There are only two sure things in life: death and taxes.
- Mark Twain (1835 - 1910
Smart bloke, Mark Twain. Very wise. And a great writer.
He said that over a hundred years ago, and taxes are as much a part of life as they ever were. As universally disliked, and as universally contentious. The only difference is that nowadays, there is more crap spoken on the subject than ever before.
Not a day goes by without another story appearing in the news about another tax evasion scandal. Parliamentary committees in the UK and the US both roundly condemn massive companies like Apple, Google and Microsoft for setting up accounting and management structures to reduce their corporate tax liability. The world's best footballer, Lionel Messi and his father, are accused by the Spanish government of setting up an offshore company to avoid paying tax on the twenty-one million euros worth of income from sales of his image rights. Inevitably, fingers are pointed in the direction of bankers too - Stephen Hester, the CEO of publicly owned RBS NatWest resigns (possibly pushed) and receives a pay-off in excess of a million quid in salary, bonuses and stock options - much of it tax free. Led by Obama, Cameron and Merkel (the Three Stooges) the G8 this week debates moves to outlaw tax havens like Jersey, the Isle of Man, the Caymans and others (I wonder if the State of Delaware, population 900,000 but with over a million companies registered, courtesy of exceptionally low corporation tax, will also be included on the hit list? There is a single building there that is the registered address of - you'll love this - 280,000 companies!).
But here's the thing: in not one of those cases has anybody acted illegally. So why the witch hunt?
First of all, no-one has so far been able to agree on definitions of tax evasion, tax avoidance and tax efficiency - all of which it seems to me are different things but lie at the crux of the matter.
Here's my take on it: a personal definition that may well be different from yours or anyone else's. Tax avoidance means you are deliberately trying not to pay tax - for instance, you are working for cash-in-hand payment, not issuing any invoices for the work, and not declaring your earnings in your annual return. Clearly illegal and immoral, although not at all uncommon: many tradesmen I have come across over the years, in the UK and elsewhere, do it as a matter of course, be they plumbers, electricians, printers or whatever. In some respects, tax evasion amounts to the same thing - you're trying not to pay tax. However, this seems to me more a case where you are a salaried employee who also receives expenses, and you falsify your tax returns (and almost certainly the amounts claimed as expenses) to misrepresent your earnings and thus reduce your tax burden. Again, clearly illegal and immoral, and again very common.....I can think of a number of cases where, for instance, British MPs have charged consultancy fees and not declared them, or issued invoices in the name of their wife or pet dog. Both of them, then, are fair game for criticism and pursuit by the appropriate authorities.
But tax efficiency is something else entirely, and this is where the waters get muddied. Tax efficiency, in my book, means that you are quite prepared to pay tax according to the law of the land, but use perfectly legal means to reduce the amount you pay. I see no immorality in this at all. For instance, when I started travelling extensively in my job, I dutifully filled out my annual tax return. One of the questions asked if I had worked outside of the UK during the tax year in question, and if so to provide details. I did this, and the Revenue promptly classified me as a UK resident (since my home address and employer were in the UK) but non-resident for tax purposes, as it transpired that I had only worked in the UK for something like 90 days that year. I was thus placed in a zero tax (exempt) band, and given a full rebate. I queried it with some colleagues who were in the same boat, and found that many of them were in the same position and my payroll guys confirmed everything was legal and above board. Normally in this situation, your tax liability falls with the country where you worked outside the UK, but invariably there is a caveat there: you have to be in that country more than 180 days to qualify. So because of the nature of my job, I spent several years happily globe trotting, working my arse off and paying no UK tax, and never once spending the required amount of time in another country to qualify for their regime (and in all honesty, even had I done so my company were simply not geared up to help me pay elsewhere). I continued to fill in my returns, accurately and on time, and the Revenue continued to zero-rate me. All very efficient, and more to the point perfectly legal. I know one guy, in an identical position, who used the extra cash to pay for a lavish wedding in Tuscany. But I don't know of anyone who voluntarily paid the "missing" tax.
