Tax is in the news. In particular, the tax arrangements of multinationals such as Starbucks, Amazon and Google. Because, when it comes to corporation tax, they aren’t paying very much of it, at least not in the UK.
I say “corporation tax” deliberately, because, of course, they are paying quite a lot of other taxes. They’re paying VAT, business rates and employers’ National Insurance directly, as well as unavoidably being subject to Vehicle Excise Duty on any company cars and trucks they run and Fuel Duty on any petrol or diesel they buy to put in them. Their UK-based employees also pay tax and National Insurance on their earnings. And, even for a wholly UK-based company paying all its corporation taxes here instead of elsewhere, these are still by far their biggest contributions to HMRC. So Starbucks, Amazon and Google aren’t exactly paying peanuts even if they are minimising their corporation tax liability.
That does not, of course, excuse tax evasion if it is taking place. Even if you spend a hundred quid a week at the supermarket, you’re still guilty of theft if you walk out without paying for a £5 bottle of wine. But is evasion going on?
We need to be clear, first, about the difference between tax evasion and tax avoidance. I’m sure most of my readers understand that perfectly well, so I’m not going to describe it in detail. But, in essence, tax avoidance is minimising the amount of tax that government wants you to pay, while tax evasion is finding ways not to pay what the government has decided you should. And I’m putting it that way deliberately, too, because there is no meaningful sense in which anyone owes any tax until the government has decided how much to take from them.
Now, I’m not an out and out libertarian, and nor do I subscribe to the “Freeman on the Land” nonsense which asserts that people can somehow opt out of tax by reciting afew magic words. I fully agree that the government has an absolute right to impose taxes, and I also agree that, in a modern society which expects things like state-provided welfare, defence, healthcare, education, etc then taxes will be essential. I don’t think we are horrendously over-taxed in the UK, and I don’t have a problem with corporation taxes being part of the overall mix. (That doesn’t mean I’m entirely happy with the current state of affairs; in fact I’m not. But that’s not directly relevant to this particular debate).
However, I do believe that nobody owes any tax unless and until the government has legislated so as to make them owe it. And if there are aspects of a person’s financial affairs that the government has chosen not to tax, then there is no sense whatsoever in which it can be said that they “owe” tax on that money, either legally or morally.
The essence of tax avoidance (as opposed to evasion) is in arranging your financial affairs so as to maximise the amount which falls within the untaxed areas and minimising those which are taxed (or, more accurately, at least in most real life situations, maximising the amount which falls into the areas which are taxed the least and minimising those which are taxed the most). And evasion, usually, consists of misrepresenting your financial affairs so as to make it appear that less of it falls into taxed (or more highly taxed) areas than is, in fact, the case. To give an example, tax avoidance is choosing to own an LPG powered car because fuel duty is lower on LPG than on petrol and diesel, while tax evasion is colluding with the garage to make it appear as if you are buying LPG when you are actually buying petrol.
So, is tax avoidance immoral? Despite what I’ve said above, there is an argument, at least for individuals, that someone who is wealthy enough not to need to keep every penny they earn should not seek to minimise their tax liability unreasonably. In this sense, paying a “fair” share of tax is simply another form of philanthropy, something which many people would consider a moral obligation for those who can afford it. I’m not going to go too far into this debate, nor even take a clear position on it; I mention it here merely to point out that it is an entirely legitimate strand of thinking. It is reasonable to argue that Premiership footballers, for example, should pay more in tax; even if you disagree with that argument you can’t dismiss it as invalid.
However, for corporations, the answer to that question is a lot less ambiguous, and is answered by the law itself. Unlike individuals, who are pretty much free to do whatever they want with their wealth including giving it all away if they want to (even to the government!) as well as hoarding it or spending it, corporations which exist as shareholder owned organisations (eg, limited companies) have a statutory duty to maximise shareholder value. That doesn’t mean they have no freedom to manoeuvre at all, and it doesn’t rule out philanthropy entirely – not least because reputation itself is of value, and generosity is often self-rewarding. But it does mean that a corporation is legally obliged to structure its financial affairs so as to minimise unnecessary expenditure which brings no tangible benefit. And one of those unnecessary expenditures is tax which can be reasonably avoided.
If, therefore, Amazon, Google and Starbucks aren’t doing anything illegal, then they are simply doing no more than the law actually requires of them. What makes it more complex here is that all three of them are minimising UK tax by transferring liability to other countries where corporation tax rates are lower. As far as their European operations are concerned, Amazon has chosen to base itself in Luxembourg, Google in Ireland and Starbucks in the Netherlands. All three of those countries have lower corporation tax rates than the UK.
