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What is a responsible tax policy?

Summary

13 August 2015

Over the last few years, there has been significant focus on tax avoidance by multinational companies. In the UK, the Public Accounts Committee, then chaired by the Rt Hon Margaret Hodge MP, gained a great deal of media coverage enquiring into the tax affairs of Starbucks, Amazon.com and Google.

Tax avoidance and tax evasion

The terms tax avoidance and tax evasion are used by many people as if they were interchangeable. Sometimes that is done out of ignorance. I believe that on many occasions it is done deliberately to confuse people about the clear distinction between them.

Tax evasion

Tax evasion is a crime. It happens when you file a tax return that is false, because, for example:

Tax avoidance

Tax avoidance is a perfectly legal activity. It consists of doing something different from what you might otherwise have done, because what you did suffers less tax than the other thing that you might have done.

Providing concrete examples is often difficult because tax law is complicated and much tax avoidance involves complicated transactions. However in a couple of radio appearances earlier this year I used the following real example of personal tax avoidance.

An illustration of tax avoidance

My wife is a graduate of Keele University. A few years ago, Keele asked her if she would consider donating £25 per month to her old university.

On my advice, my wife refused to give a donation to Keele University. Instead I, who went to a different university, started giving £25 per month to Keele University.

Why did we do this?

My wife is a basic rate taxpayer. Accordingly, if she gives £25 to Keele University, it costs her £25.

I pay income tax at 40% on a significant part of my income. Accordingly, each time I give £25 to Keele University, my tax bill goes down by £6.25, so the donation only costs me £18.75 after taking the tax relief into account.

Since my wife and I live as one household, our household is £6.25 a month better off (with no detriment to Keele University) because our combined decisions allowed us to avoid £6.25 of tax every month.

A much more complicated illustration of tax avoidance

Amazon.com was one of the companies the Public Accounts Committee enquired into. I have never worked on Amazon's tax affairs, and have no non-public knowledge about them.

However just over a year ago I wrote a simple explanation of how Amazon could sell books in the UK in a way that lowered its UK corporation tax liabilities, based on my understanding of the publicly available information.

Responsible Tax for the Common Good

The project "Responsible Tax for the Common Good" seeks to address some of these issues. It describes itself as follows:

This is a consultation exploring the meaning and purpose of responsible tax for the common good and what responsible tax behaviour and advice looks like. Hosted and curated by think tank CoVi, and supported and sponsored by KPMG in the UK, we have welcomed contributions from large and small businesses, NGOs, tax campaigners, academics, media, government and politicians. Activities have included roundtable discussions, video interviews and wider conversations and commentary and we have proactively sought a variety of voices in order to achieve a genuine discussion.

The reference above to a genuine discussion and a variety of voices is true. Some time ago, I was approached by CoVi to take part in the project, despite my having previously published pieces such as "Paying tax is not a moral issue" and "The corporate duty to avoid tax." In April 2015 the Master of Magdalene College Cambridge, Dr Rowan Williams (former Archbishop of Canterbury) hosted a dinner of about 20 people, including me, to discuss the issues. It is fair to say that I was at one end of a spectrum of views on the subject!

Subsequently I was asked if I would like to make a written contribution to the project's website. I decided to set out my view of what I regard as a responsible tax policy for a company, by writing a "dummy" policy. It was published on the project website earlier this month and is also reproduced below.

The case against morality in tax - Mohammed Amin

This post illustrates what I consider to be an ideal tax policy for hypothetical company, XYZ plc. The recent publication of “Rebuilding a social compact on responsible tax” by CoVi states that “There is also a clear moral dimension [to tax] in a society that is committed to responsibility and the common good. Businesses and business leaders already make moral and ethical judgements on what is right and what is fair, and this is no different in relation to tax decisions.” I disagree with this view. 

When it comes to taxation, I believe that there is no moral issue. In my view those who complain that tax avoidance is immoral are confusing tax and charity. The amount of tax paid is determined by the law and the role of a moral individual applies to decisions made relating to charitable donations and ensuring the disclosure of truth to tax authorities. Company directors are stewards of other people’s money and should not attempt to use it to effect their own moral choices.

XYZ PLC – MISSION STATEMENT AND TAX POLICY

At XYZ plc, the goal is to make profits so that dividends are paid to shareholders that are as large as possible consistent with retaining sufficient funds to expand the business. XYZ plc makes these profits by selling couplings to manufacturers of agricultural tractors and ice cream sweets to teenagers. Both divisions operate under brand names that do not obviously connect them with XYZ plc. XYZ plc avoids diversification to focus on core competencies.

XYZ plc does not make charitable donations except where there is a direct marketing benefit to the business. Accordingly the couplings business makes no donations, while the ice cream division budgets 1% of its profits for high visibility charitable donations which will enhance the brand. Otherwise it is left to shareholders to decide whether to give away their money and note that due to past legacies 17% of our share capital is now owned by charitable foundations which rely upon our dividends to fund their activities.

The directors are conscious that they are stewards of £10 billion of shareholders’ funds. They believe that they can achieve higher returns on these funds within the business than shareholders could achieve for themselves. However if the future projections for the tractor couplings and ice cream businesses indicate that this will no longer remain true, XYZ plc will not hesitate to sell off all  facilities and terminate all employees who do not transfer with the businesses in order to return the £10 billion to the shareholders.

XYZ plc is incorporated in the UK and has subsidiaries and branches in many countries around the world. They regard the UK as offering an excellent combination of high legal standards and attractive tax policies for multinational companies. Should other countries offer a more attractive legal and tax regime for our group, XYZ plc will not hesitate to reincorporate elsewhere, since the directors’ duty is to our shareholders who are located all around the world. XYZ plc owe no allegiance to any particular country.

As far as taxation is concerned, XYZ has a policy of complying scrupulously with the laws of all countries in which it operates. Where countries have levels of corruption that make it difficult to operate without paying bribes, XYZ plc will exit operations from that country.

XYZ plc regard it as impossible to operate without paying profits taxes, transfer taxes, payroll taxes and other taxes in the countries within which they operate. However the directors never forget that all such taxes are taking away money that would otherwise be part of profits and available for shareholder dividends.

Accordingly XYZ plc will consider all lawful methods to reduce our tax costs in all countries in which they operate. XYZ plc  apply the following tests to tax planning:

This example demonstrates my view that the obligation of citizens is to pay the tax that the law requires and no more. Morality requires that individuals tells the truth when disclosing profits to the government but the law determines what tax must be paid. If one can find ways of reducing the amount taken in a manner that complies with the law (for example it may involve locking it away in tax privileged arrangements such as pensions) then that is entirely right, based on convenience and practicality.

Mohammed Amin MA FCA AMCT CTA (Fellow) is an Islamic finance specialist and Chairman of the Conservative Muslim Forum. He was formerly a tax partner at PwC and is writing in a personal capacity.

Concluding comments

In my view the furore about tax avoidance is misguided.

Companies have a duty to obey the law in ever country in which they operate. If those laws are too onerous, the company should withdraw from the country, but it should not break the law.

Within the law, every company is entitled to do everything that it considers reasonable and practical to arrange its affairs to reduce its tax liabilities below what they would have been if it had conducted its business in a different way. No company is obligated to pay more tax than the law requires.

 

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