Tackling Avoidance and Evasion: a Primer

Two sleights of hand.

#1 – the Google Defence: “You should pay the taxes that are legally required.” Unpacked, this means merely: “because it’s lawful, we can do it.” Tax avoidance – even in its most egregious forms – is lawful. If it isn’t lawful, it doesn’t work. And the answer is a defence to a different criticism: if I am non-domiciled, even if I have lived in the UK for all my life, I only have to pay tax on that income I choose to spend in the UK. The question isn’t whether that state of affairs is legal. It is. The question is whether it’s right.

And #2 – the Lawmaker Fallacy: if Parliament doesn’t like our avoidance actions it should “change the law.” But this is to ignore the limited scope that our domestic Parliament, bound by a web of international tax treaties and EU law, has unilaterally to improve the law. Particularly in the field of business tax. If Amazon sites its servers outside the UK, the present OECD rules enable it to avoid UK corporation tax. But effecting broad based change to these laws involves the OECD shepherding the G20 countries to agreement in the face of powerful domestic vested interests.Think Global Climate Change Summits with whistles.

These are the fallacies you’ll be fed by those seeking to deflect criticism. You’ll see them deployed over the next few days by players in the #SwissLeaks #SwissStorm. And they are the truth, but they are not the whole truth.

We know this: tax specialists like me, Inspectors working for HMRC, Parliamentarians, Charities pushing the Tax Dodging Bill and the promoters of the FairTaxMark. We see that the law on tax avoidance has fallen behind what the public demands. And we fear the corrosive effects of a loss of public confidence on the functioning of our tax system.

We work with the world we have. The work of the Public Accounts Committee under Margaret Hodge – appreciated as an exercise in consciousness raising rather than forensic scrutiny – has raised to Gas Mark 9 the temperature on tax avoidance. Consumer pressure has pulled tax to the top of what we politely style ‘Corporate Social Responsibility Agenda’. And the Government has played its part, using the Code of Practice on Taxation for Banks and new rules on Public Procurement, to try and ensure there’s a pre-tax cost attached to behaviours that focus only on improving post-tax returns.

I wouldn’t want to understate the power of self-interest to bring about changes in behaviour: it may well be the defining logical proposition of human history. But, in a field so laden with opportunities to obfuscate and dissemble, in a field where minimal compliance carries such obvious rewards, it has its limitations.

So what, ultimately, we’re left with is a naked ethical proposition: pay less than your share and you bear responsibility for society being not as it should. This proposition has been advanced by, for example Christian Aid, in its ‘Tax for the common good’ report. But there’s much work to be done in fleshing it out. In a world where the tax laws distantly trail ethical injunctions, what does a fair share really look like?

23 thoughts on “Tackling Avoidance and Evasion: a Primer

  1. And back to the point we were struggling with on twitter which due to egregiousness of the HSBC position is being missed today.

    What if you filed as non-dom based on advice and father’s domicile, but HMRC challenged successfully based on probate cases, or Irish Revenue did based on divorce cases from the ’80s when liberal judges were keen to facilitate soft findings of foreign domicile by Irish nationals to facilitate recognizing foreign divorces?

    Domicile has never struck me as clear when dealing with second generations, and most of the case law is outside the tax sphere so it seems ripe for a tax test case.

    That’s still failed avoidance, but the Fisc need visibility to the facts to know whether to make/ sustain a challenge.

  2. I thought there was a good example in the HSBC issues of the lack of clarity of tax evasion/avoidance: use of Swiss trusts.

    Say a UK domiciled entrepreneur sets up a Swiss trust which has ownership of some of the shares of their company. It comes time to sell/float the company. The Swiss trust also sells their shares. The entrepreneur fills in the UK tax assessment, but does not mention the capital gains arising in the Swiss trust as they were not the ‘owner’ of the shares.

    Is this evasion or avoidance? To me the lack of inclusion of sufficient detail to allow HMRC to understand the tax affairs properly mean it’s at least bordering evasion. I know that some of your other readers would take a very different attitude…

  3. I find this a highly intriguing debate, with strong proponents on either side. Is there a moral obligation to pay more tax than the minimum required by law? There are so many degrees and nuances by which one may understand the question. Is the law defined by the letter of the law, the spirit of the law, or some combination of both?

