The Tax System Isn’t Taxing

Morals aren’t enforceable by the state. Laws are.

The issue of corporate tax avoidance is building up a head of steam, again.

In the last couple of weeks it has become clear – as if any further confirmation were required – that some of the largest global corporations operating in the United Kingdom pay virtually no corporation tax here.

This isn’t a new issue.  It’s been festering for years and it’s to the great shame of politicians on all sides that they’ve done nothing.  The current austerity climate has simply brought everything into sharper focus.

In June I wrote a post about the comedian Jimmy Carr’s tax avoidance.  I argued that using tax avoidance structures to virtually eliminate one’s tax exposure was immoral, even though it’s legal.  There are a number of reasons for this.

Firstly, it’s the extent by which sophisticated offshore structures reduce tax bills.  They aren’t comparable in moral terms to, say, the individual tax-free amount before income tax kicks in or the reasonable running costs of a rental property.  Offshore tax avoidance is utilized to virtually wipe out tax liability entirely (the clue’s in the name) rather than to accommodate reasonable demands on income before tax is applied to it.

Secondly, there is the problem of transparency.  The circus world of high-octane tax avoidance operates behind bendy, smoky mirrors; it relies on leaps of logic and suspensions of reality which would make even a theologian blush; and it’s insulated from scrutiny by a cloak of taxpayer confidentiality and grimy deals with tax inspectors.  None of this is good in terms of the rule of law or creating a cohesive society where individuals and businesses (especially small businesses) can feel that everyone is party to a social contract containing more or less the same small print.

Thirdly, it’s fundamentally immoral for an individual or a corporation to all but eliminate its tax exposure whilst making use of the public services that tax revenues provide, and on which the individual or corporation relies on to live or trade, however poorly those services might occasionally be delivered.

Interesting though a discussion of tax and morality is, a tax system cannot rely on an individual’s or a corporation’s notion of morality to function effectively, and it’s for this reason David Cameron’s denouncement of Carr’s behaviour as “morally wrong” achieved nothing.

Morality is not enforceable by the state.  Laws are.  Morality is too subjective and open to interpretation to be useful here, whereas the law provides objectivity and certainty.  Of course, laws are also open to interpretation (it’s the main thing keeping lawyers like me off the streets) but effective laws do provide a clarity which a malleable sense of “morality” cannot, especially in the context of something as numerical as taxation.  It’s also worth saying that moral sermons delivered from a political pulpit are generally ignored.

Ideally I would like to see corporations behave “morally”, and I think this is possible.  I argued here that many corporations do behave morally through their corporate social responsibility programmes, even though the intention behind these initiatives might ultimately be commercial rather than philanthropic (corporations can’t “care” because they literally aren’t human).

But with corporations there is an added difficulty as far as tax is concerned, beyond the philosophical hurdle of transposing a human concept such as morality onto money-making organisms.  Whereas an individual can choose to employ perfectly legal mechanisms to make immoral decisions – as I would argue in the case of Jimmy Carr – our tax system almost compels corporations to act immorally.

This is because corporations generally exist solely to generate profit.  As I said in my corporate social responsibility post, I don’t mean this negatively but just dispassionately and honestly. Typically, a corporation is constitutionally obliged to serve its shareholders’ interests rather than those of the government, the taxpayer, its customers or even its own employees, and its officers have a fiduciary duty to act in the corporation’s best interests.  The almost inevitable consequence of this is that minimizing tax becomes a constitutional obligation rather than a choice.

Now, one can make a perfectly sensible argument that it might ultimately be in a corporation’s best long-term interests not to use elaborate tax avoidance schemes.  Its senior managers and officers could very reasonably conclude that toxic PR, political pressure, public anger and even public boycotts of its products triggered by sharp tax practices could fatally undermine its commercial success, or even its very existence. But I think it’s unlikely that many global mega-corporations would come to this conclusion unless they found themselves in the glaring public spotlight with their tax affairs nakedly exposed.  Until then many of them will just minimize their tax payments with all the available weapons in their legal arsenal.

There is a further pressure applied to corporations – especially large multi-national ones with complicated affairs – which has the effect of trimming their tax bills: their independent tax advisers.

In the same way a corporation’s officers must act in the corporation’s best interests, tax advisers have a contractual and professional obligation to act in their clients’ best interests.  For a tax adviser this can only mean ensuring the cheque a client sends to HM Treasury is as modest as the law allows.  A tax adviser is not paid a steep hourly rate (the thick end of £1,000 an hour is not uncommon for the best/worst ones) to advise clients to “do the right thing, morally”. A tax adviser is paid to perform an elaborate, intellectual magic trick whereby problematic tax and profits disappear.

A board of directors ignoring their tax adviser’s legal tax-minimizing recommendations could arguably be failing in their fiduciary duty to the corporation.  Do corporations reluctantly implement tax avoidance to discharge their fiduciary duties, with a heavy heart?  No, I’m sure they don’t. I imagine they rub their hands with glee at the thought of screwing the taxman or taxwoman and marvel at how clever they and their advisers are, but I’m just saying they have a duty to minimize tax, too.

The intersection of morality, law, taxation, and multi-national corporations operating in a globalized, connected, digitized world may well be highly complex.  But establishing the correct mechanism for navigating through all this is not complex at all: it is the law (and to the extent international co-operation is required, politics).

If as a society we are happy for large multi-national corporations to effectively be relieved of their obligation to pay corporation tax (after all, “only the little people pay taxes”, as the late American corporate tax evader Leona Helmsley said) then let’s be open about that.  Let’s debate like proper grown-ups the pros and cons of reducing our corporation tax rate to, say, 2% if a corporation meets certain objective wealth-generating criteria such as the number of people it employs, how many patents it obtains, or its contribution to GDP.  Let’s save everyone the bother, however fun and intellectually satisfying it might be, of re-calibrating reality to pretend a corporation does business in Switzerland or Swaziland or the Cayman Islands or on the Jovian moon Io; let’s be relieved of pondering interesting though ultimately tedious and pointless distinctions of “tax morality” and “tax law”; and let’s just have a transparent tax system which everyone can understand and have confidence in.

I imagine the result of that debate would be, no, we don’t want corporations to have such an easy ride; yes, we want people to be incentivised to create wealth and innovative products and services but we still want them to pay a decent chunk of tax.  And that not only do we want these things, but we expect our tax system and our laws to deliver them – and this must surely mean that a wholesale review of tax avoidance legislation is seriously overdue.

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