Tax revenues are under relentless attack – the government needs to take action

Chasing tax avoiders is labour intensive, but since 2005, 34,000 jobs have gone from HMRC.

Chasing tax avoiders is labour intensive, but since 2005, 34,000 jobs have gone from HMRC

Taxes are the price of a civilised society and without them no state can provide social infrastructure, alleviate poverty, subsidise corporations or rescue distressed banks. But tax revenues are under relentless attack and corporate ingenuity in avoiding taxes shows no limits.

Companies have become very adept at shifting profits to low/no tax jurisdictions through complex corporate structures, as shown by Google, Microsoft, Starbucks and others. They shift profits by using intragroup transfer pricing techniques, spurious royalty and management fee programmes.

They have also enabled their executives to avoid income taxes and National Insurance Contributions by paying in gold bars, fine wine, platinum sponge and routing the payments through trusts in offshore havens. The financial effects of this alchemy are hard to estimate with any precision, but various models suggest that up to £120 billion of tax revenues a year may be lost to the UK Treasury.

The UK government has done little to check organised tax. Former personnel of big accountancy firms, key players in the tax avoidance industry, sit on the HMRC board. Their personnel populate key working parties and committees.

Chasing tax avoiders is labour intensive, but since 2005, 34,000 jobs have gone from HMRC and another 10,000 are planned by 2015 under the government’s spending cuts. Inevitably, staff are demoralised. The public sector pay freezes have failed to reward staff and many have been poached by a rampant tax avoidance industry operated by major accountancy firms.

Occasionally, HMRC does take some cases to the courts but the sanctions against tax avoiders and designers of their schemes are ineffective.

For example, companies involved in tax avoidance continue to receive government contracts, subsidies and loans and also sit on HMRC board and working parties. Despite the courts declaring some of the avoidance schemes developed and marketed by accountancy firms to be unlawful, no firm has ever been prosecuted by HMRC.

There is an urgent need for action. The action should be based on principles of democracy and public accountability. The following would go some way towards stemming the tide:

1. Citizens can and should boycott the services of the organisations using and selling tax avoidance schemes.

2. All corporate tax returns and related correspondence should be publicly available. Advice related to purchase and implementation of tax avoidance schemes should be publicly available. This information would enable citizens to become the eyes and ears of the tax authorities and alert them of unusual transactions.

3. Businesses indulging in tax avoidance should not be able to second staff to government departments or sit on policymaking committees. They should not be allowed to exercise influence on public policymaking.

4. Governments need to invest in HMRC, for example more tax inspectors, to ensure that the predatory powers of tax avoiders are checked.

5. In February 2013, UK Treasury announced that its rules “will allow government departments to ban companies and individuals which take part in failed tax avoidance schemes from being awarded Government contracts”. So far, not a single tax avoider has been prevented from securing public contracts.

This needs to change. Those indulging in tax avoidance should not receive any publicly-funded loans, contracts and subsidies. Tax payment record of all bidders should be made publicly available.

6. The incorporation certificate of companies routinely involved in tax avoidance should be withdrawn. The privilege of limited liability should be reserved for organisations behaving in a socially responsible way.

7. When a court declares tax avoidance schemes used by a company to be unlawful, then directors should become personally liable for the tax payments and related legal; costs. Those marketing the unlawful scheme should face a fine of ten times the tax that was to be avoided.

8. All multinational corporations should publish a table showing their sales, profits, costs, employees and taxes paid in each country of their operations. This will help to see how profits have shifted away.

9. Most of tax avoidance revolves around artificial transactions. These should be challenged by enacting effective General Anti-Avoidance Rule (GAAR) so that sham transactions are rejected.  The current system is not effective. For example, it requires HMRC to seek permission form a panel of business elites before taking any action. HMRC need to be free from the clutches of big business.

10. A major reform of the current system of corporate taxation is needed. Firstly, companies are taxed at the place of their residence rather than where the economic activity took place. The fact that companies are integrated entities is not recognised for tax purposes. Thus, a company with 100 subsidiaries will be treated as 100 separate entities for tax purposes.

