Evasion, Avoidance, or Compliance?

Last month the UK based International Banker magazine asked me to write an op-ed on base erosion and profit shifting. It came out late last week.

Companies do tend to structure their affairs in such a manner as to minimise the amount of tax that they pay. This perfectly legal strategy has led UK Prime Minister David Cameron to argue that he was opposed to “aggressive” tax avoidance, and he favoured “tax transparency”. The problem with Cameron’s position is that it isn’t clear that any of the companies usually singled out as engaging in “aggressive tax avoidance” are being non-transparent. The famed “Double Irish Dutch Sandwich” tax strategy does not rely on bank secrecy to operate. Capital mobility, national investment incentives and the existing international tax architecture all contribute to what is now labelled “profit shifting”.

A telling fact is that those nations that do have general anti-avoidance or anti-abuse provisions in their tax law seldom use those provisions against large multinationals or, as happened recently in Australia, lose in the courts. While claiming that aggressive tax avoidance occurs, governments don’t take action under existing laws to curb that behaviour. Although that could change, it is yet another sign that the corporate-tax system raises as much revenue as it is designed to raise.

What is really happening is that governments don’t like competition. In particular, they don’t like the competition that manifests itself within their own international tax cartel. The fact is that companies around the world are subject to the laws that governments have written themselves. Governments have also voluntarily entered into tax agreements with other nations that bind international transactions and multinational corporations. In establishing an international tax cartel, governments have both written the rules and divided up the global income-tax share amongst themselves. As economists have long known, cartels are as unstable as participants have incentives to cheat. Some members may lower their prices to gain market share.

So it is with taxation. Some governments have lowered their tax rates to gain economic activity. The UK, for example, is itself lowering corporate-tax rates in order to attract multinational corporations. In responding to those incentives, many law-abiding tax-paying citizens and companies get to be labelled “tax cheats”. As if being fully compliant with the law of the land were somehow immoral.

Please click through and read the whole thing.

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3 Responses to Evasion, Avoidance, or Compliance?

  1. alexis

    While claiming that aggressive tax avoidance occurs, governments don’t take action under existing laws to curb that behaviour.

    this is what pisses me off.
    If I did anything like the ‘Dutch sandwich’ the general anti-avoidance provisions would be activated and I would be pursued mercilessly, until I am bankrupt and beyond.

  2. Elizabeth (Lizzie) B.

    Such complex international taxation arrangements of course support a very large secondary industry of taxation lawyers and accountants, and those who educate and train them up through the ranks, to ensure that no line is overstepped. You can’t blame companies for wanting to get the best deal available and paying those who can point the way to it. A freer taxation market would help to loosen these chains.

  3. .

    ‘where profits are genuinely made”

    This statement alone shows a total lack of undertanding of multinational enterprise.

    They have cost centres which lower costs below smaller firm’s cost curves.

    They have profit centres because of market size, income etc.

    They have HQ which initially dream up ideas and plant capital but later on affiliates do this. It is the proprietary knowledge which earns the firm a profit or return on capital, ultimately.

    Taxing the HQ is perhaps the most honest way to tax.

    If you don’t like it, then lower your tax rate.

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