It really does have it all, yesterday’s Apple story. But you don’t want to read 5,000 words and I don’t want to write them. So let me focus on the bits I think are interesting or important.

First, the political dimension.

Students of the history of the European Union will know that the European institutions have often acted to protect and enhance the functioning of the single market. As I’ve argued on these pages before, we can’t really have the level playing field on which a functioning single market depends with aggressive tax competition between member states. And the institutions obviously know that.

But the power to make tax law rests by and large with member states.

The inevitable result is a tension between those member states who would seek to tilt the playing field towards them through aggressive tax competition and the institutions who are interested in preserving and advancing the functioning of the single market by keeping it level.

I said a year ago that I believed the Commission had decided to use State Aid law to explore the limits of member states’ power to engage in ‘field tilting’ through the tax code. It had decided, to put it bluntly, to be a little more activist. Whether you think that’s a good thing rather depends on what you think about tax competition. And whether you think the single market’s important. But – and I bear in mind the old saw that you shouldn’t make up your mind until you’ve heard both sides of the argument – I have to say I’m surprised at the emergent consensus that the Commission’s decision amounts to overreaching.

Second, the importance of the Apple decision.

I think it’s really important. Indeed, I think it could be a game changer. If you’re contemplating setting up an unnatural structure for tax avoidance reasons, there’s a number of things you weigh in the balance. There are financial costs to setting up and maintaining that structure; there are reputational costs; the structure can be a green flag for investors attracted by the higher post-tax returns but it can also be a red flag for investors worried about the sustainability of higher post-tax returns that can be wiped out with a stroke of a legislator’s pen; and it can negatively affect your relationship with Government in the jurisdictions those structures are designed to denude of tax revenues.

What the Commission decision does is add a really important factor to that list.

The assumption you might once have made – that you will get those higher post-tax returns – you now can’t make. You might incur all the costs – all the negatives – and only discover years later that you didn’t get what you were banking on. The mere fact of the decision – irrespective of whether it is successfully appealed against – adds risk. And there will be many cases in which that will tilt the scales against unnatural avoidance.

Third, looked at in the round, the sort of practice imperiled by this decision is bad and so challenging it is good.

If you read the Irish press you’ll see the debate about whether to appeal against the decision couched in purely parochial terms: should we keep the windfall? or should we act to protect the advantages that come from tilting the playing field in our direction?

But if you look beyond those parochial concerns you’ll see that what Ireland has been doing is giving a subsidy to Apple’s shareholders with other people’s money – and keeping a touch for itself.

The subsidy to the shareholders comes in the form of higher post-tax returns than they would otherwise have enjoyed. As the Commission Press Release noted:

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market.

The ‘other people’s money’ is the taxes that would have been paid elsewhere in the single market – including in the UK – and in the US too if Ireland hadn’t issued the rulings the subject of the complaint.

The ‘touch for itself’ is Ireland’s tiny slice – from 1 per cent falling to 0.005 per cent – of tax on Apple’s European profits together with the economic activity in Ireland associated with diverting those European wide taxable profits to Ireland.

If you look at the question whether to appeal or keep the cash purely through an Irish lens I’m perfectly content to accept there are sensible arguments both ways. But this shouldn’t blind us to the reality that Ireland’s modest benefit are at the expense of its European partners. And that the real winner is Apple which ends up paying materially no tax at all on its European profits. Not in the US, and not in the EU either.

Finally, the EU dimension.

If you agree with the proposition that it’s a good thing for big multinational companies to pay tax on their profits then you should be interested in how this result came about.

It wasn’t Ireland, or Germany, or France, or the UK that delivered it. It was the European Commission. The reality is that the smaller you are, the more difficult it is for you to generate tax receipts. You’re less important a market. And you’re less able to absorb the risks attached to widening your tax base or increasing your tax rates. Or to face down threats of retaliation. On the other hand, the bigger the market you are, the greater the heft you have.

As I argued before the referendum, writing then about State Aid rules, leaving weakens our bargaining position on tax matters. It puts us on the road to tax haven UK. And if you want an NHS, or free education, or decent pensions, or a social safety net, that’s not a good thing.

In Les Amants, Jeanne Moreau is married to a newspaper magnate with little time for his younger wife. One day her car breaks down and she accepts a lift from a younger man…

The 1958 film won for its director the Special Jury Prize in Cannes. To the rest of us it gave a splendid tagline: “This was her moment! And nothing else mattered” and a rather less glorious definition of “hardcore pornography” as a result of its risqué scenes.