As companies are engaged in intragroup cross-border transfers of raw materials, finished goods and related services, a system was needed to estimate the value of such transfers. The solution was to agree on what is known as transfer pricing and intragroup transactions were to be valued at what the OECD calls “arm’s length” principle, or free-market market prices.

 

The above assumptions are now highly problematical. Independent arm’s length, transfer prices are hard to find. For example, just 10 corporations control 55 per cent of the global trade in pharmaceuticals; 67 per cent of the trade in seeds and fertilisers and 66 per cent of the global biotechnology industry.

The idea of taxing companies at their place of residence rather than where the economic activity takes place gave them a licence to create artificial entities and play-off one country against another and escape taxes altogether.

The issues can be addressed by a system known as “unitary taxation”. Under this a group of companies under common control, such as Google, would be treated as a single integrated company. Thus intragroup shifting of profits is negated. The total profit is then allocated to each country in accordance with a formula based on sales, number of employees and location of assets. Each country can then tax the resulting profits in accordance with its democratic mandate.

A variant of unitary taxation, known as Common Consolidated Corporate Tax Base (CCCTB), is being promoted by the European Union and deserves attention.

Prem Sikka is Professor of accounting at the University of Essex

24 Responses to “Tax revenues are under relentless attack – the government needs to take action”

  1. Leon Wolfeson

    The government IS taking action.
    The Coalition is legalising quite a few types of evasion.

    That’s one of the problems.

    I agree with all but one point;

    “All corporate tax returns and related correspondence should be publicly available. ”

    I don’t see why that should be the case for small companies – quite bluntly, you would make freelance’s personal accounting, since they need a business for tax and liability reasons, public. There needs to be a (low) minimum threshold for employees before details are published, or a major change in the way freelancer’s tax and liability is handled in law.

  2. nodbod

    “The idea of taxing companies at their place of residence rather than
    where the economic activity takes place gave them a licence to create
    artificial entities and play-off one country against another and escape
    taxes altogether.”

    I am not a finance person so if my comments are incorrect then please forgive me. I have read similar to the quote above before and I understand that it was put in place to ensure that companies are not taxed twice. However it is being abused right, left and centre. Could someone please explain, in this day and age of computerised records and book-keeping, why business done in this country is not taxed wholly in this country, ie the business done by, say, Microsoft in this country is treated exactly as if Microsoft were a company totally resident in this country? Likewise rewards earned in this country are taxed at an appropriate rate, whether they are being paid in money, shares, bullion, works of art or coconut shells.

    The problem, it appears to me, is that there is no political will to stop the abuse. Actually cutting the staff numbers at HMRC is symptomatic of this. I would even point to the Cameron family business; Cameron hardening tax policy for businesses would be tantamount To turkeys voting for Christmas. The counter-argument is that we need these companies and people as they are the wealth creators. If, as the modelling suggests, they are short-changing this country to the tune of £120 billion per year, then let them go, I can’t afford them anymore.

  3. littleoddsandpieces

    Tax avoidance by firms is not just in the UK, as firms today are global.

    When a company avoids paying National Insurance, it must means their staff are not getting the NI credits needed to qualify for benefit or the state pension.
    If a company is paying zero hour contracts or below 14 hours per job, then also there is no NI credits paid, and means no benefit and no state pension.

    But one aspect of tax is ignored.

    The poorest people pay a 90 per cent tax from taxes they cannot avoid, in or out of work, from the 75 per cent of tax that comes from stealth indirect taxes and VAT.

    The bulk of those on benefit are in low waged work of all wages, and benefit is taxed even below the basic tax allowance.

    And the poor paying 12 per cent of their wage in National Insurance have had their food and fuel money of state pension payout denied them,
    when the state pension is payable whether remain in work or not.

    With the rise in retirement age, the state pension has been lost to huge numbers of women born from 1953 and men born from 1951 for life,
    and the bulk of the rest will get far, far less than the pittance already paid.
    The poorest men and women also lose for life any state pension.

    https://you.38degrees.org.uk/petitions/state-pension-at-60-now

    Welfare and pension reform has lost jobs on the high street, turning town centres into ghost towns, so losing low income small and medium independent retailers a living, and mostly young people new jobs. It is the low waged / pensioners who shop in town.

