Friday, February 01, 2013

Taxes are what we pay for a civilised society


This statement by US Justice Oliver Wendell Holmes, is chiselled into the portico of the IRS building in Washington.

It is a statement of the blindingly obvious!

No country can run its social and civic affairs without being able to pay for them, and without taxation of various forms, such services and facilities disappear, or never exist in the first place.
The principle is that all those individuals who earn money in the jurisdiction concerned should pay a percentage of tax to contribute to the effective running of the social infrastructure. This includes income tax levied against employed individuals, Corporation Tax, which is levied against the profits of companies who sell goodsd and services and who run their affairs here, Value Added Taxes and other payments which are mandated by Parliament.

Increasingly, in these straightened times, it has become fashionable for wealthy people, highly profitable companies, and those who want to reap all the benefits of a civilised society but who do not wish to pay for them, to assert their rights to avoid paying tax. These individuals and companies use a variety of dubious arguments to back up their morally-doubtful assertions.

Most recently, Starbucks has threatened to suspend millions of pounds of investment in Britain after what it described as constant and unfair attacks over its tax affairs by the Prime Minister and the Government.

Starbucks UK managing director, Kris Engskov, recently demanded talks at Downing Street after the Prime Minister said tax-avoiding companies had to “wake up and smell the coffee”. Mr Cameron’s use of the phrase at the World Economic Forum in Switzerland last week was taken as a direct attack on Starbucks which has been criticised for not paying corporation tax in Britain.

The US coffee chain has found itself under regular attack after it was disclosed that since its arrival in Britain in 1998, it has paid £8.5 million in corporation tax, despite total sales of £3 billion. It said last month it had made a profit in only one year.

Mr Engskov was so concerned about the “politicisation” of the tax issue that he asked for the talks at No 10, where he met officials last Friday. Starbucks argues that it makes no profits in the UK and so is not required to pay the tax.

“The PM is singling the business out for cheap shots, a company that, it should not be forgotten, has pledged to pay tax now and into the future,” said a source close to the firm.

David Cameron conversely, has said that companies like Amazon and Starbucks which avoided tax lacked “moral scruples”.

Well, now one of the UK’s top accountants has joined the chorus of whining against attacks on corporate tax avoidance by politicians, by telling the authorities to change the law if they are unhappy with the ethics.

Responding to calls for companies to “pay their fair share”, Mark Otty, Ernst & Young’s managing partner for Europe, Middle East and Africa, claimed that companies had a duty to pay the lowest rate permitted.

This is one of the many ludicrous arguments put forward by people like Otty, whose sense of judgement about what is moral and what is purely legal has led them into a maze of twisted logic. Companies, they argue, owe a primary duty to their shareholders, and must therefore seek to maximise their profits in order to return shareholder dividends. To achieve this they must take stringent steps to avoid paying tax wherever possible.

In order to achieve this desirable state of affairs, they will create a series of artificial structures and constructs, through which, they will claim, the company is required to conduct its business affairs. The fact that these constructions are entirely artificial and bear no resemblance to reality is neither here nor there. They are created merely to provide a series of fiscal hurdles which the company must overcome in order to conduct its business. In so doing it claims relief against tax levies because of the need to comply with these artificial structures.

Most if not all of these tax advisers keep as their mantra, a statement made by a Scottish Judge, Lord Clyde when he said;

"... No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue..."

The fact that the noble Lord made this statement which identifies a very laissez-faire attitude towards the relationship between the tax-payer and the State, is no doubt reflected by the fact that it was made in the case of Ayrshire Pullman Motor Services v Inland Revenue 14 Tax Case 754, at 763,764, in 1929.

Things have changed a significant amount since those pre-war days, and I doubt it very much that any judge sitting today would be willing to make statements of such a liberal slant! However, it is perhaps indicative of the distance from contemporary reality that so many tax planners share that they would think that such a statement is still justifiable.

Mark Otty's intervention follows Starbucks’ threat to suspend millions of pounds of planned investment in the UK if the attacks continue. Goldman Sachs chief executive Lloyd Blankfein has also warned that the row risks stigmatising “every right-thinking person who organises his or her affairs in a sensible way”.

Otty observed: “The only way you can resolve this issue is through a legal code. I don’t see how you can have any assessment on payments of tax other than what is in the statute. The simplest solution is to stop banging on about morality and change the law. ”

Public anger has mounted at the way global companies such as Google, Starbucks and Amazon move profits from one country to another to lower their tax rate. While the behaviour is not illegal, MPs have called it “immoral”.

So how does Starbucks engage in this so-called 'legal' behaviour.

Accounts filed by its UK subsidiary show that since it opened in the UK in 1998 the company has racked up over 3 billion pounds ($4.8 billion) in coffee sales, and opened 735 outlets but paid only 8.6 million pounds in income taxes, largely due because the taxman disallowed some deductions.

