One of the recurring themes in social sciences is the “capture” of the state by economic elites. This enables them to advance their economic interests, shape public policies and choices. This is nowhere more relevant than in debates about tax avoidance, a key item on the agenda for next week’s meeting of G8 nations in Ireland.
The summit will no doubt conclude with the customary photo opportunities, smiles, handshakes and self-congratulatory statements, but one thing it won’t discuss is the colonisation of the state by economic elites, a key reason for the continuing failure to tackle organised tax avoidance.
In recent months, multinational corporations, such as Google, Apple, Microsoft, eBay, Apple, Vodafone, HSBC and Amazon have been hitting the headlines for their tax avoidance and other anti-social practices. The Big Four accountancy firms - PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG - have been grilled by the UK parliamentary committees for devising and marketing tax avoidance schemes, many of which have been declared to be illegal by the courts. Yet the same economic interests play a key role in devising and enforcing UK tax laws. Here are a couple of examples.
The Patent Box
A new piece of tax legislation known as the Patent Box has come into operation with effect from 1 April 2013. This is an attempt to reduce the effective rate of corporation tax by creating special tax regimes, which are not so easily visible.
The key idea of the Patent Box is to tax corporate profits derived from patents and certain other intellectual property at the rate of 10% rather than the headline rate of 23% (reduced to 22% from 1 April 2014). Companies don’t have to legally own a patent and many are indeed now leasing them. The beneficial ownership can be held in a tax haven. This concession could reduce corporate tax bills by about a billion pounds year.
No doubt, in due course we will hear of the games in creative patents and novel ways of assigning income to them to reduce corporate tax bills. The legislation was drafted by a working party consisting entirely of representatives of major corporations, including GlaxoSmithKline, Rolls-Royce and Shell. The working party crafting this massive tax concession had no representation from trade unions, investigative journalists, tax justice campaigners or critics.
Controlled foreign companies legislation
The controlled foreign companies (CFC) rules represent another piece of legislation crafted by corporate interests. The legislation applies to companies controlled from the UK but resident in an overseas territory. The details are complex but in essence they mean that if, for example, a group treasury is located within the UK and receives income from overseas subsidiaries then it would be taxed at a rate of 5.25% rather than the full corporation tax rate.
The working parties crafting the legislation had representatives from Diageo, Tesco, Vodafone, Shell, Rio Tinto, GlaxoSmithKline, Kraft, Cable and Wireless, HSBC, Prudential and Avia, just to mention a few. All have a vital economic interest in securing compliant tax laws. There was no representation from any civil society organisation, trade unions or critics.
The combined effect of the CFC and the Patent Box legislation could reduce corporate tax bills by about £5 billion a year, at a time when ordinary people are facing massive hardships.
The UK government was advised on the development of these two items of legislation by KPMG, an organisation which paid $456 million fine in the US for criminal wrongdoing. The House of Commons Public Accounts Committee noted
KPMG seconded staff to advise government on tax legislation, including the development of the “Controlled Foreign Company” and “Patent Box” rules. It then produced marketing brochures relating to both sets of rules highlighting the role its staff had in advising government. The brochure “Patent Box: what’s in it for you”, suggests that the legislation is a business opportunity to reduce UK tax and that KPMG can help clients in the ‘preparation of defendable expense allocation.
General Anti-Abuse Rule
What about curbing tax avoidance? From 1st July 2013, a General Anti-Abuse Rule (GAAR) will come into effect. The principle behind GAAR should be to discourage organised tax avoidance by focusing on the economic substance rather than just the legal form of a transaction. This way, it can be argued that many of the transactions are a sham, because they have no economic substance and are merely internal book-keeping entries designed to avoid taxes and should thus be ignored.
However, the UK legislation is not like that. Lord MacGregor, Chairman of the House of Lords Economic Affairs Sub-Committee on the Finance Bill, said that
There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the Government need to explain that to the public. GAAR is narrowly defined and will only impact on the most abusive of tax avoidance.
The UK GAAR requires Her Majesty’s Revenue and Customs (HMRC) to apply a “double reasonableness” test. This requires HMRC to show that the tax avoidance schemes - the Treasury prefers to call them tax arrangements - under scrutiny “cannot reasonably be regarded as a reasonable course of action”. The net effect of the linguistic turn is that an avoidance scheme will be treated as abusive only if it would not be reasonable to hold such a view.
Under the UK law, whether something is abusive is not necessarily a matter of economic fact, or connected with erosion of tax base, or that fact that some portion of someone’s income and profits has escaped tax. The test is whether what has happened is reasonable. If some dubious practice is well established then it may well be considered to be reasonable.
Who will decide whether the state of affairs is reasonable? The procedure is that HMRC will have to put its request to a panel of so-called independent experts who will give their opinion as to whether the arrangements in question constitute a reasonable course of action.
The advisory panel is most likely to consist of directors of companies and accountancy firms, as they are assumed to have the technical expertise. Thus the tax avoidance industry and companies implicated in tax avoidance will be in a position to shackle HMRC. If they permit HMRC to bring a case against someone then in due course the same benchmarks can apply to them and their businesses too. If the matters somehow reach a court, then it will also be shackled because the law requires that it must take into account the opinion of the GAAR Advisory Panel given to the HMRC.
A recent advertisement invites unpaid individuals to sit on the GAAR panel. Inevitably they will come from corporations who can continue to pay them whilst on secondment to HMRC.
No fight against tax avoidance is ever going to be effective until there is some distance between big business and the tax authorities, but in common with many others the UK state is too close to corporate interests.
Curbing corporate power and realigning political institutions to the needs and concerns of ordinary people should be on the agenda of G8. But, regrettably, it will not be discussed, and tax avoidance is likely to remain rampant.