    As employment rises, so will the benefits bill, as most new jobs are low waged at levels back a decade in the past in worth, or low income self employed, insufficient capital and little chance of affording expensive advertisements, used by politicians on expenses so freely.

    The majority of people going to food banks are in work. But benefit sanctions means no access to food vouchers to food banks and sanctions have risen nearly 70 per cent as has starvation.

    So the poor pay tax and get what exactly back?
    Hunger, freezing now winter is here and the loss of state pension payout when wealthy MPs (having their taxes paid by the taxpayer) gain about the same lost food and fuel money to the poor, by getting an 11 per cent pay rise in 2015 election year.

    When will Labour do a u-turn and stop talking welfare and pension reform and bring back the welfare state, that the poor pay for in round robin of funding more than enough.

    Anybody?

  4. Guest

    “If a company is paying zero hour contracts”

    Er? It’s done entirely on income.

    And no, the benefit cap will prevent things from stabilising, that’s the point.

    But then you torpedo any argument by linking a pro-Hamas site.

  5. Premsikka

    The difficulty is that politicians have become subservient to corporate interests. They frequently interpret “business” as the corporate entity rather than its stakeholders – workers, customers, suppliers, local communities, investors, etc. Emancipatory change only comes from pressure from ordinary people.
    Yes, the local and global and intertwined, but governments can always act. The UK managed to introduce flight tax and create Patent-Box to enable corporations to reduce their tax obligations. So it can act on other matters too. Some international developments, such as the recent OECD announcement on the automatic exchange of information, are welcome, but more needs to be done.

  6. Premsikka

    “Could someone please explain, in this day and age of computerised records and book-keeping, why business done in this country is not taxed wholly in this country”. The current system of corporation tax is the outcome of nearly 3000 treaties and was introduced at the time of the League of Nations. At that time vast parts of the world were under colonial rule and it suited powerful nations to have corporate taxes paid at the place where companies were resident or controlled – which was in the western world – rather than where economic activity took place. The emergence of transnational corporations and information technologies have made older understandings obsolete. A new system is needed and the article mentions “unitary taxation”.

  7. Premsikka

    Yup, government is giving special concessions to companies. Please have a look at the HMRC board. It is now run by corporate elites.
    In some Scandinavian countries (Finland, Norway) everyone’s tax return is publicly available as sunlight is seen as a way of combating darker practices. UK may have to do the same though politically it is not yet ready. My suggestion can be refined and smaller entities can be exempt, but big business has been very adept at exploiting what it considers to be loopholes.

  8. Premsikka

    Excellent stuff and over the years I have written many research papers on accountants and auditors. You might have seen this
    http://visar.csustan.edu/aaba/PINSTRIPEMAFIA.pdf

    http://www.plutobooks.com/display.asp?K=9780745335162

  9. nodbod

    Thank you for the explanation of the existing system and why it was introduced. As you wrote, a new system is needed. Perhaps unitary taxation is what is needed but I cannot see many governments or multinationals falling over themselves to get it introduced – back to the the reduction in headcount at HMRC.

  10. Premsikka

    Big corporations, accountancy firms and the OECD are opposed to unitary taxation. NGOs and developing countries support it. Versions of unitary taxation are applied to domestic tax systems in US, Canada and Switzerland, which are federal states and often have internal tax havens and these (e.g. Delaware, Nevada, Zug) can decimate local tax systems. So there is a working laboratory. Unitary tax systems can be applied unilaterally, regionally (e.g. EU) or on global basis. The OECD is currently patching up the corporate atx system, but it can cure its ills.
    HMRC needs staff as without that it can’t undertake investigations or prosecutions.

  11. Leon Wolfeson

    That would be different to revealing only certain types of people’s returns.

    Moreover, honestly, I can’t say I’m especially happy with the idea, since you can be sure it would lead to witch hunts of i.e. landlords for throwing people out for claiming benefits, etc.

  12. Leon Wolfeson

    Thing is, by the Coalition’s record it will work to undermine any agreement, and I don’t trust Labour to be any better :/

  13. Premsikka

    Yes, you are right to be concerned about he unintended consequences. That is one of the reasons for engaging in a public dialogue, with the hope that this way one might make better public decisions. That said, without public availability of tax returns it would be difficult to counter tax avoidance. Tax authorities are unlikely to have sufficient staff and they will need to rely on citizens to alert them. The UK may not fully follow the Scandinavian example, but it can require corporations to file their tax returns and related material.