    When is tax planning just tax planning, when is it ‘aggressive’? What do the categories ‘aggressive tax planning’, ‘avoidance’, ‘fraud’, ‘dodging’ etc. even mean? Of course, there is no final answer. Many tax practitioners and business groups around the world argue for a strict interpretation of the law, consequently emphasising outright tax evasion – plainly criminal activity – as the threshold to which we should hold businesses accountable. And they will be able to point to “rule of law”, legal jurisprudence and even established international norms that support such a position, saying that the question IS indeed about whether it’s strictly legal, not whether it’s right. And that change lies in the hands of formal policy-makers.

    On the other hand, there’s a (limited group of) tax pratictioners like yourself, Jolyon, as well as many civil society campaigners and (increasingly) policy-makers that argue for a broader source of law and authority or just acknowledge morality/ethics as important elements, without immediate reference (necessarily) to their strict legal relevance. And they will be able to point to “license to operate”, moral/ethics, sustainability, reputational or even economic efficiency arguments to support that position. Most of the substantive debate, however, I believe, goes on somewhere in the middle of these positions. Many in the former group recognise that the spirit of the law is relevant, and some recognise morality, to some extent.

    And many in the latter group argue for the primacy of solid legislation. And consequently some good debate on what is or should be legitimate tax behaviour. But I think what this middle ground debate lacks is sharpness – as your blog alludes to. Civil society campaigners have trouble answering exactly your final question – what is a fair share? There’s too much of a grey area. Although David Quentin’s sophisticated “risk mining” analysis and recommendation that tax advice halts at “maximum certainty” is convincing, it still allows for too little wriggle room (within the law) for many to accept it. There are few, if any, solid analytical examples to showcase, “This is what we want”.

    Meanwhile business defenders have trouble explaining why environmental and social concerns can be naturally integrated into CSR policies, whilst tax is an emphatic no-go. They point hastily to the OECD MNE guidelines and other such products that in all substance leaves out tax planning considerations, ignoring that these are essentially political products, which probably will change with the momentum behind tax and CSR, which renders the argument somewhat tautological.

    Sharpness may come from a better definition of what tax should be paid, perhaps via an alternative tax system. Or perhaps the point is that the analysis _should_ be subjective and context-dependent, thereby given the “best possible result” in each unique situation. It really comes back to your fundamental view on the tax system – do you want predictability or accuracy? Probably can’t have both. But right now we’re going for accuracy, with the job in the hands of experts, some of which are able to use this expertise and role for other purposes.

  4. “What does a fair share really look like?”

    To each beholder their own idea of beauty I suppose. However, as you seem to have offered us an opportunity to express our own taste and fancy, let me say for my part I am extremely suspicious of anyone who claims to know with any degree of certainty what “fair share” is. I would go with the strict letter of the law. Not because I believe it to offer any better notion of “fair” than any other (I can’t see how it could or does); rather because it gives me certainty.

  5. I’m an NZ tax lawyer and, admittedly, don’t know a lot about the UK system. But based on my limited experience I think you have room to make improvements that are not precluded by international treaties, etc.

    For example, I had a client returning home from the UK who wanted to set up the same arrangement in NZ as he had there. It involved contracting for his services through a Channel Island company. Of course, I only had his word that it was effective for UK tax purposes.

    I told him that I could think of at least three reasons why that structure would not work in NZ, without considering it in detail. I also said that, on the bright side and unlike in Australia where I have also practised, he probably wouldn’t go to jail in NZ for that arrangement. Since then, I have changed my mind on the last point. He probably would get jail time in NZ now for such a structure.

  6. It is an important debate, and I would agree with @fairskat that it could do with sharper definitions and analysis of different categories of action – avoidance, planning, evasion etc… to get beyond the catch-all of ‘tax dodging’.

    But I am confused @Jolyon, as to why you put the Swissleaks cases as being in the grey area between evasion, avoidance, morality and policy change — I thought this was mainly about evasion – taxpayers hiding money in undeclared Swiss bank accounts and carrying suitcases full of banknotes to avoid detection.

    The ‘Google’ and ‘Lawmakers’ defences seem a bit beside the point in this case if what people were doing here was already against the law?

  7. “But this is to ignore the limited scope that our domestic Parliament, bound by a web of international tax treaties and EU law, has unilaterally to improve the law.”

    I’m not sure I agree that this is a fallacy.

    You know the old joke/riddle about Noah’s arc: “The following animals go onto the arc in formation: two lions, two giraffes, two sheep, two llamas and two rabbits. Noah then goes off to find the other animals. How many animals are on the arc?”

