Tax dodging? It's harder to do - and rarer - than you think So you'd like to know how to avoid tax. After all, everyone else seems to be doing it, so why end up as the Muggins who has to pay while everyone else mugs the Treasury? The simplest and most obvious method of not paying taxes is simply to avoid doing anything. If you're not taking part in economic activity then no one will be …
Generally a good overview - but the point about interest recipients being taxable, potentially leading to higher overall taxation is a touch disingenuous.
Interest income may be taxable but returns on equity typically aren't - and a loan note which converts to shares if not redeemed after a fixed period may well be a debt in the hands of the 'return payer', but equity in the hands of the 'return recipient'. So clever structuring can exploit the differentials in accounting treatment to reduce taxes (although scope for it is shrinking; the typical DCLNs which were so popular a few years back no longer work in the UK for example). Goodness only know how you'd handle the impact of that kind of thing on the group accounts underpinning the formulary apportionment beloved of unitary taxation advocates, but so far they haven't even explained how they'd make capital allowances work.
Rather than shrug their shoulders and go 'Its not out fault' when large corporations deliberately set-up their corporate structure to void paying tax, it would make a change for them to show balls and say, yes, we dont want to pay tax, so we go out of our way to set up our business with the prime aim of avoiding tax.
There is no other reason for their Corporate structures - they are inefficient, complex, and just there so as to not pay tax.
Tax dodging is hard for 'the little people' Its a piece of cake for the rich. And whilst it may be rare its undertaken by the very very rich so the sums involved are not 'rare'. Tax dodging means society misses out or 'the little people' have to pay more to make up.
'Rather than shrug their shoulders and go 'Its not out fault' when large corporations deliberately set-up their corporate structure to void paying tax, it would make a change for them to show balls and say, yes, we dont want to pay tax, so we go out of our way to set up our business with the prime aim of avoiding tax.'
Deliberately giving yourself bad PR - when there are hordes of sanctimonious tubthumpers out there who will pounce? Not likely.
Companies have a fiduciary duty to endeavour to maximise return to shareholders, so it makes sense for them to spend some effort on minimising (legally) their tax liabilities. In this case company law and the aspirations of government to maximise tax revenue are in conflict.
As Eric Schmidt said, if legislators don't like the current legal tax arrangements it's within their remit to change the law. And to do that rather than posturing and grandstanding in parliamentary committees.
Exactly. There's no point in them admitting that they take pains to minimise the tax they pay because they are already required *by law* to do exactly that for the benefit of shareholders (for all publicly traded companies).
It's just a no-op, no different from admitting the vile crime of attempting to maximise their profits (or market share, or whatever the strategic goal of the moment is).
I recommend "The State We're In" by Will Hutton for analysis of why UK companies are in an unusually difficult situation wrt attracting investment, BTW: it's because the banks are legally obliged to maximise profit, rather than "helping local businesses".
Government wishes and company law are indeed in contradiction here, unfortunately.
"Exactly. There's no point in them admitting that they take pains to minimise the tax they pay because they are already required *by law* to do exactly that for the benefit of shareholders (for all publicly traded companies)."
No, that's wrong. They are required to work in the best interests of the shareholders, not to maximise profit. This is a common misconception.
Fiduciary duty means the executives of a company must work in the best interests of the shareholders... that does not mean they have to use all possible methods to maximise profits.
For example:
Step 1) A telephone company changes the contracts for it's customers making the company vastly more money for than expected for a few years as the customers are trapped.
Step 2) As the various customer contracts end, the customers leave and swear to never touch that company again.
The executives have maximised the profit of a company for several years, but they haven't worked in the best interests of the shareholders because by maximising profit for a year or two they destroy the profit of the company futher down the line.
This post has been deleted by its author
The wonderful thing about theoretical suggestions is that they never need to be tested.
Quote
For example:
Step 1) A telephone company changes the contracts for it's customers making the company vastly more money for than expected for a few years as the customers are trapped.
Step 2) As the various customer contracts end, the customers leave and swear to never touch that company again.
End quote
However, in several current cases that is almost exactly what has been going on for some classes of user. Per second charging has been replaced by per minute charging. Just do not talk about fixed price contracts with escalator clauses. Quite how they get away with that level of chicanery I will never know.
