To Tax Or Not To Tax

by Prof Ryan Spox

Things that annoyed me today:

Mostly it was the vexed question of tax avoidance. Specifically, it was the depressing realisation that we have no idea how we can actually achieve that heady goal in our own personal finances.

Let us be clear here: tax avoidance is the entirely legal process by which individuals or corporations act in certain ways to reduce or remove their obligations to pay certain taxes. Tax evasion is the act of illegally evading taxes you are required to pay. So, for example, if a corporation makes no profit then it will pay no corporation tax, because corporation tax is a tax on profits. A simple way to avoid corporation tax is, therefore, to ensure that you make no profit. If, however, a corporation “cooks its books” so that it declares a failure to make profit when the actual profits have been hidden from the taxman, then it is being very naughty and engaging in tax evasion and its corporate officers may end up in jail. (A cynic might suggest that this only happens to corporations who have failed to make adequate donations to appropriate political institutions. We, however, reject such a view, preferring to believe that all politicians are incorruptible paragons of virtue, Shining Knights who seek only to serve the Public Good. Gawd bless ‘em! Gawd bless ‘em all, we say!)

So, having got that out of the way, there is a bit of stushie in contemporary British society over the whole tax avoidance issue. A few months back we had our heroic Prime Minister, young Davie Cameron publicly lambasting the comedian, Jimmy Carr, for trying to hold on to most of his hard-earned wages by participating in complex off-shore tax avoidance schemes that were surprisingly similar to the ones favoured by Mr Cameron’s father and which helped make “Call me Dave” the privileged rich kid he is today.

But, as a society, we have moved on from there and now we are all getting super-agitated over the issue of global mega-corporations that seem to do a huge amount of business in the UK, involving a vast turnover of cash, and yet pay incredibly little – or no – corporation tax simply because they appear to have made little or no actual profit. And yet, curiously, they still feel it is worth continuing to do business in the UK. (Tax Me Harder)

To put all this in some kind of context, let us consider a few irrefutable facts:

First of all, it is a basic tenet of contemporary Capitalism that a corporation exists to make profits. It needs those profits in order to pay dividends to its shareholders who are after all, its actual legal owners. Those afore-mentioned cynics with whom we do not associate ourselves, might point out that many corporations have forgotten the second of the sentences above: they want to make profits in order to boost the share price and trigger bonuses. The actual shareholders are an irritating necessity who can be safely ignored because, rather than being private individuals who have invested some spare cash in a venture that might boost their family incomes and in which they might be expected to take a personal interest, they are themselves corporate entities who only hold onto the shares long enough to see their price rise sufficiently that selling them generates a tidy profit for their parent corporation, leading to increased share prices, dividends and bonuses all round.

Secondly, if, as a species, we intend to live in a society larger than a family-sized group of hunter-gatherers then we are going to need to have government. Here, by “government”, we are not referring to such bloated self-seeking gravy-trains as BritGov or any of its international partner conspiracies. Rather, we refer to “government” with a small “g” by which we mean a mutually accepted (if not necessarily agreed) system of rules, regulations and corresponding enforcement authorities which help us get through the day without killing each other or suffering the inconvenience of a foreign invasion. Along the way it can also provide a modicum of infrastructure that keeps things ticking along and, for the Godless Communist Extremists amongst you, it can even educate your children and ensure that they, and you, don’t die unnecessarily of easily preventable medical conditions.

Thirdly, if we’re going to have government then, somehow, it has to be paid for. And that means taxes. This is why taxation is as old as civilisation and – probably – is actually older than that. Throughout history, taxes have been paid in produce, in labour and, most conveniently, in the form of money. Even in so-called “failed” states like much of Somalia or bits of central Africa people still pay “taxes” to scary men with guns although what they get in return is rarely the benefits of enlightened government but, more probably, the benefit of not being killed.