As an aside, it should also be noted here that these are all EU countries, and that’s precisely why they’ve been chosen. EU single market rules mean that we can’t treat a Luxembourg company any differently to a UK-based one. None of these three companies could get away with doing what they are doing if they had chosen not to set up an EU base at all, as they couldn’t transfer tax liability to the US in the same way. I’m not making an anti-EU point here either; if you want my views on the EU then you’ll need to look elsewhere. But this has to be borne in mind if you do want to criticise companies for transferring tax liability within the EU in this way: it’s an inevitable consequence of our EU membership and if you think that’s a bad thing then you are opposed to one of the fundamental tenets of the EU itself. I don’t find myself in an awkward situation here, but some of those complaining the most loudly about tax transference almost certainly would do, if they actually stopped to think about it for a moment.
Anyway, going back to my previous point, the main reason companies transfer tax liability out of the UK is because other countries have lower corporation tax rates. Now, as it happens, I do think this is a bit unfair. It’s unfair on smaller, UK-based companies that aren’t in a position to set up subsidiaries elsewhere in the EU. It’s unfair on shareholders and employees of UK-based companies who have less money available to them. It’s unfair on customers of UK-based businesses who have to pay prices which reflect higher taxation costs.
It is not, however, unfair on the UK government, which has, presumably, calculated that the amount of tax foregone by transference to other EU countries is less than the amount which would be foregone by reducing rates overall. And if it is not unfair on the UK government, then neither is it unfair on the recipients of the UK government’s expenditure, since the government is already doing its best to maximise revenues and the disparity in tax paid is precisely a result of that maximisation.
Having said that, I do think there is a case for reducing corporation tax in the UK. I’m not at all convinced that we are maximising revenues by keeping rates comparatively high; I think there’s a strong argument that reducing them would not only reduce outward transference but also encourage inward transference. If Amazon, Google and Starbucks – among others – were to base their EU operations in London, then the financial benefits to the UK could be quite significant.
The only rational outcome that can stem from the publicity given to Amazon, Starbucks and Google’s tax affairs, therefore, is a campaign for a reduction in UK corporation tax. Any argument that these companies are behaving “immorally” is fatally flawed; the law require them to minimise tax where possible, and the EU makes it impossible for any member state to outlaw minimisation by means of transference.
It would be nice to think that all those up in arms about the low values of corporation tax paid by Google, Amazon and Starbucks are aware of all this, but I suspect that most of it is beyond them. It certainly isn’t beyond the government, though, which is why it bothers me a bit that we have senior government ministers making statements about “corporate morality”. They are, surely, well aware that there’s nothing immoral at all about acting within the law and in accordance with the requirements of the law. Of course, the spin doctors may well be saying that it’s bad politics to be seen to be siding with rich multinationals, but, frankly, I think it’s worse politics to take a position in public that, in private, you know is unsustainable. And I think that the government is missing an opportunity here, too: the opportunity to say “We’re losing out on all this revenue because the previous government put taxes up too much, that’s why we need to do something about it and attract these companies into the UK instead of driving them away”.
Maybe it’s just the politics of coalition, and, to be fair, there are some things where I’m more in tune with our Liberal partners than with some in my own party. But when it comes to basic, simple fiscal responsibility it would be nice to have Conservative ministers giving a truthfully Conservative opinion rather than trying to pander to a sector of the electorate that is, in any case, already predisposed to disbelieve what they hear.
Either our corporation taxes are too high or they’re not. If they are, then they need to come down. If they’re not, then liability transference by multinationals is simply part of the price we pay for having the rate we want to have. Either of those positions is defensible. Blaming the corporations themselves for managing their finances carefully is not.
Actually, there may be some justification for criticising one of these companies. It turns out that the particular mechanism used by Starbucks, of paying themselves a royalty in order to use their own name and recipes, may actually be evasion – not avoidance – after all. There is case law to the effect that you can’t form a contract with yourself and that, therefore, creating an artificial distinction between one part of an organisation and another cannot affect the overall tax liability of the organisation. This may possibly be a large part of the reason why Starbucks is reportedly “negotiating” with HMRC about changes to their future tax payments, while the other companies mentioned are doing nothing of the sort. But this information comes along with reports that the extra tax will be paid for, effectively, by their staff. Now, what was it I said earlier about high corporation tax rates being unfair on employees?