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What is Tax Avoidance? 

Tax avoidance is legal. So what is the problem with it? We investigate. 

Tax avoidance is shifting profits so you have to pay a lower rate of taxes. It involves using loop holes in tax systems so that you can reduce rates in a way that law makers never intended but which is entirely legal. Often, this means registering sales that took place in one country with a company based in another, where tax-rates are lower. For example, in 2017 Amazon registered almost 75% of its UK sales through a Luxembourg based subsidiary.

Tax evasion is hiding profits or fiddling accounts in order to avoid taxes, and is definitely illegal.

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What is the problem with Tax Avoidance?

In 2017, it was estimated that globally tax avoidance was losing nations over $500 billion a year.

In the UK, tax avoidance is channelling much needed money away from the NHS, housing and other vital forms of public infrastructure. But the cost of tax avoidance is even greater in poor nations. In countries where wages – and accordingly individual income taxes – are low, a far higher proportion of government revenue comes from corporate taxation. This can be as much as 16%, compared to 8% in richer countries.

If looked at in proportion to GDP, the countries that lose the most from tax shifting are consistently the poorest. In Chad, during 2017, the estimated losses to profit shifting were larger than all of the (non-resource) taxes collected in the country that year. In Pakistan the losses were 40% of tax revenues.

Governments in these countries face a catch-22: charge a high rate of tax and watch profits generated in their own country channelled abroad; or liberalise their own tax laws, cutting government income and adding to the issue.

Many of these countries have a vast wealth in natural resources. Tax havens allow companies to plunder these resources whilst paying very little to the country in return.

In many senses, for many countries, tax avoidance is then an issue of human rights. Oxfam estimates that tax avoidance costs developing countries $100 billion a year, which is enough to “educate the 124 million children around the world who can't currently go to school, and provide healthcare that could save the lives of six million children annually.”

In 2016, 300 leading economists wrote to the world’s leaders saying that there is no economic justification for allowing tax havens at all.

Isn’t this an issue for governments?

Yes. Governments decide tax rates, tax credits and accounting laws. But it is also an issue for consumers and companies.

Governments can only control tax regulations within their own countries – while companies will continue to exploit laxer tax regulations abroad.

Certainly, rich countries should be plugging their own loopholes. Ireland, the Netherlands, Luxembourg and Switzerland all remain on our list of tax havens. The UK would be on there if we weren’t looking for companies that operate in the UK. Such countries cost themselves and other important revenue for public services, and desperately need to address the problem.

These countries should also be pursuing international agreements to address the issue as a whole. Without this kind of agreement, change will be incremental and poor countries will continue to have limited chance to respond.

In the meantime, if tax avoidance is an issue of human rights, corporations also have a responsibility to change. By demonstrating a willingness to pay fair taxes, companies can allow countries to charge fair rates as well as contribute to the national infrastructure and resources that they benefit from.

In the past, companies have not only avoided paying taxes, they have pushed for the kind of tax liberalisations that only make the problem worse. Last year, when Amazon announced plans for a second US headquarters, it made it clear that tax credits would be a key factor when judging bids.

As a result, Chicago offered to pay between 50% and 100% of its workers’ income taxes back to the company. Amazon employees would tax pay tax on their wages, but the revenue would go straight back to the multinational. New Jersey offered $5 billion in tax incentives. And Fresno in California promised to redirect 85% of the company’s taxes into the ‘Amazon Community Fund’ for the next 100 years – a pot that would be jointly managed by Amazon executives.

If governments should not be making these kind of offers, companies should not be asking them to make such an unsustainable trade-off between generating jobs and funding public services.

What about consumers?

A recent survey suggested that nine out of ten people in the UK believed that tax avoidance by big businesses was morally wrong.

Some companies already refuse to engage in tax avoidance. The Fair Tax Mark, which shares Ethical Consumer’s offices, was established in 2014 in order to identify these. Accredited companies refuse to engage in tax avoidance practices. As of spring 2021 there were over 60 accredited companies.

Logos of current Fair Tax Mark accredited organisations
Fair Tax Mark accredited companies as of January 2021

Our own rating system for likely use of tax avoidance also tries to highlight the companies that are paying fair taxes. Those that receive our best rating do not have more than one subsidiary registered in tax havens. Those with a middle have two or more normal risk (i.e. trading) subsidiaries in tax havens. And those that received a worst have two or more high-risk subsidiaries registered in tax havens.

By choosing these companies, consumers not only reward good practices, they refuse to fund a huge systemic problem that is disadvantaging governments around the world.

Another option is buying local. If companies do not have subsidiaries abroad, they cannot channel profits away.

In the UK there are also lots of campaigns looking to tackle tax avoidance at a government level. In 2016, 15 councils in England and Northern Ireland committed to putting tax justice at the heart of their procurement policies. Christian Aid and the Fair Tax Mark are continuing the campaign for local governments to buy only from companies that commit to fair taxation. Oxfam, Action Aid and Tax Justice Network are also running campaigns around the issue.

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