Here's another form of tax efficiency. I'm now a tax payer in another EU country, and have been a for few years. The situation here is different from the UK, in that when I'm on the payroll of a company registered in that country, I have to pay full tax in that country, even if 100% of the work is done offshore. There is no such thing as zero rating as it was (and maybe still is) applied in the UK - so I happily paid my 45%. Now however, as a sole trader my tax rate is pegged considerably below that and I can offset pretty much everything against that as a business expense. Mobile phone bills, printer ink, petrol for the car, air fares, hotel bills, it can all be offset, provided I can produce an invoice for the commodity or service. I understand there are similar provisions in the UK and elsewhere. Again, I fail to see where the problem is in this: at the end of the day, surely it is the duty of every family man to ensure that his income is maximized to take care of his family without unduly burdening the state, and tax efficiencies such as these can make all the difference.
Now then, much of the criticism I have seen lately has been levelled against companies and individuals who have practiced perfectly legal tax efficiency measures. Invariably there have been charges of greed, immorality, pariahs and so forth - all very unpleasant. The label "super-rich" has been applied to most of the individuals who have been able to reduce their tax burden via offshore companies or whatever. But hang on a minute - in 99% of cases, they have done absolutely nothing different to me, and I am certainly not super-rich....quite the opposite, in fact. Despite all my tax-free years, I have no savings to fall back on, no offshore bank accounts. But many people who are riding this particular bandwagon would consider me doubly evil, what with my banking background and history of (perfectly legal) tax efficiency.
At a corporate level, Google and Apple, in particular, have been the subject to the most appalling and virulent criticism over their tax affairs in both the UK Parliament and the US Congress. The complaint, basically, is that despite earning billions of dollars profit, they have only (only!) paid tax in the low hundreds of millions. They have done this by setting up off-shore subsidiaries in low tax countries (Ireland, for instance), and reporting the bulk of their profits in those jurisdictions, despite being US companies (where there is a more punitive tax regime). Now that seems to me a very prudent course of action to take, especially when you consider that, as publicly traded and quoted companies, they are legally and duty bound to provide the best possible return to their shareholders. It seems to me they have merely hit upon a perfectly legal way of doing exactly that, and if anything should be applauded. Google, to their immense credit in my view, have responded to the criticism by pointing out that very fact, and further making it clear that they have complied with both the letter and the spirit of the law in each country - and stated that since politicians make those laws, it is up to them to change those laws. In which case, Google will happily comply with whatever the politicians come up with. Cue accusations from Labour and Republican politicians that the company is being "mealy mouthed and dishonest"....a clear case of the pot calling the kettle black, if you ask me. But then, when have you ever heard of an honest politician, or for that matter one admitting to have been wrong?
The so-called tax havens seem to be getting together a co-ordinated front in meeting this onslaught of criticism, and quite right too. Most tax havens (for want of a better title, and remember there is no internationally agreed definition of a "tax haven" either) are small countries with little in the way of natural wealth - no oil revenues, too small to be manufacturing or agricultural powers, often relying to a great extent on shipping and tourism to pay their way and keep their citizens gainfully employed. So I fail to see the moral objection to them developing financial services industries that allow companies and individuals to retain more of their hard earned cash through tax efficiency measures, and in doing so support their exchequers. This is not a new situation, it's been common for many many years, and some of the biggest companies in the world were using tax havens to improve their balance sheets (and hence shareholder dividends), and this was encouraged. In the early 1980s, I worked for a massive American bank, at that time the biggest company of its kind in the world. It had a highly complex corporate structure, with many subsidiary companies by business line and domicile, but the holding company, the one whose balance sheet determined the profits on which shareholder payouts and tax liabilities were calculated, was registered in - Delaware. An evil tax haven, according to current thinking, It was considered a tax haven then, too, but was perfectly respectable. The bank in question endured no criticism from any political body, and was held up as a perfect example of all that was good about America and American business. The chairman resigned in my first year to take up the position of Treasury Secretary in the first Reagan administration. It was not alone, either - virtually every major bank on Wall street, and many other major companies in the US and elsewhere, were registered in Delaware for precisely the same tax efficiency reasons. They still are.
