Some activity that is not technically ‘tax avoidance’ may still be problematic. But a GAAR cannot deal with it, and it is unfair to criticise HMRC over multinationals’ tax planning, Judith Freedman tells Tax Journal.
Using the international tax system to one’s advantage is not technically ‘tax avoidance’ but supporting the right to rely on tax law does not mean that there is no problem with the outcome, tax academics have said.
The Commons public accounts committee report published on Monday criticised HMRC’s efforts to tackle tax avoidance by multinationals. But evidence presented to the National Audit Office, published yesterday, suggested that ‘the only way to tackle the way the international tax system works is through reform of that system’.
‘There are people at HMRC who spend their whole lives trying to deal with these issues’, Judith Freedman, professor of taxation law at Oxford University, told Tax Journal today. ‘HMRC staff have to work in the context set by Parliament and they are doing their best,’ she said.
The NAO commissioned the Oxford University Centre for Business Taxation (OUCBT) in the summer to review HMRC’s disclosure of tax avoidance schemes (DOTAS) regime and the tax avoidance ‘landscape’. The review, written by Professor Michael Devereux, Professor Judith Freedman and Dr John Vella, informed the NAO’s appraisal of DOTAS and HMRC’s efforts to tackle marketed avoidance schemes.
Varying uses of the word ‘avoidance’ in popular debate have caused ‘much confusion’, the authors said. It was necessary to distinguish different types of activity to be able to address them with well-targeted actions.
Last month Amyas Morse, head of the NAO, said DOTAS has helped to change the market but ‘it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds’.
The review has been published on the OUCBT website but the authors have emphasised that it represents their own views – the OUCBT is ‘an independent academic organisation that has no collective view’. The OUCBT is funded by some of the large multinationals including Reed Elsevier plc, owner of Tax Journal’s publisher LexisNexis, as well as the Economic and Social Research Council.
The ABC of avoidance
Ineffective tax avoidance (A) can be combated under existing law, which does not make the activity illegal but makes it ineffective, the authors said.
Effective avoidance (B) is ‘activity which reduces tax payable due to use of a defect in the legislation or other failure in the way that the legislation is written, that cannot be corrected by purposive interpretation’. The appropriate action ‘will be revision of the law in the shape of specific anti‐avoidance rules and also a general anti‐avoidance rule or principle which would help to undercut the cat and mouse game of legislation being followed by taxpayers devising new schemes relying on that legislation’.
The best action to take, the authors said, would be ‘improved tax policy‐making translating into a more principles based approach to tax legislation’.
‘Widespread concerns’
Transactions and behaviour that reduce taxation ‘either by using legislation that offers certain opportunities or by relying on the structure of the international taxation system’ (C) have been described as avoidance in recent debates but do not involve the type of ‘exploitation’ described in (B), the authors explained.
‘Supporting the right to rely on national and international tax rules does not mean, however, that the paper argues that there is no problem with the outcome,’ they wrote. ‘There are widespread concerns about the way in which the international tax system works, concerns which many of those researching into taxation have been investigating for some time. There is a growing consensus that the only way to tackle the way the international tax system works is through reform of that system.’
Devereux, writing in yesterday’s Financial Times, said the international tax system that had grown up over the past century ‘imperfectly allocates taxing rights to national governments and is full of contradictions as to where different forms of income are taxed’.
He added: ‘That gives companies opportunities to choose the form and location of both their activity and their profit.’
Some possible responses, including unitary taxation, are discussed in the paper submitted to the NAO.
While the avoidance debate has often been framed in terms of ‘fairness’ and taxpayers accused of engaging in avoidance have been labelled ‘immoral’, the authors said, they argue that ‘the proper place for these discussions is alongside other considerations, to inform the policy process’.
Freedman confirmed that the government’s proposed general anti-abuse rule was designed to tackle activity within (B) but not (C). ‘We could not have a general anti-avoidance rule or principle that dealt with (C),’ she said. ‘You can’t have a principle that rewrites the law in that way – the courts would strike it down.’
The authors said the range of different activities referred to technically and popularly as avoidance ‘must be disaggregated’ to determine how to limit behaviour that ‘society as a whole considers undesirable’.
They added: ‘This needs to be done without unreasonably deterring investment or creating conditions in which compliant taxpayers feel they cannot go about their business with any assurance of certainty. In the end, this can only be achieved by legislation passed through Parliament having arisen from a proper political process, including debate involving all sections of society from protest groups and NGOs through to experts and policy advisers.
‘The media has a role to play in facilitating this debate, and many journalists have done an important task in bringing forward information, although some allegations have been based on misunderstandings of the system (albeit sometimes understandable misunderstandings or gaps in knowledge in the light of tax complexity) …
‘The fact that companies incorporate subsidiaries or headquarter companies wherever in the world they wish to, taking into account the tax rate, provided they satisfy all the surrounding rules about doing that and comply with any transfer pricing and CFC rules in place is not something HMRC can counteract.’
The authors acknowledged that they were already on record as calling for fundamental reform of the tax system. ‘In assessing the work being done by HMRC, or the way taxpayers currently behave, however, this type of problem [described in (C)] must be dealt with differently from the types of activity [in A and B].’