Some years ago I worked on charging models, some of them quite dynamic, i.e. capable of responding to market changes or advanced time of day charging..
It was pretty easy to show that even apparently minor and customer benefiting changes could generate much more revenue. The matter is a bit too complex to explore in detail here but basically, change the charge steps so that customers always end up finishing their average call just into the next charge step. Make the charge step fairly big and you can reduce the equivalent per minute or per second charge by an attractive amount. For example go from per second to per minute, a huge change, or from e.g. per ten seconds to say a per 90 second steps and call it the 'Super Saver Bulk Rate.'
Perhaps the Night owl rate, charged in 5 minute steps, etc. It generates a small amount of traffic at a time when things are idle so the marginal cost is close to zero.
Watch the data package charges, work out how much data people use, compared with how much they think they use. Set the rates to either overflow the customer into the next band and thus pay a huge top up, or blackmail them into signing up for an over rate package to avoid bill shock and pay for data they will never use. (Admission, I cancelled all data allowances and use a data incapable phone preferring minutes plus texts on a very cheap package. For me, data is for wired connections.)
None of this relates to tax payments which are a business cost, minimising business costs is highly likely to be a prime target for many, if not all activist shareholders.
With deposit rates so awful, income generating shares need to generate a good income or they become pointless. My pension fund needs income, so I can pay the tax person their growing take.
> Step 1) A telephone company changes the contracts for it's customers making the company vastly more
> money for than expected for a few years as the customers are trapped.
> Step 2) As the various customer contracts end, the customers leave and swear to never touch that company
> again.
Actually I suspect this is exactly what is happening in a lot of the larger IT companies which manage to push profits ever higher during an economic downturn. e.g. Office365. Lots of people are happy to sign up to more expensive deals because they know they have no time to search for alternatives. I suspect that down the road, things will start to get ugly.
The other thing is that bonuses are paid in the short term. So piling up profit in a tax haven may not be an effective long-term strategy, but it does allow the finances to look good, which benefits the executives who get large bonuses. Yes, it isn't rational from a shareholder perspective, but it people are often short-sighted and the canny executive can take advantage of that for their own benefit.
" So piling up profit in a tax haven may not be an effective long-term strategy, but it does allow the finances to look good, which benefits the executives who get large bonuses. "
Not just bonuses, dividends too.
So you've recently had the (amusing? disgraceful?) spectacle of Apple in the USA borrowing money so the allegedly profitable company can pay a dividend.
Much of the alleged worldwide profits can't be brought back into the USA without paying some tax on them, and Apple would prefer not to do that.
Still, it's better than working for a living and paying tax on it like most of us in the real world have to.
Not picking on Apple, they're just the one that's been in the news lately.
Company directors are under no legal obligation to maximise returns for shareholders. Not here, no in Delaware not in Australia. There is case law to go along with the actual written law as well. The Delaware case law is about not using a tax avoidance scheme.
People need to stop repeating this lie because it makes you look like an idiot.
"As Eric Schmidt said, if legislators don't like the current legal tax arrangements it's within their remit to change the law."
Perfectly true. The only thing is that Eric Schmidt and co pay many millions in lobbying to make sure that the elected legislators will not change the law, or else will only change it after careful *consultation* with their *advisers*. They also spend many millions in campaign funding to make sure that any elected legislators who are serious about changing the tax laws are not elected next time round, and replaced with more suitable legislators
"The only thing is that Eric Schmidt and co pay many millions in lobbying to make sure that the elected legislators will not change the law"
Yes, but politicians *should* have no "Fiduciary duty" to these lobbyists. A politician's duty *should* be to their constituents, the vast majority of them not being part of any particular lobby. Unfortunately too many of us are distracted by shiny advertisements when it comes time to vote. Should we blame the billions dumped into campaign contributions, or our own complacency?
Yeah, but Eric Schmidt said that knowing that it takes a long time to agree changes to international law, especially something as complex as international tax law. On a local level things get changed, holes plugged, but the tax "optimisation" firms have a queue of other loopholes lined up to use once the ones they're currently using are plugged.
There is a fine issue in all of this relating to companies. In general the employees have employment contracts which in many cases require the staff to follow the law. They are also employed to act in the best interests of the company while still within the law.