Despite all the noise and hot air blowing around Westminster, Capitol Hill, the Bundestag and elsewhere, about doing away with these "immoral tax havens" so that the relevant governments can make sure that the companies and individuals who pay (let's not forget that there is a fee, often a steep one) to use these facilities, are also made "to pay their fair share" in taxes. Okay, that's all very laudable....but what exactly is a fair share? That for a start is one thing you are NEVER going to get agreement on - France for instance will always want higher tax revenues to support a bloated state employment sector than will the US, for whom free enterprise and small government are more de rigeur (and we'll leave aside the different interpretations that Democrats and Republicans put on that concept for now).
The only way you will ever get uniformity of taxes across the world is if you have a single tax-setting authority - like a global inland revenue service, if you will. And that, sorry Mr.Cameron et all, will NEVER happen. No country is going to sign away its sovereignty in that way. The UK remains out of the Eurozone largely because it does not want "Brussels bureaucrats" or "German bankers" to run its finances (although it could be argued they already do). Can you imagine a nation like Poland, proudly independent after 50 years under Communist oppression and now prospering under democracy, handing over its tax setting powers to those same civil servants in another country? Nope, neither can I. And what of India, where only 2% or so of its 12billion citizens actually pay any tax - even though many more should do so but simply don't bother (and escape any sanction because the Indian civil service and justice systems are themselves too corrupt to pursue them)? No chance. There are many more example I'm sure.
So, then, it seems to me the G8 leaders, or the G20, or any other number you care to name, can waste millions of pounds, or euros, or dollars, of tax payer money, sitting around big tables in opulent surroundings and debate the subject until the cows come home - and it will make no difference. There will continue to be countries that will be happy to remain low tax environments; there will continue to be a global financial services industry specializing in assisting its corporate and private customers to take perfectly legal advantage of those low tax environments; and of course there will always, but always, be customers prepared to take that advice and reduce their tax burdens, whether they be the Google's of this world or the Travellin' Bob's.
And that seems perfectly right to this tax payer, for whom the right of individual choice is paramount (provided those choices are legal and harm no one).
- Mark Twain (1835 - 1910
Smart bloke, Mark Twain. Very wise. And a great writer.
He said that over a hundred years ago, and taxes are as much a part of life as they ever were. As universally disliked, and as universally contentious. The only difference is that nowadays, there is more crap spoken on the subject than ever before.
Not a day goes by without another story appearing in the news about another tax evasion scandal. Parliamentary committees in the UK and the US both roundly condemn massive companies like Apple, Google and Microsoft for setting up accounting and management structures to reduce their corporate tax liability. The world's best footballer, Lionel Messi and his father, are accused by the Spanish government of setting up an offshore company to avoid paying tax on the twenty-one million euros worth of income from sales of his image rights. Inevitably, fingers are pointed in the direction of bankers too - Stephen Hester, the CEO of publicly owned RBS NatWest resigns (possibly pushed) and receives a pay-off in excess of a million quid in salary, bonuses and stock options - much of it tax free. Led by Obama, Cameron and Merkel (the Three Stooges) the G8 this week debates moves to outlaw tax havens like Jersey, the Isle of Man, the Caymans and others (I wonder if the State of Delaware, population 900,000 but with over a million companies registered, courtesy of exceptionally low corporation tax, will also be included on the hit list? There is a single building there that is the registered address of - you'll love this - 280,000 companies!).
But here's the thing: in not one of those cases has anybody acted illegally. So why the witch hunt?
First of all, no-one has so far been able to agree on definitions of tax evasion, tax avoidance and tax efficiency - all of which it seems to me are different things but lie at the crux of the matter.