Over the past three years, Starbucks has reported no profit, and paid no income tax, on sales of 1.2 billion pounds in the UK.

Starbucks makes its UK unit and other overseas operations pay a royalty fee - at Starbucks, of six percent of total sales - for the use of its ‘intellectual property' such as its brand and business processes. These payments reduce taxable income in the UK.

McDonald's also charges its UK subsidiary a royalty for ‘intellectual property', although at a lower rate of 4-5 percent.

The tax advisers are constantly dreaming up new schemes with which to reduce the tax-take, but what they do is transparently artificial, and bears no resemblance to any real business commercial structure. They like to argue that they are enabling business to grow and develop new jobs, but in reality, they are merely enabling these businesses to relocate millions of pounds worth of profit, on which tax should be paid, and hide it in some benevolent tax haven.

They are assisting, advising and encouraging wealthy individuals and businesses in ways of hiding monies which should be subjected to tax treatment, thus denying the state access to the money which it needs to maintain a civilised society. The only way that these wholly deceitful schemes stay in the zone that enables them to be called 'legal' is that they have to be reported to the HMRC before they are used. So, being declared to the Revenue, enables them to stay just 'legal' all the time that HMRC have to spend evaluating them, which can take time, considering how many schemes they have to review. The great irony is that in virtually all the cases that are reported, HMRC determine them to be illegal and do not allow them for tax-savings purposes. So this is nothing more than buying time for rich people to hive off a chunk of taxable earnings until they too are declared illegal.

This is just time-deferred tax evasion by any other name, and it sucks!

Will the big tax advisors stop engaging in this rich man's game of taxation roulette? Not a bit of it, they are making too much revenue out of it and earning fortunes for themselves. What is even more ironic is that they get invited in by HM Treasury to advise on new financial proposals and how their tax treatment should be viewed, and then they go back to their firms, and expand their practices advising clients on the new proposals! At a time of austerity, when everyone in the country is supposed to be working together for the common weal, and making sacrifices, these advisors are actively working against the fiscal interests of the UK - they are openly damaging the fabric of the body-financial - and they should be treated as fiscal terrorists. They are no different from those who would seek to damage and undermine the fabric of our democratic society by planting bombs, except they are creating even more financial damage by their actions, and we should know them for what they are.

So, I have a 'modest proposal' to advance for ways to treat these companies who seem to feel it is perfectly permissible to wave their tax avoidance policies in our faces. My proposal is that they should be denied any of the benefits which provide our country with a civilised underpinning. Taxes help to build hospitals, schools, and other public facilities. They help to maintain law and order, they pay for defence, and they provide the infrastructure on which the country is organised.

If they don't want to pay taxes, then these companies should be denied policing services, if they suffer criminal losses, let them sort them out themselves. If they need the fire service, they will attend but primarily to ensure that the fire does not damage adjacent premises, and at the end when the fire is under control, they will be sent a bill for the costs incurred.

I am certain that it is not beyond the wit of man to identify other tax-supported services which could be denied to these businesses, if they refuse to pay tax at a transparent and fair rate. In the banking world, banks who provide such services to clients should be placed on a list of entities whose chief executives and Chairmen never receive awards, gongs or knighthoods, and the same goes for the major accounting firms who specialise in these offerings. If you help others to cheat on their lawful taxes, you will pay in other ways. Bankers and accountants, and lawyers love these putty medals, and seats on quangos and advisory boards, and if they are involved in facilitating tax cheating in these ways, then let them do so at their peril.

We all have to pay tax, there is nothing so inevitable as Benjamin Franklin advised us. None of us like doing it, but it is necessary to maintain a civilised environment. If people want to find a jurisdiction where the rich don't pay tax, and where it has virtually reached a stage where the Government openly turns a blind eye to the actions of the wealthy in avoiding payment, try living in Pakistan for a while, and see how much you like it, I have been there quite a lot, and I know!

17 comments:

simoncz said...

I find it amazing that a company that doesn't make a profit in UK wants to expand its operation here.

AbogadoNZ said...

Having been made aware first hand what the effective tax rate is for Otty's partners it is high time EY was taken off the list of accounting firms anyone should do business with. After all what would happen if everybody paid around HALF the published rate. Yes Mr Otty this is a moral issue and it is clear you don't have any.

Christie Malry said...

As you would deny Starbucks from state services because it doesn't pay corporation tax, would you similarly exclude from state services any individual who doesn't pay income tax? If not, why not?

Theremustbeanotherway said...

In response to Malry, I would deny state services from any individual, who had set up arrangements to exploit a gap in the rules in order to avoid paying tax.

The reason being is that he or she has chosen to be a freeloader.

This is rather different from someone that doesn't pay tax, because of the meagerness of his or her circumstances.

I doubt that Malry would be able to appreciate the difference.