So, whether your government is Big or small, National or Local, Federal or State, in order to function it needs your taxes. (How much it needs and what it should do with them is a matter for your own individual politics. Today, at least, we are not going down that route other than to note that many governments seem to have lost sight of the fact that they do not exist simply in order to collect taxes to pay for their own existence; rather, they’re supposed to be raising the money in order to actually do useful things.)

In order to collect taxes, governments pass, and then enforce, laws that say who will pay what, when and why. In order to maximise profits, corporations will attempt to minimise the taxes they pay whilst, in most case (we would guess!) remaining within the law. The result, inevitably, is a pseudo-biological “arm race” between the taxman and tax lawyers. Yes folks, it’s evolution at work!

The reality of modern Britain is that, as a result of frankly moronic financial planning by a series of disparate flavours of BritGov, going back over decades, we are, as a Nation, a bit strapped for cash right now. So we need to maximise our tax returns. Which, inevitably, has drawn attention to the afore-mentioned corporations who seem to have very successful businesses which pay very little actual tax. Clearly, they are up to something and, whatever it is, is obviously Bad, even if it is not, in any sense, illegal. And this means that they are not playing the game of pretending that “We are all in this together.” And that makes them doubly bad. What makes them triply bad, and especially ripe for official denunciation, is that some of the more obviously out-of-kilter financial results are for corporations that can, perhaps, be best described as “Foreign” or, even more despicably, “American”. Yes, Starbucks, Amazon, Google and Apple, we, and BritGov, are looking at you.

The reality, not surprisingly, is that all large corporations play this game. BritGov just seems curiously reluctant to point the accusing fingers at supposedly “British” companies like Boots (co-owned by a US private equity fund and some legitimate Italian businessman), Cadbury’s (owned by the US food mega-corp Kraft)  and so on. In fact, this has been happening for years as you can explore for yourself here: Tax Free Britain.

Or you can just examine this:

Top 12 UK Tax Dodgers from 38 Degrees

Top 12 UK Tax Dodgers from 38 Degrees 

Which comes from here: 38 degrees – tax dodgers

Now, all of these corporations will point out that they employ lots of people within the UK, that those people not only pay UK income tax but also spend their money in this country which attracts further tax in the form of VAT, duties and Lord knows what else and, therefore, the fact that the corporation makes little or no profit and thus pays negligible taxes does not mean that it is not benefiting both the economy in general and tax returns in particular. And all that is absolutely true. The UK’s economy and tax income is better off for having them here. So Hurrah for that!

But…  Were these private companies, whose owners were all on the books as employees, then they would have no requirements to pay dividends to shareholders and they could be hugely successful, thriving businesses whilst ensuring that their Pre-Tax Incomes were exactly balanced by their Expenditures, including salaries and income-related tax-deductions for everyone who works there. The net result would be everyone has a well-paid job, the company keeps going (and possibly even growing) year after year, yet never actually makes a taxable profit whilst still contributing economic benefits and tax income to the state.

The problem for such a company arises if it does have shareholders who expect a dividend. To pay a dividend it has to make profit, which is then taxed before the dividend is paid. Still, if Starbucks, Google, Amazon, Apple and their ilk make negligible profit and thus pay negligible dividends to their shareholders, then – however disgruntled their shareholders might be – everything is above board, is it not?

Except they do make profits and they do pay dividends. In fact, they make huge profits. But, being multi-national mega-corporations whose HQ is not based in the UK, they just use clever accounting to claim that they don’t make any worthwhile profits from their businesses in the UK and, therefore, don’t pay any significant tax here. The details of how they do this vary from corporation to corporation and aren’t really relevant here. What matters is that they do it and it is, currently, entirely legal.

And that seems to upset a lot of people. The outrage is caused by a feeling that whilst this may not be illegal it must, surely, be immoral. The basic argument is rather simple: any corporation that trades within the UK is benefiting from the entirety of the system of government that exists in that nation and it is, therefore, only right and proper that they contribute a fair share to the running costs associated with that system of government. Here, unsurprisingly, there is a conflict between the definition of “fair” and the reality of “legal”. For most people, the more actual profit your corporation makes as a result of its business dealing here, the more actual tax you should contribute to the cost of keeping the UK open for business.