Here's my take on it: a personal definition that may well be different from yours or anyone else's. Tax avoidance means you are deliberately trying not to pay tax - for instance, you are working for cash-in-hand payment, not issuing any invoices for the work, and not declaring your earnings in your annual return. Clearly illegal and immoral, although not at all uncommon: many tradesmen I have come across over the years, in the UK and elsewhere, do it as a matter of course, be they plumbers, electricians, printers or whatever. In some respects, tax evasion amounts to the same thing - you're trying not to pay tax. However, this seems to me more a case where you are a salaried employee who also receives expenses, and you falsify your tax returns (and almost certainly the amounts claimed as expenses) to misrepresent your earnings and thus reduce your tax burden. Again, clearly illegal and immoral, and again very common.....I can think of a number of cases where, for instance, British MPs have charged consultancy fees and not declared them, or issued invoices in the name of their wife or pet dog. Both of them, then, are fair game for criticism and pursuit by the appropriate authorities.
But tax efficiency is something else entirely, and this is where the waters get muddied. Tax efficiency, in my book, means that you are quite prepared to pay tax according to the law of the land, but use perfectly legal means to reduce the amount you pay. I see no immorality in this at all. For instance, when I started travelling extensively in my job, I dutifully filled out my annual tax return. One of the questions asked if I had worked outside of the UK during the tax year in question, and if so to provide details. I did this, and the Revenue promptly classified me as a UK resident (since my home address and employer were in the UK) but non-resident for tax purposes, as it transpired that I had only worked in the UK for something like 90 days that year. I was thus placed in a zero tax (exempt) band, and given a full rebate. I queried it with some colleagues who were in the same boat, and found that many of them were in the same position and my payroll guys confirmed everything was legal and above board. Normally in this situation, your tax liability falls with the country where you worked outside the UK, but invariably there is a caveat there: you have to be in that country more than 180 days to qualify. So because of the nature of my job, I spent several years happily globe trotting, working my arse off and paying no UK tax, and never once spending the required amount of time in another country to qualify for their regime (and in all honesty, even had I done so my company were simply not geared up to help me pay elsewhere). I continued to fill in my returns, accurately and on time, and the Revenue continued to zero-rate me. All very efficient, and more to the point perfectly legal. I know one guy, in an identical position, who used the extra cash to pay for a lavish wedding in Tuscany. But I don't know of anyone who voluntarily paid the "missing" tax.
Here's another form of tax efficiency. I'm now a tax payer in another EU country, and have been a for few years. The situation here is different from the UK, in that when I'm on the payroll of a company registered in that country, I have to pay full tax in that country, even if 100% of the work is done offshore. There is no such thing as zero rating as it was (and maybe still is) applied in the UK - so I happily paid my 45%. Now however, as a sole trader my tax rate is pegged considerably below that and I can offset pretty much everything against that as a business expense. Mobile phone bills, printer ink, petrol for the car, air fares, hotel bills, it can all be offset, provided I can produce an invoice for the commodity or service. I understand there are similar provisions in the UK and elsewhere. Again, I fail to see where the problem is in this: at the end of the day, surely it is the duty of every family man to ensure that his income is maximized to take care of his family without unduly burdening the state, and tax efficiencies such as these can make all the difference.
Now then, much of the criticism I have seen lately has been levelled against companies and individuals who have practiced perfectly legal tax efficiency measures. Invariably there have been charges of greed, immorality, pariahs and so forth - all very unpleasant. The label "super-rich" has been applied to most of the individuals who have been able to reduce their tax burden via offshore companies or whatever. But hang on a minute - in 99% of cases, they have done absolutely nothing different to me, and I am certainly not super-rich....quite the opposite, in fact. Despite all my tax-free years, I have no savings to fall back on, no offshore bank accounts. But many people who are riding this particular bandwagon would consider me doubly evil, what with my banking background and history of (perfectly legal) tax efficiency.
At a corporate level, Google and Apple, in particular, have been the subject to the most appalling and virulent criticism over their tax affairs in both the UK Parliament and the US Congress. The complaint, basically, is that despite earning billions of dollars profit, they have only (only!) paid tax in the low hundreds of millions. They have done this by setting up off-shore subsidiaries in low tax countries (Ireland, for instance), and reporting the bulk of their profits in those jurisdictions, despite being US companies (where there is a more punitive tax regime). Now that seems to me a very prudent course of action to take, especially when you consider that, as publicly traded and quoted companies, they are legally and duty bound to provide the best possible return to their shareholders. It seems to me they have merely hit upon a perfectly legal way of doing exactly that, and if anything should be applauded. Google, to their immense credit in my view, have responded to the criticism by pointing out that very fact, and further making it clear that they have complied with both the letter and the spirit of the law in each country - and stated that since politicians make those laws, it is up to them to change those laws. In which case, Google will happily comply with whatever the politicians come up with. Cue accusations from Labour and Republican politicians that the company is being "mealy mouthed and dishonest"....a clear case of the pot calling the kettle black, if you ask me. But then, when have you ever heard of an honest politician, or for that matter one admitting to have been wrong?