In some very litigious domains shareholders would sue if the managers/directors financial controllers/whatever failed to maximise the return for the shareholders by not taking full advantage of the legal opportunities to contain costs.
I will be quite open about tax avoidance, I have not invested some money as the return I would obtain is so tiny and the tax complications would be onerous. The net effect would be to earn so little that the additional work on tax affairs would in effect earn me less than a quarter of the minimum wage. Now such underpayment is illegal.
A special class of import duty...
You pay a lot of money to your overseas mega corp non-UK/EU parent corp? Well now that's a special class of import and you sure do done gots to (I believe that's how they talk abroad) pony up 30% of it.
At least that would keep the cash in the Eurozone, say - you can't really try that on between Luxembourg and Spain, obviously, that'd would be counter productive. If protectionism's good enough for the USA it's defo good enough for Europe, too. We used to be exceptionally good at it, too, not so long ago, albeit it on a more national scale than a continental one.
I am not an economist. Or even an accountant. I do dream up crazy ideas though.
"I moved abroad - no more tax for me. I literally can't pay it where I live now even if I wanted to."
Almost the same here. Left Europe permanently and will not return until the EU is dead and done with. Used to have a Limited in the UK and another company in another Euro country. Taxation madness in both cases. Over here? Flat tax the price of a dozen pizzas a year. No booking and accounting required, no tax audits, no indirect pressure to force you to use tax lawyers to avoid all the pitfalls of just filing your darn tax statement(s).
Think about how many mouths the average EU company has to feed just to be able to file their taxes in a way that it doesn't backfire on them. That's even before tax optimization or evasion and just to get all the ducks lined up *just* to file a correct tax declaration. It's a whole bloody industry at work there, which produces nothing but costs everyone's dime. The average tax laws in most European countries are way too complicated due to the many exceptions for special interest groups or out of protectionism for this or that niche group. It's a system that cannot be fixed with more amendments and more adjustments. It needs to get axed and has to be rewritten from scratch.
Make it as simple as unavoidable to pay our dues. Both for average blue-collar Joe, the Mom-and-Pop Coffee Shop and the global market dominator.
For companies based within a country; fair enough, they should pay their taxes in that country.
For foreign companies, dealing via national intermediaries; what makes a government think it is even entitled to tax the profits of companies other than those based in the taxing country?
Apple Stores (UK) pay tax on their (small) profits, buyers pay VAT on their purchases. How does the government also have a claim to tax Apple (overseas) for their profit made in selling to Apple Stores?
Of course we see less tax revenue than we would see if Apple were a British company. If we want to tax Apple's profit we need to encourage them into the UK and be a British company. We cannot because we do not have a competitive corporate tax rate.
The problem is that we don't get what we could get because we haven't created a situation in which we can get it. That's not Apple's problem, that's our problem. None the less we and our government demand we should get a slice of Apple's profit.
Bottom line is the British government wants to have its cake and eat it too. Rather ironic when this government bangs on and on about the wrongs of 'entitlement culture'.
What we need are global tax reforms which are more effective than the blunt instrument of corporation tax which we are hoping to apply to foreign companies outside our jurisdiction. We need a system which can tax money flow which generates those profits.
Except that, if everyone was being honest, Apple Stores (UK) would be making a far larger profit. For example Apple UK 'buy' a laptop from Apple Ireland for £999 and then sell it for £1000. Profit=£1. Apple Ireland buy the laptop from a Chinese factory for £500 and sell it to Apple UK for £999. Profit=£499. What's to stop Apple UK buying the laptop direct from China? Arguably this would be far more efficient due to the decrease in paperwork. The only reason not to is to lower the total tax liability. Where was Apple's total profit of £500 really 'earnt'? Most people would say in the UK.
I fully agree though that Apple are not doing anything wrong. It's up to the UK and other governments to update their own tax laws.
Ah yes, but think of it from Apple's point of view.
If you're a Megacorp who orders laptops in by the million, it makes a lot of sense to buy them all as one company- you have one account to administer, your delivery addresses can be changed to reflect market conditions (so if they sell well in Lisbon but not in London, part of London's allotment could be shipped to Lisbon instead), and you have more bargaining power as a single million-unit customer rather than 1,000 thousand unit entities arranged around the world.