The fact that you can choose to pretend that you actually made that profit in another country with a different tax regime does not change the moral argument: you want to play here, you have to pay here. To exacerbate things, the reality is that, the bigger the corporation, the more likely it is to be able to avoid taxes in this way. Your local joinery company may only employ three incoherent teenagers and a Polish dentist (he’s handy with a drill!) who do good and reliable work but you can be pretty sure that a small business like that pays a higher rate of corporation tax on its actual UK-generated profits than any global mega-corporation (including, incidentally, most UK-based banks). Little guys can’t afford the expensive tax lawyers required to set up these entirely legal methods of avoidance.

Incidentally, did we mention that, however annoying their behaviour might be, what all these corporations are doing – like poor Jimmy Carr before them – is entirely and undeniably legal.

Still, it would be nice if they did contribute a bit more to the UK’s coffers so BritGov decided to name and shame them all (well, except the UK banks, obviously). This led to calls for a boycott of these businesses because they didn’t deserve our business. An understandable knee-jerk response, perhaps, which tended to ignore awkward realities such as the fact that many Starbucks’ branches are actually franchises – the owner pays the corporation a licensing fee for use of their brand and products and then proceeds to run a small business which employs local people, makes profit and pays its taxes on that profit. Meanwhile, the franchise fees that were paid disappear into the global Starbucks’ coffers and vanish from the sight of the UK tax system forever. So who does boycotting hurt? Not the mega-corporation, obviously.

(Of course, if UK consumers were not such sad, impressionable basket-cases who can’t enjoy a decent cup of coffee unless it has a recognised brand-name plastered all over it, the franchisee could be running an excellent, independent local coffee shop which actually generates higher profits, and thus taxes, because it doesn’t need to pay that franchise fee. The reason people take on the more expensive franchise option is because that’s what consumers want. Instead of simply boycotting your local Starbucks, try signing a solemn oath that, if it goes independent, you will continue to support it by buying its new, and probably better, coffees.)

And yet, bizarrely, the public outcry and calls for a boycott have prompted Starbucks to state that, over the next two years they will pay more tax than is currently required of them.

Sounds good, right? The system works, people power prevails.

Really?

A corporation will pay more tax than it is legally required to do because BritGov has publicly “outed“ it and, in essence, bullied it into paying some sort of protection money? That’s a slightly disturbing thought. How many of us are going to spontaneously decide to send HM Revenue and Customs a bonus cheque for, say £1000, in January? They haven’t asked for it, they have no basis for expecting it, there’s absolutely nothing in Law to say you should do it, but, hey, let’s just send them some extra money anyway.

Will you be doing that? We suspect not. But, over the next two years, Starbucks will be doing exactly that: paying BritGov a legally unnecessary £20 million just to make this story go away.

And that’s What’s Wrong With This Country Today. Someone does something which is not, according to current law, illegal but which most people find objectionable and immoral and all BritGov can do is talk about it in the hope that the offender will change their behaviour? Do they not understand what governments are for? They make laws in order to define what is, and is not, legal. And then they actively enforce them. And in a democracy those laws will, at least in principle, reflect the Will of the People. (Don’t laugh, there may be impressionable children reading this.)

Should global mega-corporations making huge amounts of money in the UK actually pay a reasonable amount of tax in order to continue doing business here? Well, of course they should and if, currently, they are not legally obliged to do so, then the solution is unbelievably simple: change the tax laws. If they don’t like it, they will leave and someone else will fill that void. But the reality is that they won’t leave, because a huge income generated in the UK on which you pay 24% corporation tax is still a whole lot better than no income on which you pay no tax. (In the absence of any kind of state benefits system, which would you prefer: a guaranteed income of the UK average of £24,000 a year on which you will pay, roughly, 20% tax? Or no income at all on which you pay no tax? Which makes more financial sense?)

If only young Gideon Osborne had studied something useful at Uni, like Accountancy or Home Economics, he might actually understand this stuff.

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