  14. JohnRich

    Everyone has the right to organise their financial affairs in a tax efficient manner.

    Why pay more tax than is actually due?

  15. JohnRich

    Theat would be against the Director’s Human Rights !!!

  16. Guest

    Where is that right enshrined? Let’s have the reference, ta.

  17. Premsikka

    No one has said that anyone should pay more tax!! All that many people are saying is that don’t indulge in creative schemes to dodge taxes. Some of these dodges may or may not be lawful as HMRC does not bring many cases. Las could be changed by the same corporations then object and politicians give in to their lobbying.

  18. DoctorFranklin

    When considering corporate tax reform, it is useful to consider the role of government spending and taxation in macro-economic terms. Although the mechanisms are quite different, there is a similarity between banks creating credit for investment and consumption and government spending. Banks recover the debts as repayments and the government recovers its investment as taxation. In both situations, money enters the economy to do a purpose and is then recovered with a yield. For banks the yield is the interest, for the government it is improvement in society, the environment and the economy. The responsibility of government in taxation policy is to tax where the benefits of its investments are financialised: to a great extent this being in corporate profits and the wages of high earners. From a macro-economic perspective there is a tension between money entering the economy as government spending and money entering the economy as bank credit. Bank lending is systemic in its benefits, but specific in its liabilities. By contrast government spending is also systemic in its benefits, but is arbitrary in its liabilities. In economic policy, where expansion of the money supply is needed to avoid deflation, the scope of government to spend is constrained where incomes are suppressed. Current policy is therefore to be lax in recovery of tax from those whose wealth is likely to be invested (including corporations) as the leverage of such investments effectively increases money supply. In effect the investments arising under such circumstances utilise the suppressed cost of labour to obtain a return, transferring the liabilities of both banks and the government to people on lower incomes. Since this suppresses demand in the medium term, it is a policy dead end. Breaking this impasse is very difficult for the reasons described in the article due to current international tax agreements. To have the full range of policy options, governments need to have total power to tax as well as mechanisms in place both to constrain bank lending using reserve requirements and the capacity to create money, other than notes and coins, that has no reciprocal debt or tax due on it. It would be a tragedy if another and more serious financial crash is needed to encourage policy makers to abandon the neo-classical economic dogmas and accept that private debt in excess is an even greater danger than government over spending and interference in investment decisions. We can’t avoid politics and leave it to the market, because government has a vital role in macro-economic function. The rightist politics that tries to deny this is intellectually weak and forever looks like a fig-leaf for the self-entitled rich.

  19. gareth

    If HMRC don’t have the manpower, how about opening up the collection of unpaid tax to bounty hunters? Pay them a commission/success fee on any tax recovered.
    ow

  20. gareth

    How about asking ICAEW how it is possible for auditors to give clean audits for UK non-wholly owned subsidiaries of multi-nationals when the profits of those subsidiaries have effectively been transfer priced out?

  21. blarg1987

    How do you define efficient? Do you mean knowing what tax to pay and paying it as quick as possible or do you mean setting up a complicated shell company to divert money to reduce tax liability?

    The former is efficient the latter seems very complicated, it is the intent that is key just like for example if I decided to park my car outside the front of you house, it may seem efficient for me to do so, however if the intent is for me to wind you up you would rightly have a grievance and potentially could take action.

  22. Leon Wolfeson

    Why not just pay for people to work for HMRC, and skip the bounty? I mean, sense.

  23. DW1949

    At election hustings Prem’s list of action points will be useful for framing questions. Always ask the people who want your vote to BE SPECIFIC. To do this the question has to be specific. e.g. Will your party increase the number of staff at HMRC by 30,000 to ensure that due tax is collected and that tax evaders are taken to court. Will HMRC be bench-marked on its tax collection? Will business interests cease to sit on its Board?

    The answer is likely to look like this: – bla bla bla, crack down on evasion, socially irresponsible bla bla. You/we/I jump up: I asked a simple question, you have not answered it: Will your party etc. etc.

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