Here’s Supreme Court Judge Potter Stewart in Jacobellis v Ohio, a case that arose when the state of Ohio tried (and ultimately failed) to ban Les Amants on the grounds that it was obscene:

“I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description. And perhaps I could never succeed in intelligibly doing so. But I know it when I see it.”

Tax avoidance is a bit like hardcore pornography. To ban it you first have to overcome a tough definitional problem: what is it?

Of course, it’s not all bad. Some behaviour that resembles tax avoidance can serve a useful purpose. We use tax breaks to encourage ‘good’ behaviour, like saving for our old age. Pension saving reduces our tax bill but it isn’t tax avoidance in any meaningful sense.
But move outside this narrow category and things get very thorny very quickly.

Take the Cameron family inheritance tax planning.

UK tax law says you can pass anything to your spouse free of inheritance tax. Gifts on death to almost anyone else and with a value higher than £325,000 would incur tax. But gifts made whilst you’re still alive, which you outlive by seven years, are free of tax.

When Ian Cameron died, David Cameron received £300,000 in his father’s will. The rest went to his mother tax free. She then gifted the then Prime Minister a further £200,000.

Was this tax avoidance?

Before answering that question, let’s take a look at another piece of purported avoidance much discussed in recent weeks.

The best way to think about charitable tax relief is a kind of matched giving scheme under which the State adds a bonus to gifts made by taxpayers to charities. But only gifts in cash: there’s a rule that says gifts of goods don’t attract the bonus.

If you’re a charity operating a string of shops re-selling donated goods that limitation is unhelpful. It reduces the value of those donations by the value of the bonus. But what if the taxpayer appoints you, the charity, as her agent to sell the goods for her and then makes a gift to you of the proceeds? Then the gift is in cash.

A number of charities operate this arrangement. One of them is Oxfam, which has been very vocal in campaigning against tax avoidance. Because of its campaigning position, Oxfam’s arrangements have understandably drawn comment from the likes of the Institute for Economic Affairs, a right-wing think tank.

But is it tax avoidance?

Oxfam’s defence, in essence, is that its arrangements work. But that arrangements “work” isn’t the sword to slice through the Gordian Knot. At a technical level, all tax avoidance works. If it didn’t work, it wouldn’t avoid tax. And nor does it help that HMRC agrees that it works. Again, either explicitly or tacitly, every transaction that successfully avoids tax is agreed by HMRC to work.

So what is the touchstone?

Like “hardcore pornography” the problem we’re trying to resolve is, ultimately, a definitional one. What is the class of transaction we want to ban?

Typically we try to resolve this question by looking at the language the draftsman of the statutory provision has used. “He’s imposed a low tax charge on this thing,” we reason, “but did he really mean to?” The problem with this approach is that it involves an attempt to derive from his language an intention that can’t really be found in it. If the intention was clearly expressed, the scheme wouldn’t succeed in avoiding the charge to tax.

But Oxfam and David Cameron stories suggest an alternative. Start with the facts: what’s the real transaction? Does it attract a higher tax charge?

In the case of Oxfam, the answer is straightforward. Oxfam doesn’t market itself as a broker of second hand clothes. And few who have clothes to sell go to Oxfam to resell their clothes. (Not least because Oxfam pays you in nectar points: 2 points per £1 of clothing sold or about 1% of what you should get as principal.)

Oxfam have taken the real transaction – a donation of clothing – and done the charity shop equivalent of a Double Irish. To get from A to D in a tax efficient manner they’ve walked round three sides of a square. That looks to me like tax avoidance.

But what about David Cameron: what’s the real transaction? Here the analysis is less straightforward.

And it boils down to this. What do we mean when we say a transaction is “tax avoidance”?

If we’re attempting a moral judgment, we look into the minds of the actors. Was the £200,000 gift deliberately routed via the Prime Minister’s mother in order to avoid £80,000 that would otherwise have been payable? If, on the other hand, we’re attempting a technical description of a class of transaction that avoids tax it might be sufficient for us to ask whether the real source of the £200,000 was his father’s estate.