Some activity that is not technically ‘tax avoidance’ may still be problematic. But a GAAR cannot deal with it, and it is unfair to criticise HMRC over multinationals’ tax planning, Judith Freedman tells Tax Journal.
Using the international tax system to one’s advantage is not technically ‘tax avoidance’ but supporting the right to rely on tax law does not mean that there is no problem with the outcome, tax academics have said.
The Commons public accounts committee report published on Monday criticised HMRC’s efforts to tackle tax avoidance by multinationals. But evidence presented to the National Audit Office, published yesterday, suggested that ‘the only way to tackle the way the international tax system works is through reform of that system’.
‘There are people at HMRC who spend their whole lives trying to deal with these issues’, Judith Freedman, professor of taxation law at Oxford University, told Tax Journal today. ‘HMRC staff have to work in the context set by Parliament and they are doing their best,’ she said.
The NAO commissioned the Oxford University Centre for Business Taxation (OUCBT) in the summer to review HMRC’s disclosure of tax avoidance schemes (DOTAS) regime and the tax avoidance ‘landscape’. The review, written by Professor Michael Devereux, Professor Judith Freedman and Dr John Vella, informed the NAO’s appraisal of DOTAS and HMRC’s efforts to tackle marketed avoidance schemes.
Varying uses of the word ‘avoidance’ in popular debate have caused ‘much confusion’, the authors said. It was necessary to distinguish different types of activity to be able to address them with well-targeted actions.
Last month Amyas Morse, head of the NAO, said DOTAS has helped to change the market but ‘it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds’.
The review has been published on the OUCBT website but the authors have emphasised that it represents their own views – the OUCBT is ‘an independent academic organisation that has no collective view’. The OUCBT is funded by some of the large multinationals including Reed Elsevier plc, owner of Tax Journal’s publisher LexisNexis, as well as the Economic and Social Research Council.
The ABC of avoidance
Ineffective tax avoidance (A) can be combated under existing law, which does not make the activity illegal but makes it ineffective, the authors said.
Effective avoidance (B) is ‘activity which reduces tax payable due to use of a defect in the legislation or other failure in the way that the legislation is written, that cannot be corrected by purposive interpretation’. The appropriate action ‘will be revision of the law in the shape of specific anti‐avoidance rules and also a general anti‐avoidance rule or principle which would help to undercut the cat and mouse game of legislation being followed by taxpayers devising new schemes relying on that legislation’.
The best action to take, the authors said, would be ‘improved tax policy‐making translating into a more principles based approach to tax legislation’.
‘Widespread concerns’
Transactions and behaviour that reduce taxation ‘either by using legislation that offers certain opportunities or by relying on the structure of the international taxation system’ (C) have been described as avoidance in recent debates but do not involve the type of ‘exploitation’ described in (B), the authors explained.
‘Supporting the right to rely on national and international tax rules does not mean, however, that the paper argues that there is no problem with the outcome,’ they wrote. ‘There are widespread concerns about the way in which the international tax system works, concerns which many of those researching into taxation have been investigating for some time. There is a growing consensus that the only way to tackle the way the international tax system works is through reform of that system.’
Devereux, writing in yesterday’s Financial Times, said the international tax system that had grown up over the past century ‘imperfectly allocates taxing rights to national governments and is full of contradictions as to where different forms of income are taxed’.
He added: ‘That gives companies opportunities to choose the form and location of both their activity and their profit.’
Some possible responses, including unitary taxation, are discussed in the paper submitted to the NAO.
While the avoidance debate has often been framed in terms of ‘fairness’ and taxpayers accused of engaging in avoidance have been labelled ‘immoral’, the authors said, they argue that ‘the proper place for these discussions is alongside other considerations, to inform the policy process’.
Freedman confirmed that the government’s proposed general anti-abuse rule was designed to tackle activity within (B) but not (C). ‘We could not have a general anti-avoidance rule or principle that dealt with (C),’ she said. ‘You can’t have a principle that rewrites the law in that way – the courts would strike it down.’
The authors said the range of different activities referred to technically and popularly as avoidance ‘must be disaggregated’ to determine how to limit behaviour that ‘society as a whole considers undesirable’.
They added: ‘This needs to be done without unreasonably deterring investment or creating conditions in which compliant taxpayers feel they cannot go about their business with any assurance of certainty. In the end, this can only be achieved by legislation passed through Parliament having arisen from a proper political process, including debate involving all sections of society from protest groups and NGOs through to experts and policy advisers.
‘The media has a role to play in facilitating this debate, and many journalists have done an important task in bringing forward information, although some allegations have been based on misunderstandings of the system (albeit sometimes understandable misunderstandings or gaps in knowledge in the light of tax complexity) …
‘The fact that companies incorporate subsidiaries or headquarter companies wherever in the world they wish to, taking into account the tax rate, provided they satisfy all the surrounding rules about doing that and comply with any transfer pricing and CFC rules in place is not something HMRC can counteract.’
The authors acknowledged that they were already on record as calling for fundamental reform of the tax system. ‘In assessing the work being done by HMRC, or the way taxpayers currently behave, however, this type of problem [described in (C)] must be dealt with differently from the types of activity [in A and B].’
