a tax advantage, the scheme will not be allowed, even if each step is legally admissible, if the overall effect is simply to avoid tax.  Bank confidentiality was once absolute but EU pressure and financial diplomacy has allowed the UK to share tax information with the EU, Switzerland and even Liechtenstein.

The UK is far from guiltless in this tax avoidance round-about as she tolerates special tax regimes for the Channel Islands and the Isle of Man; she also presides over the many offshore jurisdictions the world complains about in the British Overseas Territories and Crown Dependencies like Gibraltar, Bermuda, Cayman Islands, British Virgin Islands and the Turks and Caicos where huge wealth enjoys low, if any, tax. She is not alone as France shelters Monaco, Germany uses Switzerland and Luxembourg (hypocritical EU chief Juncker blessing sweet-heart tax deals while her Premier); the Irish Republic’s whole economic basis would be threatened if tax privileges were cut back, so dependent has she become on offshore entities operating there. The Netherlands coins it in hosting the world’s largest number of holding companies able to pay dividends offshore tax-free.

It hardly needs to be said that these avoidance structures damage the countries where the revenue and true profits are actually earned and logically where the bulk of the tax should be paid. The loss of tax revenue due to avoidance affects - all public services, all health spending, all subsidies for the poor, all infrastructure improvements – for the benefit of less than 1% of the population.

Fairness is a good test of a tax system and numerous leaks as of late have shone a bright light on many murky corners. The 2007 Falciani List of undeclared accounts at HSBC Geneva was followed up by the Lagarde List of other culprits: many were Greek and although the List was handed over, the corrupt Greek elite sat on this information and pursued nobody: the French claim they recovered €800m in unpaid tax.

In 2016, hacks on Panama offshore lawyers Mossack Fonseca reaped a huge harvest globally exposing the offshore manoeuvres of senior politicians in Pakistan, Iraq, Russia, Ukraine and Iceland among others. The ultimate sources of cash were mainly China, Russia and the UK and while the transactions were probably legal, the protagonists were highly secretive which in itself creates suspicion. Most recently a leak of information from Bermudan-based offshore law firm Appleby has highlighted activities of large entities like Apple, Glencore and Nike including aggressive avoidance schemes. Dozens of prominent people are also named, notably Trump fundraisers but also no less than H M The Queen whose Duchies of Lancaster and Cornwall are active offshore. This may be good accountancy but it is rotten politics as the Windsors seek to avoid taxes levied in their own name!

Philip and Tina Green, laughing all the way to the bank

You do not have to be a red revolutionary or to be consumed by bitter envy to choke over the unfairness of these shenanigans. It is Robin Hood in reverse, robbing the poor to pay for the rich. Why do we tolerate a system which allows a rag-trade tycoon of mixed history like Sir Philip Green to organise his wife Tina to become a resident in Monaco, transfer ownership of his empire to her, held in a Jersey trust, and pay out a dividend of £1.2bn, mainly to her, entirely tax-free? It is excessive in business terms and obscene in social terms.

Tax avoidance can only be combatted on an international basis. Tax havens need to be shut down, new taxable income yardsticks established, new tax avoidance doctrines need to be developed and embraced legally; reforming governments must heed the growing swell of public opinion calling for an end to tax inequality based on one law for the super-rich and another for the rest. If some mogul rattles his begging-bowl and pinstripe-suited tax experts complain that they will lose their livelihood, I imagine “the barely managing” and the poor in the UK will chorus: “Well, ain’t that a shame!”

SMD

16.11.17

Text copyright © Sidney Donald 2017