It’s a bold tax lawyer who passes moral judgments. But on the technical question, I was struck at the time, by Number 10’s description of the £200,000 as a payment to “equalise” that which had passed from Ian Cameron to his children. That description seemed to me to source the money to the estate of father. If that were right, the real transaction would not only include the £300,000 the then Prime Minister received in the will but also the £200,000 gifted by his mother.

And, to go back to Potter Stewart’s language, you might have the beginning of an intelligible definition of a tax avoidance transaction: one where the natural transaction attracts a higher charge to tax.

(This post was originally published as a Financial Times’ Alphaville blog. I republish it here to make it easier for non-FT subscribers to read it).

Yesterday the Government published a Consultation Document which took two big steps to tackle two different, but related, problems.

The first addresses misbehaviour by taxpayers who tend to hear what they want to hear and disregard the rest.

Assume you’re a taxpayer and you have a dodgy tax adviser who tells you that if you engage in a piece of tax planning you can declare your tax liability to be 10 when it would otherwise be 100.

Of course you want to believe him – and so you don’t take the care you should to check whether he’s telling you the truth. What he is telling you is convenient for him to tell you (he charges a fee) and it’s convenient for you to hear it (it reduces your tax liability).

As things stand, if the tax planning doesn’t get challenged, you save 90. If it is challenged successfully you are back where you started, owing 100.  This penalty regime is designed to ensure that you ask the questions you should before you put 10 rather than 100 on your return; to give you reason to exercise caution when confronted by a tax adviser whispering sweet nothings into your ear. If the Government’s proposals are adopted, you might end up paying 190 rather than saving 90.

The second regime tackles that dodgy tax adviser. And those he takes advice from. And those he relies on to execute his scheme. Banks, accountants, solicitors, advisors, IFAs, trustees, and even barristers. The Consultation Document describes these as “enablers” of tax avoiders.

Very often these individuals are subject to no regulation. Its remarkable but true that you have to be regulated to be a dental hygienist but you don’t have to be regulated to offer tax advice. So there can be a complete absence of regulatory control of some enablers.

But the real issue is this. A tax advisor gets his fee for telling you that you can declare 10 rather than 100. He’s in the money from the start. And if you should happen to sue him later, he might have wound himself up, or he might shelter behind the advice given by a barrister, or he might point to the small print in the scheme documentation telling you that (despite the fact he’s charging you a fee) you must take your own tax advice.

So he gets handsome reward and very often without any personal accountability for the consequences. This state of affairs can encourage abysmal behaviour by highly paid professionals – some examples of which I set out here.

And for the taxpayers who are led astray – and many young men and women have made fortunes from their abilities as performers or footballers and lost them in consequence of a decision no worse than a poor choice of financial advisor – this asymmetry is both unavoidable and profoundly unfair. And it places huge pressure on HMRC and on tax collection.

So the problems are very real problems.

And the solutions in the Consultation Document are very real solutions. We must await the draft legislation – it can somtimes deliver less than is promised by the publicity grab of the Consultation Document. But my instinct is that, for behaviour within the compass of the Consultation Document, these measures will prove to be a real game-changer. (Indeed, they may well go too far – but that is a point for another day.) So, looked at in the round, I applaud them.

But let me strike a few notes of caution.

First, the measures look to be targeted primarily at individual rather than corporate avoidance. Individual tax avoidance – the data suggests – is yesterday’s problem. But the same cannot be said to be true of corporate avoidance. I’d like to see an extension of the targeted avoidance behaviour to corporate profit shifting.

Second, the proposed legislative solutions are consistent with the overall pattern of behaviour of the Government. That pattern is to ‘resolve’ often quite difficult, and factually nuanced, problems with legislation rather than with feet-on-the-ground resource. Legislation can be a good tool, but it’s also a blunt tool and it can lead to unfair or otherwise poor outcomes. Over time, our tax system suffers. HMRC is profoundly under-resourced – and legislation can go some way towards protecting against the consequences but not all the way.

Finally, Government needs to do much, much more to address the opacity that surrounds its efforts to tackle avoidance. Until we can see that HMRC is tackling avoidance – until we know that Google or Facebook or Uber is paying the ‘right’ amount of tax – people are going to remain sceptical about the efforts that are, or are perceived to be, being made by HMRC. Until Government tackles this issue, however many legislative steps it takes, I am afraid we are going to go on being sceptical about its conduct. I have addressed that issue at length here.