The so-called tax havens seem to be getting together a co-ordinated front in meeting this onslaught of criticism, and quite right too. Most tax havens (for want of a better title, and remember there is no internationally agreed definition of a "tax haven" either) are small countries with little in the way of natural wealth - no oil revenues, too small to be manufacturing or agricultural powers, often relying to a great extent on shipping and tourism to pay their way and keep their citizens gainfully employed. So I fail to see the moral objection to them developing financial services industries that allow companies and individuals to retain more of their hard earned cash through tax efficiency measures, and in doing so support their exchequers. This is not a new situation, it's been common for many many years, and some of the biggest companies in the world were using tax havens to improve their balance sheets (and hence shareholder dividends), and this was encouraged. In the early 1980s, I worked for a massive American bank, at that time the biggest company of its kind in the world. It had a highly complex corporate structure, with many subsidiary companies by business line and domicile, but the holding company, the one whose balance sheet determined the profits on which shareholder payouts and tax liabilities were calculated, was registered in - Delaware. An evil tax haven, according to current thinking, It was considered a tax haven then, too, but was perfectly respectable. The bank in question endured no criticism from any political body, and was held up as a perfect example of all that was good about America and American business. The chairman resigned in my first year to take up the position of Treasury Secretary in the first Reagan administration. It was not alone, either - virtually every major bank on Wall street, and many other major companies in the US and elsewhere, were registered in Delaware for precisely the same tax efficiency reasons. They still are.
Despite all the noise and hot air blowing around Westminster, Capitol Hill, the Bundestag and elsewhere, about doing away with these "immoral tax havens" so that the relevant governments can make sure that the companies and individuals who pay (let's not forget that there is a fee, often a steep one) to use these facilities, are also made "to pay their fair share" in taxes. Okay, that's all very laudable....but what exactly is a fair share? That for a start is one thing you are NEVER going to get agreement on - France for instance will always want higher tax revenues to support a bloated state employment sector than will the US, for whom free enterprise and small government are more de rigeur (and we'll leave aside the different interpretations that Democrats and Republicans put on that concept for now).
The only way you will ever get uniformity of taxes across the world is if you have a single tax-setting authority - like a global inland revenue service, if you will. And that, sorry Mr.Cameron et all, will NEVER happen. No country is going to sign away its sovereignty in that way. The UK remains out of the Eurozone largely because it does not want "Brussels bureaucrats" or "German bankers" to run its finances (although it could be argued they already do). Can you imagine a nation like Poland, proudly independent after 50 years under Communist oppression and now prospering under democracy, handing over its tax setting powers to those same civil servants in another country? Nope, neither can I. And what of India, where only 2% or so of its 12billion citizens actually pay any tax - even though many more should do so but simply don't bother (and escape any sanction because the Indian civil service and justice systems are themselves too corrupt to pursue them)? No chance. There are many more example I'm sure.
So, then, it seems to me the G8 leaders, or the G20, or any other number you care to name, can waste millions of pounds, or euros, or dollars, of tax payer money, sitting around big tables in opulent surroundings and debate the subject until the cows come home - and it will make no difference. There will continue to be countries that will be happy to remain low tax environments; there will continue to be a global financial services industry specializing in assisting its corporate and private customers to take perfectly legal advantage of those low tax environments; and of course there will always, but always, be customers prepared to take that advice and reduce their tax burdens, whether they be the Google's of this world or the Travellin' Bob's.
And that seems perfectly right to this tax payer, for whom the right of individual choice is paramount (provided those choices are legal and harm no one).
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