taxing double speak


Tax expert Richard Murphy discusses what he sees as the issue of the moment – the paradoxes in government messaging on tax

 

George Osborne describing tax avoidance as morally repugnant nearly a year ago was a surprise to many. Even then, few would have expected David Cameron to make an attack on tax avoidance and evasion the centrepiece of his G8 Presidency and the focus of its summit in Northern Ireland this June, yet he has done just that.

In doing so he has also used language that makes clear that his understanding of what tax avoidance is aligns very closely with that which prevails in the popular press. Cameron has condemned companies using transfer pricing and royalty arrangements to shift profits to places like the Netherlands, taking a fairly clear swipe at Starbucks on the way, whilst implying that companies organising their affairs so sales to UK customers are not recorded in this country offend UK tax principles.

He appears to be saying he thinks companies have choices when it comes to tax and that many of those they are making are the wrong ones. As a long term campaigner against tax avoidance I do, unsurprisingly, agree with a great deal of what David Cameron has said: much of it I could have written.

However, I am therefore also very aware of the substantial gulf between his rhetoric and what his government is actually doing.

 

Paradox

Cameron is calling upon governments to increase their co-operation in tax matters to ensure companies pay the right amount of tax in the right place at the right time. There is, however, a problem with that for the Coalition. Since coming to office they have pursued a policy of promoting aggressive tax competition.

They have introduced a territorial tax base for the UK, meaning that all profits earned by UK companies outside the country are now beyond the reach of UK tax authorities, encouraging offshoring and the shifting of assets out of the UK. In the process they have explicitly encouraged UK companies to move their treasury functions to offshore tax havens, by offering a 5.25% tax rate in return.

They have also cut the UK corporation tax rate by 7% in four years, all with the aim of creating ‘the most competitive corporation tax system in the G20’. And that is where the problem arises: the UK is following a policy of promoting tax competition on the one hand, whilst David Cameron is asking the countries it is trying to out-compete to co-operate on the issue of tax avoidance on the other. The two policy agendas are not just hard to reconcile, they are in conflict with each other.

 

Conflicts

The same conflict arises with regard to the government’s policy on tackling tax avoidance. Michael Meacher’s General Anti-Tax Avoidance Principle Bill, currently before the House of Commons, would take steps to address many of the commercial arrangements Cameron says he finds unacceptable. Yet Cameron is promoting instead a much more limited proposal, the General Anti-Abuse Rule for tax, which cannot deliver on the government’s rhetorical promise, as it is so narrowly drafted it explicitly can’t address the type of commercial tax planning that has been the object of Cameron’s attention.

To stoke political fury on an issue, whilst consciously ignoring steps available to address it, seems a certain way to set any government up for a political bruising.

It seems clear that at present the UK government has little clue what it is doing on corporation tax policy. It is seeking to use tax competition, low taxes, easy access to tax havens and a restricted tax base as the basis for an industrial policy designed to lure companies into the UK, yet is publicly very willing to criticise companies taking advantage of these opportunities. Companies thinking of locating in the UK because they believe one message will likely be put off by the other, whilst the Revenue will be unwilling to tackle tax avoidance believing it is against government policy to do so, despite the Prime Minister saying it isn’t.

This is a recipe for an unholy mess.

Cameron has to make clear which policy he believes in. It would seem that he has little choice but to follow through on his much vaunted promises made in advance of the G8. But in that case the goal of giving the UK the most competitive tax regime in the G20 has to be abandoned because both are not possible at once. No 10 has to give No 11 the lead on this issue.

But will it?

 

Richard Murphy is founder of The Tax Justice Network and blogs at Tax Research UK

His book “The Courageous State” is available from here.