Plus with a single purchasing company you only have one pair of international contract laws to abide by with regards to your supply (i.e. you just need US/Chinese lawyers for supply rather than US/Chinese, UK/Chinese, Europe/Chinese, Japanese/Chinese, etc).
So it DOES make good business sense even if you're not trying to save tax.
"I fully agree though that Apple are not doing anything wrong. "
Your own example shows that they are doing something wrong. The sale of the laptop from Apple Ireland to Apple UK is a fake sale solely for the purposes of avoiding tax - there is actually a specific law against that. Run it past a jury and see how far you get; everyone knows exactly what's going on but the government is scared of upsetting rich shareholders. So they pretend to have someone looking at whether these sales are fraudulent or not and keep kicking it into the long grass in the hope that everyone will forget about it.
The sale of the laptop from Apple Ireland to Apple UK is a fake sale solely for the purposes of avoiding tax - there is actually a specific law against that.
I would guess Apple's stance would be "prove it", and if we could no one would be debating the issue, we wouldd have had it solved. Even if Apple are playing the game, they are playing on the right side of existing law.
What if I am happy to buy product from Apple Ireland at £499 and sell at £500? There may not be much profit in it for me but it might be enough profit to make it a viable business. How's that not legitimate business?
How is it then not a legitimate business when scaled up to Apple Ireland selling to Apple UK?
We probably feel it isn't because it is "Apple" on both sides of the fence, though it is two different Apples in the eyes of the law and in tax terms.
Corporation tax is generated on profit, in the country where the profit is ultimately received. We however want a slice of that. The only fair and moral way to get that slice seems to me is if we tax that profit as it flows out from the country it arises from.
But what is the source of that £499 profit? If it costs them £500 to make and sells for £999 that is indeed an extra £499 that Apple makes. But there are a lot of other costs they have to pay, like R&D, keeping the lights on and floors clean at Apple HQ, and so on. If all that profit was booked as being made in the UK it would be just as unfair as booking only a £1 profit.
In reality, the reason why Apple is able to sell things for significantly more than the production cost, unlike many of their competitors, is because of additional value created in the US. Whether you believe Apple's products really are better because their R&D team takes the time to get the user experience right, or whether you believe their marketers have a lot of people brainwashed, those R&D and marketing guys are in the US - that's where the additional value is created that allows them to charge £499 more than the production cost, versus the £49 some of their competitors are limited to.
So I'd argue the profit applicable to the UK is much closer to the £1 figure than your £499 figure. And indeed, that is how Apple's corporate tax structure has things set up - almost all their profit accrues to the US. Much of it is 'delayed', because according to US law their overseas profits aren't taxed until they're brought back into the US. But it will eventually be taxed here, they're just sitting on it hoping for lower rates in the future than the current 35%. That may make them look bad in the US, but that's exactly what hundreds of other US companies are doing and is in keeping with their responsibility to do what is best for their shareholders - it is better to sit on the money now and hope for another corporate tax holiday like was very stupidly done in 2004 (or whenever it was) which has made all US companies with significant overseas profits figure if it happened once it is worth hoping (and lobbying) for again.
The thing is, how much do they sell it to PC World for? They aren't going to sell it for a £1 margin. The shelf space, and the cost of employing a PFY to sell copies of Norton Antivirus along with it cost a lot more than that. Once you have that, you have a fair wholesale price for the laptops entering the UK market, and HMRC would expect Apple UK to pay the same price.
When Dell, for instance, sells a computer to PC World (I assume that's the UK equivalent of our Best Buy?) then PC World picks up the cost of the shelf space and PFY. In Apple's case they pay for the shelf space and PFY - which at least for shelf space cost Apple far more given that Apple stores are typically located in some of the most expensive real estate around. Presumably they pay their PFYs more, as even though they aren't really "geniuses" they at least know which end of a power cord goes in the wall, something that the typical Best Buy employee would have trouble with and I'm guessing the same is true with your PC World guys.
So using the difference between the wholesale price that PC World buys a computer for, and what it sells a computer for probably isn't the correct metric, though if it was used it would benefit Apple - they'd probably be able to show a net loss in the UK!
Yes, PC World, or at any rate Currys which is owned by the same company as PC World is the UK equivalent of Best Buy. Best Buy own Carphone Warehouse in the UK which also sells Apple products (iPhones, iPads and some laptops and accessories), so you can use them as an example as well.
