VOICES GARETH MYLES Taxing matters
Professor Gareth Myles, Director of the new ESRC/HMRC Tax Administration Research Centre (TARC), discusses the fairness of taxation, taxpayers’ attitudes to different levels of taxation and how national tax systems function in a global environment. Does the UK need to update its tax system to cope with a new corporate world?
When does corporate tax efficiency become tax avoidance? HMRC recognises four types of tax compliance
behaviour. ‘Tax planning’ is when a taxpayer responds as Parliament intended to a tax incentive. An example would be placing savings in an ISA to benefit from tax-free interest payments. ‘Tax avoidance’ is when tax liabilities are reduced using tax laws to obtain an advantage that Parliament never intended. Whether Amazon assigning its sales to an affiliate in Luxembourg qualifies as avoidance has to be tested against this definition and the relevant EU rules. This has to be distinguished from ‘abusive tax avoidance’ which occurs whenever activities are undertaken solely for the purpose of reducing the tax bill. The recent General Anti-Abuse Rule (GAAR) uses a double- reasonableness test to define abusive avoidance as arrangements ‘the entering into or carrying
“ The identification of where
companies operate is becoming ever more difficult
out of which cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances’. Arrangements that might be regarded as abusive include the formation of ‘hybrid entities’ which are affiliate companies that exist only to exploit differences in tax rules between countries or the use of financial engineering to create positions that only deliver benefits through
”
The growth of internet sales has created a divide between the location of the purchaser and the place to which the sale of the product is assigned
tax reductions. The fourth type of behaviour is ‘tax evasion’ which is the false statement of tax liabilities. In short, tax planning becomes avoidance when less tax is paid than Parliament intended, and becomes abusive when unnecessary activities are undertaken to reduce the tax bill. The headline cases that have been reported in the media are all examples of tax avoidance but not of abusive tax avoidance. Have companies have always worked so hard to minimise their tax liabilities or is this is a new phenomenon? Corporations now work so hard to reduce tax
liabilities because of the increase in opportunities to do so and the gains that can be made. In an older, simpler world the possibilities did not exist so there was little point in making effort. What has caused the change is the increase in globalisation, the growth of the multinational, evolution in the nature of products, and new ways in which products are traded. Most cases of tax avoidance arise from multinationals making the most of international differences in tax rates and regulations. If the tax rate is lower in one country than another, it makes sense for transactions to be recorded in the low-tax country. The evolving nature of products and new forms of trading assist with this. Intellectual property (IP) has become a more significant component of products and it is very hard to place a fair price on IP. When a coffee company in the UK states that
it has to pay a licence fee to an affiliate in the Netherlands for the IP in a brand of coffee it is very hard for HMRC to determine what this licence fee should be. The company can effectively choose its own licence fee to minimise tax liability. Similarly, the growth of sales over the internet has created a divide between the location of the purchaser and the place to which the sale of the product is assigned. Sellers can select the location to gain a tax advantage without altering the experience of the purchaser. Finally, financial instruments are now available that were unimaginable 30 years ago. This permits complex financial engineering to exploit tax differentials to the full. Companies now work hard to minimise tax liabilities because the potential gains are so significant.
Does the UK need to have a tax system that is favourable to companies to attract businesses and commerce. Or does globalisation mean companies can operate in one country but choose to pay their taxes elsewhere? The consequence of globalisation and the internet is that the identification of where
26 SOCIETY NOW AUTUMN 2013
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