The world faces one of those unfathomable mysteries. Any number of charities, campaign fronts and political groupuscules adamantly insist that corporations and the rich are dodging their rightfully due taxes. They propose measures which would lead to that cash being recovered and then comes the mystery. The money that is collected never amounts to a hill of beans compared to the original claims. How and why could that be?
One answer is that all are in this together, the politicians and even the tax collecting bureaucrats are in cahoots with the plutocrats. No, some really do make this argument. A rather more sensible revelation would be that the original claims are so vastly overblown as to be nonsense – that is why no one is ever able to collect the sort of sums alleged to be being hidden away.
The particular trigger for this musing is that Her Majesty’s Revenue and Customs (the U.K.’s version of the Inland Revenue Service) has only been able to collect, following various law and reporting changes, one third of what campaigners insisted would be forthcoming subsequent to those changes. There have been mutterings of a lack of will, insufficient taxmen and resources for them to work with and so on. Again, good sense insists that we look to a different reason. HMRC itself has always said that the tax gap – the difference between what is due and what is paid – is about one third what the campaigners themselves say it is. The gap is one third, collections are one third, really, it is not all that complex an explanation.
It is worth looking at the varied claims of dodging in more detail. For example, a claim was made that many Britons were piling their money up in Swiss bank accounts and thereby not paying the tax due on them. Some billions – even in this modern world and with respect to government finances something we can still describe as real money – would be retrieved for the public finances if only something were done. A deal was therefore made. The Swiss banks would comb their accounts for U.K. citizens and check that the appropriate taxes, or at least reports of income to the right people, were made up and paid. The result was under a tenth of the sum originally claimed.
The reason being that there is not one homogenous group of Britons using Swiss banks to dodge their taxes. There are at least four. The first is those who have a Swiss account and pay the taxes due when they are due. The second are those who have U.K. passports but are not resident in Britain. Unlike the U.S. and like every other country except Eritrea, taxes are due based upon residency, not citizenship. So, those non-resident do not owe U.K. tax.
The third set is a result of a quirk of the British tax system, domicile. If you are not really a Briton (a complex idea, but essentially a foreigner who just happens to live in Britain, even if still a British citizen) then you only owe U.K. tax upon U.K. earnings. Money that you earn in a foreign place, then kept outside the U.K., does not pay U.K. tax. For this group – and they tend to be the richer who bother to claim this status – the Swiss, or other foreign account, is precisely what makes their worldwide earnings non-taxable in Britain. Then there is the fourth group, those who are lying and cheating.
The original claim was that near all of those Swiss accounts held by Britons would be in group four. Reality ended up with their being some one tenth or less. We might be getting a clue as to why collections are so much less than initial claims.
We in England were also treated to a series of claims about corporate dodging. Starbucks, for example, was so castigated for not paying corporation tax (a tax upon profits) that it made voluntary extra payments. That the company was in fact – really in fact, not just as a result of interesting accounting – making a loss in the U.K. Therefore, there were no profits to tax. That was not something anyone wanted to hear. They had signed up too many flagship sites to put coffee shops into and were paying too much in rent – the landlords then presumably paying tax upon their incomes or profits. We also had the insistence that Starbucks actually and deliberately following international tax law was evidence of that awful dodging which must be excoriated.
A standard part of the system is that subsidiaries of the same holding company not only should but must deal with each other at “arm’s length prices,” the prices at which they would deal with a company not a common subsidiary. This is so that profits cannot be moved around across borders. A Swiss subsidiary does the coffee bean buying for the group and the U.K. subsidiary bought these at cost price plus a margin. That margin was said to be tax dodging. Yet how may bean buyers will deal with a customer on a no margin basis? Quite. Therefore, Starbucks U.K. must, must, pay a margin to the common subsidiary in Switzerland.
The tax justice campaigners really have twisted themselves into knots in insisting that following the rules on righteous and just reporting of profit is tax dodging now, haven’t they?
