Why it’s right to protest about individual company’s tax

December 8th, 2010

It’s been argued – even to their shame by Labour politicians – that it’s inappropriate to target individual companies when protesting about tax avoidance. That’s wrong, for three reasons.

The Duke of Westminster with his lover, Coco Chanel.

First, the decision to tax avoid or not is that of the individual company. No one asks them to. Despite the claims made by some company directors and some apologists for this abuse, company directors are under no obligation to minimise their tax bills. Indeed, if doing so increases the risk within their companies it’s quite easy to argue that they’re acting against the best interests of their shareholders when doing so. In that case the main reason why many companies do it is to increase short term earnings that trigger director’s bonuses – and that has to be wrong for everyone throughout our economy except the already overpaid directors.

Second, it’s not necessary to tax avoid. It’s quite clear that some companies don’t and get along well all the same. They seek to be tax compliant, which means that they seek to pay the tax that the law intended they should pay in each place that they operate, and no more. We can’t argue with that. No one has to voluntarily pay more tax than the law expects.

Third, it is certainly true that government is responsible in a very real sense for tax avoidance; after all, it is government that creates the laws that are avoided. However, no government invites people to abuse the law, and secondly, far too much of that law (including the loopholes in it) now exists as a result of the lobbying and advice of business itself. For some people to suggest that there is, somehow, some clear and absolute divide between the government and the rest of society when it comes to tax law is just wrong.

The reality is that big business and those with wealth and the people who act for them have enormous impact on the way in which tax law has developed. This happens in three ways. First, they fight the laws we have through the courts to undermine them. The classic example was the 1936 case involving the Duke of Westminster – who paid his gardeners using a wholly artificial device called a deed of covenant to save himself tax. As a result he won a concession from the House of Lords that said that:

Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

This has been the tax avoiders excuse for their abuse ever since.

Second these companies, and most especially the tax profession, lobby for taxes that suit those with high incomes and in the process invariably ignore the burden they place on ordinary members of society. Two examples will suffice. The Association of Chartered Certified Accountants has argued for flat taxes in the UK. These would remove all higher rates of tax, which would massively advantage those who no pay them. Many tax institutes argue for similar ‘simplifications’ that seem to have the same net effect. PricewaterhouseCoopers, the biggest firm of accountants in the world, has regularly argued for the replacement of higher rates of tax on income and profits by Value Added Taxes. When doing so they usually fail to note that this move would be regressive – shifting the tax burden from those most able to pay to those least able to pay as a result.

Third, big business and the tax profession set up the mechanisms for tax abuse. So, for example, the Big 4 firms of accountants that dominate the profession world wide – PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young – are present in all the world’s major tax havens. That’s not chance: their presence underpins the credibility of these locations and lets big companies use them for tax avoidance. If they weren’t there then those companies couldn’t have their tax haven subsidiaries audited. But the relationship is stronger than that: in many cases the Big 4 proactively support the creation of tax havens as PricewaterhouseCoopers are doing in Jamaica, or support their abolition of taxes on business, as PWC (again) did in Jersey in 2004.

So, most certainly government has a very clear role to play in tackling tax abuse. But don’t for one minute think that because tax avoidance is legal it isn’t firstly a crime against society and secondly that large companies and their advisers aren’t guilty of it, because it is, and they are.

Written by Richard Murphy

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