The taxpayer is entitled to reduce his tax liabilities using reliefs provided by Parliament, so no he doesn't have to permit HMRC to select the biggest shovel from the store.

It doesn't mean that he should be allowed to lock up the store and prevent HMRC getting any shovel out at all!!

Rowan Bosworth-Davies said...

I suppose the observation by Christie Malry is appropriate from someone who describes themselves as a Chartered Accountant. I do not suggest that Christie Malry advises clients how to avoid tax in an aggressive manner, because I don't know, but to answer the question posed, I would include in State exclusion any individual or corporation who chooses to seek to exploit the tax regime in an exploitative or aggressive manner. In that group, I would include all those who purchase and use wholly artificial systems and structures which are designed to create a fictitious patina of commercial or personal legitimacy, whereas they are in fact a total fiction, designed only to avoid tax. If individuals want to be freeloaders on the benefits that a civilised society provides and for which all citizens have to share the costs, then they should be stigmatised and marginalised. I am quite serious, if they want to live in a society where tax cheating is a national sport and is not interdicted by the Government because the entire political class is at it as well, then go and live in Pakistan. See what it's like to live in a society where there is no health service, and poor women routinely die in childbirth; where there is no maintained state education and most poor children are sentenced to illiteracy unless they can find a means (and believe me they do try)to get education by any means; where the police are so corrupt that no person in their right mind goes near them for fear of the bribes they will be forced to pay, then be my guest, get on the next plane, and good riddance to them.

Woozy said...
This comment has been removed by the author.
Woozy said...

I wholeheartedly agree that "Taxes are what we pay for a civilised society". However, the current tax system is being used to implement a wealth transfer from Joe Public to banks and other corporations. If you look at current government spending you'll see that a huge proportion of current taxation is being used to fund various forms of corporate welfare and a backdoor bailout of the banks - through massive interest paid on fraudulent PFI schemes and bonds held banks bought using free money from the Bank Of England. So I think it's naive to expect people and corporations not to take avoidance measures when taxation reaches current levels. Tax levels have now reached a point where people will increasingly seek to avoid them. Income tax, National insurance, VAT, Stamp Duty on property and equity transaction, Withholding Tax on savings, Taxes on dividends, Taxes on capital gains, and so on and so on. Quite frankly it's now ridiculous! The government has been very clever in all of this by shifting the argument from "where is all the tax revenue going?" to "who isn't paying their fair share of tax?".

Rowan Bosworth-Davies said...

Then use your vote at the ballot box. That's all we have to express our concern. I feel just as fiscally disenfranchised as you do, but if you cheat on your taxes, then you are part of the problem, not the solution. You have a choice, you can leave the country if you don't like its laws. It's a simple choice, democratic government, or a feudal oligopoly where the rule of law doesn't run, and there are no hospitals. You choose.

petitb said...

I have a simpler proposal: Large corporations simply pay corporation tax at (30?)% of turnover. Irrespective of so called expenses, like royalties.

cringing2 said...

Hmm, in reality, taxation levied by a sovereign currency issuer pays for nothing. It is currency destroyed.

That said taxation has a purpose but the purpose isn't spending.

In a just system, accumulation and speculation would be taxed rather than labour, production and consumption.

Corporations i.e. unions of rent seekers, can only exist by state fiat and their profits should be the first port of call for currency confiscation.

AlienPsyTing said...

Taxes help to build hospitals, schools, and other public facilities. They help to maintain law and order, they pay for defence, and they provide the infrastructure on which the country is organised.

They also help fight foreign wars in such diverse places as Iraq, Kosovo, Serbia, Libya, etc. amongst other wastefull persuits, I could go on. Additionally we have a complex tax system that benefits having a larger than necessary IRS whic I'm sure could easily be cut in half. NI should be integrated in into Income tax and the state involve itself less in interferring in the way people live their lives maybe then ppl and companies and other may feel happier about paying 'their fair share (something that progressives can never quite manage to define as apecentage) keeping in mind that the top 1% pay 24.8% of the total income tax take and the top 16% pay approx 60%

Ewen Cameron said...

The fact that companies and wealthy individuals can legally reduce their tax liabilities to relatively little or nothing is a sympton that civilisation is breaking down.

Politicians only ever propose tweeks to the tax system but in order to avoid further damage to our civilisation we need a Civilised Tax system.

A great deal of work has been written on what factors are required for a tax system to be effective. My own thoughts are that as we now live in a global civiliation I do not think it is effective having seperate tax systems for each country.

I also think the idea that only individuals, not non natural persons (such as companies and trusts) should pay tax has a lot of merit.

In addition, I think the level of tax individuals pay should be related to both their ability to pay, what they consume and be set every three months as opposed to annually.

Thanks for taking the time to read my views on this.

rashedkhanbd11 said...

Tax avoidance reduces government revenue and brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for avoidance.
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