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Calling corporate bluff on tax

Tue, 23rd Jul 2013

Like distant thunder in a heatwave, the corporate tax debate rumbles on without any real break in the weather. In fact, if anything the temperature is still rising, so resolutely are the real issues being ignored by everyone involved, including the media.

Take the proposal, approved by progressives and conservatives alike, to allow the tax authorities to take action if they suspect companies are evading tax, even in the absence of technical illegality.

This is a truly bad idea that sets a terrible precedent. It is true that corporate tax rules are overcomplicated and unfit for purpose, but the remedy for that is to change the law. Giving an executive agency a mandate to override what Parliament has put in place, on its own say-so, is wrong in principle and dangerous in practice.

HMRC already benefits from an enormous amount of discretion. Despite scrupulously maintained accounts, a small-business owner of my acquaintance lives in utter dread of the annual tax inspection, the resulting demand seemingly dependent entirely on the mood of the inspector, with knowledge that the same individual will be back next year being an unanswerable disincentive to appeal.

To existing discretion to throw its weight around add the consideration that HMRC is a byword for dysfunctionality, a house of management horrors. Its ineffectiveness at the day job has been castigated over and over by Parliamentary committees, and some have questioned whether it is capable of carrying out its duty of care to its own hapless employees. Now imagine the consequences if an out-of-control organisation like that were to combine ‘discretion’ (which hardly seems the right word) with incentives. In fact, we know what they are already, from the writings of Orwell and Kafka and the experience of the old Soviet Union. You might as well entrust a fire service to a pyromaniac.

On the debate about the law too, the debate sails as wide of the mark as an Australian fast bowler at Lords. Thus, like everyone else, an otherwise fascinating BBC radio discussion on the history of corporate tax evasion signally failed to draw the conclusion that was staring it in the face.

Controversy over the subject goes back to at least the eighth century, when the Venerable Bede was apparently scandalised by bogus monks setting up monasteries to attract tax exemptions granted to subsidise the production of expensive illuminated books. The solution arrived (much later) through force majeure in the shape of an invasion of pillaging Vikings, in the face of whom even bent monks could hardly dispute an edict that they should contribute like everyone else to the common cause of survival.

Mutatis mutandis, the same is true today. The day is long past when corporations could claim exemptions that do not apply to the rest of society. We really are all in it together. For Vikings substitute global and financial warming, the latter of which of course was caused precisely by overexploitation of the privilege of not being in it all together that corporations had first grown accustomed to and then systematically abused.

In today’s world, pleading Corporate Social Responsibility as a sop for economic bad behaviour is scarcely more adequate than monks pointing to pious works in lieu of paying for defence. Now as then the solution is an edict that makes it clear that companies are not crude, one-dimensional economic organisations answerable only to shareholders but are inextricably part of society as a whole, from which they derive their rights, not the other way round. Although many business people appear to have forgotten it, free enterprise doesn't stand as an end or even a virtue by itself – it’s only a virtue if it benefits society as a whole, which it is now more and more patently failing to do.

I know I repeat myself (well, no one else does): corporate managers take tax avoidance to the edge of the law because that’s what the shareholder-primacy ideology, backed up by self-interest and enshrined in corporate governance codes, tells them to do, just as they take it as a justification for short-changing customers, fleecing suppliers and offloading as many obligations as possible (pensions, welfare, risk in general) on to the rest of society. Ironically, the last revision of company law in 2006 actually increased the shareholder orientation of corporate UK, where shareholder influence is now the (misguided) envy of investors in other jurisdictions. Until this toxic nexus of law, ideological assumptions and vested interests built on them is unpicked, asking companies not to evade tax is as useless as demanding that sharks stop being carnivorous or pigeons give up eating peas.

Corporate leaders such as Google’s Eric Schmidt and Tim Cook at Apple have dared politicians to change the rules if they want companies to pay more tax, taking a calculated bet that they will have neither the courage nor the intellectual will to get to the bottom of the issue, and even if they did their own lobbying would be enough to snuff out any lingering enthusiasm. We should call their bluff. Go on, lead – have the guts to change the rules and spell out why, before it is too late.



 

 


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User comments

Henning :: 25th Jul 13
Are there not a number of statutory changes which would go a long way toward reducing the scope for companies to set up subsidiaries or other corporate entities in low-tax countries to allow the transfer of balance sheet surpluses away from where they were earned? This is what some of the mooted OECD reforms seem to be aiming at.
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