The cruical point here is that there are two different Apple companies involved. A wholesaler based in Ireland, and a retailer based in the UK.
Apple want to set the wholesale price between the Irish and UK companies as high as possible, so that more profit is made in Ireland where the tax rate is lower. When selling to PC World or Carphone Warehouse, they obviously want to make it as high as possible so that they make the profit rather than another company, but if they set it too high, then they will sell kit from other manufacturers instead, so the negotiations will lead to a fair market price. That is the market price that HMRC will expect Apple Ireland to use when selling stuff to their own Apple UK retailer.
The UK retailer is responsible for paying for the shelf space and PFYs in just the same way that PC World and Carphone Warehouse are responsible for paying for their shelf space and PFYs. Apple has "Geniuses", Carphone Warehouse has a "Geek Squad" and PC World has "Tech Guys". Yes, I agree that the Apple employees do know more about their products than PC World or Carphone Warehouse employees.
If Apple decides to spend more money on better trained staff and fancier shelves in a nicer location than PC World, then that's up to them, I don't see why that would justify a discount from the wholesaler. What does justify more money from Apple is that you can take your PC World bought MacBook to the Genius Bar at an Apple Store, and they will fix it under the terms of Apple's manufacturer's warranty. PC World only fix their own stuff under the terms of their Coverplan warranty, which they charge extra for, and I don't recommend anyone takes it out.
The simplest thing to do would be to insist that companies end internal favouritism if they want to take advantage of some of these.
So Apple (China) has to charge anyone else who wants to buy a thousand iThings the same amount it charges Apple (Ireland) before Apple (Universe) can claim the tax benefits of doing it that way.
Not quite.
"Oh. hang on. A stack of their money is moved out of the US just for that reason."
Apple pays full US corp tax on sales that happen inside the US. They do not shift profits out of the US.
However, they do not move their foreign profits into the US and so their foreign profits do not pay US tax.
A slightly diferent situation to the one you're assuming.
Most of these large global entities are responsible to shareholders, no matter where those shareholders are based.
So rather than reported profits in $region, why does the government not simply require that companies report:
a) share value
b) dividend value
c) presence - percentage of business done in $region (based on property/employees/sales)
and come to a percentage of tax required based on that - not unlike the inexact IR35 requirements for individuals.
Rather than a dividend tax, this would be a tax based on projected value of the company as a whole calculated from shares, dividends and presence. The bonus being that
a) companies have a disincentive to try and hide or reduce shares and dividends and for fear of punishment by the shareholders.
b) companies can use clever accounting, but they can't hide the the physical number of employees, premises and sakes that they have in a region.
Anyone see any holes in this idea?
It's a good stab, and I think you've badly injured the concepts...
But seriously: - what you're proposing is a hybrid wealth/income tax. Immediate reactions:
- How do you value private/non-traded shares?
- How do you 'value' dividends (paid or declared? Before or after WHT/imputation impacts?)
- The 'presence' section looks like, and would face the same issues as, 'conventional' formulary apportionment
- Targeting shares/divis is a good way to go for non-distortionary revenue raising (google 'taxing the maximand') but denies you the behavioural regulatory function of tax, ie R&D tax breaks etc. Policy makers do seem rather wedded to that side of things, at least in common law jurisdictions.
Overall - I'm not sure it's feasible starting from where we are as a *replacement* for existing CT, but it would be an interesting complement to it, perhaps phasing in more and more as it beds in and improves in operation?
In fact, 100% tax could be workable. It's called "communism" and is to be specifically and clearly differentiated from "Stalinism". Like most utopian notions (like capitalism) it only works on a small scale and only if the people involved are actually good at what they do.
Meanwhile, back in the real world the govt should tax turnover at a low rate and forget the reams of tax-dodging wriggling over what "profit" means. Either that, or it should allow me to be taxed only on what I have left at the end of the year, not what I received.
Read Dickens on profit - "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." Bring that back in spades for the business making a loss if you tax all income/turnover at a fixed percentage, instead of acknowledging that they don't even have enough cash to pay their own employees, let alone other peoples.