A second campaign concerned Boots. The pharmacy company had been bought in a leveraged transaction. The resultant interest on the borrowings pretty much wiped out the profits upon which corporation tax would be charged – this was tax dodging. All complaining about this entirely missed the point that the recipients of the interest would pay tax. Whether we charge tax to the dividends, the returns on equity, before they leave the company or interest, the return on debt, after it does makes very little difference. They are economically equivalent, it is still the returns to the financing of a company being taxed. But something to complain about, get the mob shouting in the streets over.
It was said that Vodafone was dodging tax on a series of German transactions. The details are too boring to go into, but the claim was remarkable: the company should have been taxed in Britain upon profits made in Germany. This is in contrast to those claims about Google et al, which is that they should be taxed in Britain on transactions made in Britain.
Either principle seems realistic, tax upon corporate domicile or location of economic activity, but both appears greedy. The outcome was interesting too. The company claimed that U.K. law was in breach of EU law, the varied court cases ending up with the company shown to be right. That is, the money the campaigners claimed was being dodged was never due at all. At heart this was all very similar to that point about domicile above. All agreed that if those German profits were brought into the U.K. then they would be subject to the usual U.K. corporation tax rules. The argument was about whether they were before this happened or not. As it happened, not. In the end some portion was brought back into the U.K., the usual tax was paid and that was that. But still those initial claims of tax dodging were wrong.
The fourth set of poster boys for bad behavior were the tech companies. Selling into the U.K. from Ireland and thereby booking the sales and their subsequent profits in Ireland. This is indeed a method of not paying U.K. tax and it is also something the EU’s single market rules deliberately encourage. On the basis that a single market means you not only can but should do that, service all of it through just the one company, that company being taxed in whatever is its location.
This has all become very much more delicious as well. Various attempts to reduce this were attempted, the U.K. has a “diverted profits tax” which brings in –well, we should know this by now – very much less than those recommending it said it would. But it is Apple which is the most interesting one here.
The EU Commission decided that Apple’s tax affairs in Ireland amounted to state aid – something ‘verboten.’ They have thus insisted that €13 billion must be collected. However, this all rather looks in doubt, for a central part to the case was that these profits were not being taxed anywhere. That is central to the case – if Apple pays U.S. tax on those profits, then much of that Irish bill disappears. And Trump’s recent changes to U.S. tax law mean that Apple will be paying tax in the U.S. – so the €13 billion is all rather moot. Even the great victory of Europe over taxes is in question, eh?
Such things as the Panama and Paradise Papers stunts have been equally disappointing in terms of any extra money being raised. The papers were full of claims, of course. For example, ex-PM David Cameron’s father had set up offshore funds, funds which did not pay U.K. tax! Well, yes, that is the point of offshore funds. A German, an American and a Briton will all face different tax laws about how the profits from such an investment should and will be taxed. Putting the fund offshore, where it pays no tax directly, thus means that each investor can pay the appropriate amount to the national tax system she herself is subject to, that is the very point, that the correct tax can be paid. As, as it happens, David Cameron was doing, as his father had.
There are these very large claims about how much tax is not being paid and every time we go and look in more detail we find that they are, to put it mildly, grossly overblown. The truth and reality about tax evasion at least being that it is not offshore and the rich responsible for the bulk of it at all, but domestic cash business never being declared in the grey economy that is. It is really not a great surprise therefore that actions to curb offshore never do quite live up to their billing as tax revenue raising escapades.
There is one further, and interestingly important, point we can make. The largest estimates of how much is slipping through the system are of the order of $120 billion a year. As the excellent researcher Maya Forstater has pointed out, this is some 0.5 percent of current global tax revenue. OK, hands up everyone who thinks that governments having half a percent more money is going to solve much? Is going to make the world a more efficient, just, or equal place? Or, given our experience of the true recoveries possible, thinks that governments having 0.166 percent more revenue a year is going to be anything more than a rounding error?
Time we went off and worried about something useful or important perhaps.