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Avoidance: Time for campaigners to learn the law
Tax barrister Anne Fairpo has had enough of politicians and press getting tax law wrong, and unleashed the following diatribe in her 10 December podcast.
I am getting fed up with the continuing failure to understand either tax law or the relative issues on the part of the press and MPs on the Public Accounts Committee (PAC).
Avoidance is, according to HMRC, £4.5bn of the tax gap of £32bn. That is 14%. Yes it's quite a bit, but evasion - crime and the black economy - accounts for almost £15bn, or 46%. Simple non-payment accounts for £4bn; that's another 14% as well.
These figures come from the HMRC's tax evasion report for 2011-12, it's not from some Pollyanna tax apologist.
The figures make it clear we'd be much better served if the PAC and the press made some attempt to go after those sectors, the ones that are actually evading tax and people who are flatly not paying stuff they know they owe, rather than going after soft touch high-street retailers, particularly one that had an effective global tax rate of over 32% the first nine months of 2012.
This is Starbucks we're talking about.
If it's avoiding tax as a group, it's doing so incredibly badly. In fact, it would be better off moving profit to the UK at those rates.
LexisNexis tax manager Ben Saunders pointed out in his blog that if Starbucks were gaming the system, they'd be at break-even in the UK. Their current arrangement gives a tax charge in the Netherlands and Switzerland without a current matching tax reduction in the UK. They're sufficient loss-making that deductions for royalties and interset and so on and are conditional losses, not current reductions in tax.
It's particularly irritating that these stories paid HMRC and UK tax laws so little favours. They seem to think they are completely toothless. But on Starbucks royalties alone, HMRC disputed the transfer pricing so that Starbucks now deducts or deducted 4.7% for tax purposes and not the 6% reported in the accounts.
Transfer pricing isn't just something companies do. It's an internationally agreed set of tax principles that are aimed at ensuring companies can't simply shift profits around as they choose.
Other articles just completely ignored thin capitalisation rules suggesting that Starbucks is 100% financed by debt from the USA. Where does anyone get the idea from that paying interest from the UK to the USA is a tax saving scheme?
UK corporation tax rate is 24%. The US Fed rate is 35%, so paying tax from UK to USA is an increase in tax of 11%. This is not a tax saving. They would be better off as a group not paying interest to the US parent. But you can guarantee that the IRS would be deeply unhappy about that, to put it mildly.
If it's an arms-length rate, does it matter if the company pays interest to a bank or to its parent? It's still getting the same deduction for tax purposes. Those who are making the argument that subsidiaries shouldn't pay for the use of their parent company's intellectual property should aquaint themselves with the inflows to the UK of things like the royaltie and licence fees to UK businesses before they decide such payments are immoral.
Or are they only immoral when the payment leaves the UK?
Finally, I'd love to be able to congratulate the BBC journalist who did eventually accept that plain vanilla loss relief is not controversial tax planning. But we'd have all been better served if the facts had been checked before the story went out.
I'm annoyed because we need a discussion on tax in this country. We've got a long tax code because we bolt on bits here and there. No one really stops to sit down and say what are we trying to achieve with the tax system?
Is it simply a money-raising thing, are we trying to manipulate behavior? If we're trying to do all that, how should we go about it? We need that discussion, but this isn't what we're getting.
What we are seeing in the press is not a discussion, it's a one-sided excoriation of non-UK businesses fuelled by misunderstanding and misrepresentation.In the meantime those who are actually breaking the law and evading tax are just laughing as a steamroller passes them by.
Anne Fairpo contributes a weekly tax podcast to AccountingWEB, sponsored by CCH. You can get free CPD by listening to her archived reports and completing short questionnaires on the topics covered.