Not even gonna go there on the arguments about sector specific rates based on average profit margins; VATs used in the flat rate scheme (nearest current proxy) range from 4% to 14.5% [see http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5 ] Administering that sort of thing as the sole form of business taxation in a way that doesn't drive small business to the wall (no economies of scale) and encourage all big business into high margin sectors would be just as complex as the current system, with all the joys of the transition into the bargain.
"Bring that back in spades for the business making a loss if you tax all income/turnover at a fixed percentage"
So what? I don't see the argument for the taxpayer supporting loss-making private businesses, which is what happens now. Why should losing money this year mean that you get to lower your tax next year, for example? I don't get to do that so why should Google or News International, or even the corner shop?
There is no moral or rational basis to tax individuals on income but not companies.
But there's zero moral basis to tax companies at all, they gain no benefit, and as Tim points out, they don't really bear the tax anyway. I'll repeat that, companies don't benefit, their shareholders, employees, and customers, do.
The real value a society gets from a company is the value of the goods and/or services it provides in a competitive market that people willingly purchase. Is the real value of Google for example, the tax it pays (or doesn't, as the case may be), or the use of Google on the web, for as near as free as you can tell (putting up with adverts you can ignore) ? Would you rather pay for the searching so they can pay more tax ? Like hell you would.
It seems to me that there are two reasons companies are taxed, one is that even if you recognize the tax incidence falls on shareholders, workers, customers etc, it is convenient and simple to tax companies (the "honest" approach). The other is that it appears that the great majority of people don't recognize that it is really them paying those company taxes and that it is a major con by governments along the lines that "someone else is paying", not you, so we can look so munificent and generous, so vote for us now (the dishonest approach).
"But there's zero moral basis to tax companies at all, they gain no benefit, "
Oh, right. I didn't realize that companies build all their own roads and only employ people from the own private schools.
Wise up, son.
"Would you rather pay for the searching so they can pay more tax ? Like hell you would."
If Google can't stay in business doing what they're doing while paying their tax then let them go to the wall. Sod 'em.
This post has been deleted by its author
Its great to see an alternative view point being published but there is a thin line between being contrarian and being misleading. To take the easiest example lets look at the end of the article and the reference to the £4 billion windfall expected from the Swiss banks.
The windfall was expected to come from a one off 21% to 40% levy on assets on accounts that were open between 2011 and May 2013, in return for which the depositors' slate with HMRC would be wiped clean. Those depositors were warned of the changes in advance of the law being implemented, so had the option of moving their assets, or of changing the ownership structure, to avoid the new legislation.
Furthermore the Swiss rejected the principle of automatic exchange of information, so it is still down to HRMC to go knocking at the Swiss regulators door if they suspect that something has gone awry. A further restriction is that HMRC are only allowed to make 500 information requests per year.
We should not be too surprised that the £4 Billion estimate was an eye catching headline rather than a feasible return. To suggest that the low return is proof that tax evasion via Switzerland was over-estimated is a huge stretch. For a start any evasion predating 1st January 2011 was not covered and remains protected by Swiss banking secrecy.
A decent factsheet on the agreement can be found at http://www.out-law.com/en/topics/tax/tax-litigation--disputes-/the-ukswiss-agreement-over-taxation-of-undeclared-swiss-bank-accounts/
He did indeed, Tim - to no great effect as you point out. But just before this (around 2000, but I can't be bothered to look it up) the Treasury had the wizard wheeze that entrepreneurs needed help to establish start-ups. They therefore allowed the first £10,000 of profits for 'small' companies to be free of Corporation Tax. The result (who could possibly have guessed?) was that every window cleaner etc. incorporated themselves in order to increase their tax free allowance. A couple of years later the allowance was quietly withdrawn.
Or their other genius wheeze of giving you money when you filed online. 250 quid or something like that. Heard of an accountant who registered a couple of thousand businesses, did some trade between them (nothing illegal, no carousel fraud) and filed their paper work online.
Generally I agree with the sentiment of this article. What's worth remembering is that the majority of tax laws doesn't exist to make anyone actually PAY taxes, they are written to help people avoid paying taxes.
Since most of the laws are written (or rewritten) by politicians it's no wonder that the corporate entities run rings around them. If you can't "do" then teach, and if you can't teach ... then become a politician.
The Register 
Biting the hand that feeds IT
Copyright. All rights reserved © 1998–2024