    The answer, of course, is two lions. And a lot of blood.

    Is what Amazon do moral? Well, on the spectrum of morality, it’s not exactly at the heroic end.

    Would it be better if all online retailers paid a similar rate of tax to traditional retailers? Yep, probably.

    Would it be better if only most online retailers paid a similar rate of tax to traditional retailers? Well, applying the Noah’s arc theorem, if 4 online companies paid their “fair share” of tax and 1 took the avoidance route…then in a short span of time you’d have 0 online retailers paying their fair share plus one taking the avoidance route. And a lot of bloody takeovers.

    That’s not the same thing as saying what Amazon does is “moral”. It’s just saying that it’s inevitable that the biggest company in that market will be a “tax avoider”. If Amazon wasn’t a tax avoider, they wouldn’t be the biggest online retailer; they might not even exist, because companies don’t tend to last long with profit margins that are 10% lower than their competitors. Corporate success becomes a game of which company is willing to take the lowest road – and there will always be a queue of people willing to take that lowest legal road (most of them work in venture capital…).

    The context of your comment that “effecting broad based change to these laws involves the OECD shepherding the G20 countries to agreement in the face of powerful domestic vested interests” appears to be that this would be more difficult than getting all of the online retailers to play fair, despite no law compelling them to.

    In fact, the “domestic vested interests” that prevent political process are exactly the same ones that prevent “moral” tax behaviour at a corporate level. The only difference is that it’s (a) the politicians’ jobs to enact progress, and (b) it’s actually in their interests to do provided all countries do it. Directors of corporates would be acting against their own self interest, making it effectively impossible.

    To me, it is obvious: If you want permanent, effective change, then it needs to be legislated. To suggest otherwise let’s politicians off the hook: you engineer a situation where the politicians won’t be blamed by the public if nothing happens, but they will be blamed by their donors if it does. Getting true change through hinges on making it politically more appealing than pleasing donors, and that can only happen if the public broadly understand what is needed.

  8. Qu: would it be better if online retailers paid a similar (effective) rate of tax to traditional retailers?
    Ans: It depends on the facts.surely.

  9. Do we expect HMRC to be a guardian of taxpayers’ souls? Where do I find the “spirit” of the law, outside of its words and interpretation? And who pays more tax than they are legally required to? (Well, apart from the likes of Starbucks, who – for good commercial reasons, involving reputation and publicity – deliberately choose not to claim allowances or deductions to which they are entitled, to create an artificial tax liability.)

    That said, there are questions around whether Google does actually have a taxable presence in the UK – all those “sales” staff who claim not to be making contracts – and even if it does not, whether its UK activities are properly remunerated – i.e. transfer pricing. And around whether Amazon is paying itself a proper rate for the undoubted commercial benefit of being able to deliver goods “next day” from its UK warehouses – i.e. transfer pricing again, perhaps on a “profit split” basis. Its brand (created in the US) and its IT infrastructure (undoubtedly in Luxembourg) clearly have value too, though.

    Most people’s conception of a “fair share” tends to involve other people paying more.

  10. That’s the issue. There’s a touch of belt and braces about avoidance in jurisdictions which won’t afford decent levels of transparency. You might hope that (a) the planning works but (b) even if it doesn’t HMRC never get to the bottom of what’s really happened.

  11. Strictly speaking (if you assume it’s arguable that the UK domiciled entrepreneur “UDE” isn’t liable for tax on the sale of the shares as settlor or beneficiary) it rather depends on what’s in UDE’s mind when he makes the return. If he has good reason to believe there is no liability in respect of the trustee’s sale then it’s avoidance (query failed). If he has no good reason to think that then it’s probably evasion – but see also my answer to aislingdonohue…

  12. Thanks FairSkat. Very helpful thoughts. I’m, of course, arguing for an ethical imperative alongside the law, not instead of it.

    And it may also be worth observing, explicitly, that my conclusion matches almost perfectly to yours that “sharpness may come from a better definition of what tax should be paid.” At the moment, I’d agree we lack that sharpness. But it’s a reach to see that because we don’t have it now we can’t have it ever. But there’s more work to do in this field – and I have a little project afoot. More to follow.

  13. Perhaps my fault but I wasn’t intending to argue that the ethical imperative should replace the law – plainly it can’t and shouldn’t – but a refined ethical proposition might sit alongside the law as a guide to, for example, what transactions one should engage in…

  14. Nice to encounter a fellow Kiwi on this board. The piece was written for the interested public, really, rather than tax specialists – but I certainly wasn’t intending to argue that there is no scope for improvement of domestic tax law.

  15. The truth is that we don’t know what attempted or actual avoidance there is and what evasion there is – likely there is a bit of both. but both of those defences have been offered by those who names have turned up in the investigation.

  16. Thanks Andy. I agree with almost all of that. I think we probably only part company when it comes to your Noah’s arc theorem. What we have in the Arc at the moment is a pair of lions and a lot of blood (UK based retailers are getting killed by those whose tax arrangements mean they can deliver better post-tax returns to their investors). I’m not sure how changing the status quo makes the situation worse?

  17. Either I’ve mis-written or you’ve misread. I don’t think I was arguing anywhere that HMRC should be the guardian. And nor, indeed, if you read me carefully, was I arguing for some extra-legal process approximating the legal one. More to follow on this…

  18. Yes, and I’d agree very much that morality and the law can indeed be complementary, not competing.

    The point about sharpness is central, I think, and highly related to the discussion of an alternative tax system. Is it possible to arrive at a very sharp answer of what a “fair share”, which takes into account morality, under the current (international) tax system? I think we can move closer, but probably not get to the point many campaigners want without bringing about some fundamental changes. That needs to be recognised, or at the least, discussed more deliberately.

    Looking forward to see what you come up with!

  19. I’m making a slightly different point – not that status quo makes the situation worse, but rather than asking corporations politely to change behaviour (without legislating) does not change the status quo. The point you make is a logical one, and explains why the status quo needs to change. Certain retailers are simply unable to structure themselves in the same way as others, and that creates an unfair playing field. But that does has to come through law.

    As long as there is at least one business willing to refuse the polite offer (the lion), everybody else is effectively obligated to choose between being a lion or its prey. Unless you can change the behaviour of everybody, natural momentum will lead you back to where you started. And the only real way to get everybody to change their behaviour is legislation.

  20. Does that not assume that HMRC was in a position to challenge? And if full disclosure of the arrangement was not given, then HMRC would only be able to challenge if it did a proper investigation.

    Maybe the ‘arguable’ bit is the key differentiator then? Evasion is an unarguable filing position, avoidance is an arguable filing position?

  21. Strangely perhaps, no. The question of whether it’s (a) avoidance or failed avoidance or (b) evasion is not the answer to which is not contingent on whether HMRC is in a position to investigate. It’s purely a function of UDE’s state of mind at the time he files.

    That having been said, obviously, the question of whether UDE (as to (a)) has his actions challenged to discover whether they amount to avoidance or failed avoidance or (as to (b)) whether he’s nabbed for evasion is a function of whether HMRC knows what he’s done.

    One of the pernicious things about arrangements of this nature is that there’s a sort of ‘belt and braces’ approach: it might be avoidance that works (or it might be avoidance that doesn’t or it might even be evasion) but the taxpayer can say, in effect: I’m filing on the basis that it’s avoidance and good luck to you the Revenue in achieving such visibility of what I’ve done as will enable you to form your own view as to whether you agree with my filing position.

  22. No doubt the fault is mine 🙂

    You started by describing the positions that taxpayers are simply required to obey the law, and that legislators make the law, as fallacies, or at least half-truths. But they are whole truths. Yes, of course, standing on your rights – or driving right up to but not over the line – may have consequences, and some of those consequences may be non-financial, and certainly nothing to do with how much tax you actually owe.

    You appear to be arguing that it is not enough for taxpayers to pay the tax that they is due under the law – that taxpayers should also behave according to some shared moral code; that is, they should refrain from behaviour that you (or they, or someone else) consider immoral, even if that behaviour is entirely legal. And that it is not enough to say that legislators make the laws; we should first ask whether the laws are right. Are you proposing that there should be a code of conduct setting out the shared morality that each taxpayer is required to follow?

    That is all very well, but conscience is a matter for individuals and not a matter for determining a person’s tax liability. Taxpayers are entitled to comply with their legal obligations, and no more.

  23. That is rather disappointing and suggests a revision is needed to the tax evasion statutes. Perhaps on the basis of disclosure of information ‘reasonably necessary to understand the filing position’.

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