Where have all the tax avoiders gone?

A new holding company created in the Cayman Islands expressly to sell assets worth tens of millions of dollars. Those assets assigned an accounting value of zero, effectively invisible in the company’s balance sheet. An “arbitrary” US$10,000 cash injection explicitly designed to activate a tax law permitting a “total tax free gain of about US$60 million”, calibrated not to affect the “commercial effects of the transaction”.

Obligatory tax-blog picture of the Cayman Islands. Pretty, isn't it. (Creative Commons slack12/Flickr)

What label should we give to engineered offshore transactions designed to avoid paying tax? I used to think I knew the answer to that question, but as 2014 draws another turbulent year of tax controversies to a close, I’m not so sure.

An odd cross-current has become detectable in the “tax avoidance” debate this year. The professional and business side of the debate used to be dominated by a fairly standard position: boiler-plate defensiveness crossed with ‘Duke-of-Westminster’ fundamentalism about the legal and ethical neutrality of shrinking one’s tax bill to the legal minimum. Over the last twelve to eighteen months almost every vocal big business, business association and tax professional body has moved away from that previous default. Almost everyone now accepts that choices between filing positions have consequences – if not ethical then at least reputational - that taxpayers should take into account. But in the next breath there tends to follow a second sentiment: that one’s own behaviour has either already changed, or didn’t need to change in the first place; that the scale of corporate tax avoidance has been overblown; and that in any case the corporate income tax isn’t a very good idea to start with.

Corporate tax 2.0?

Sorry, I thought you meant... [Photo by Gillicious, CC, Flickr]

I promised I wouldn’t write about tax, either on this blog, or while I was away on leave; and am therefore failing on both counts. I’ve been tempted into this transgression by the surprisingly radical report released over the summer by the Economic Affairs Committee of the UK House of Lords, the latest in the deluge of UK parliamentary inquiries into tax avoidance and the integrity of the corporate profit tax. As you’d expect from a committee that includes both Nigel Lawson and Robert Skidelsky, its report is politically provocative (what report on tax can afford not to be these days?) But it’s also in parts a more theoretical and birds-eye view than the reports of its Commons sister, the Public Accounts Committee, can afford to be.

Unsurprisingly, the brief media coverage focused on the politically provocative bits: proposals on naming/shaming, HMRC ‘deals’, barring tax-scheme advisers and publishing large corporates’ tax returns. Far less commented upon, though equally radical, has been the Committee’s blue-sky consideration of alternative corporate tax systems – and particularly a recommendation for the Treasury to examine the possible advantages of taxing corporate sales instead of corporate profits - or, more properly, to replace the corporate profit tax with a ‘destination-based cash-flow tax’, or DBCT. (Michael Devereux of the Oxford Centre for Business Taxation, who was appointed the Committee’s specialist adviser for this enquiry, is the UK’s leading proponent of the DBCT, and has probably done more technical groundwork on it than anyone else).

That there’s political space in the parliamentary system for this kind of big-picture thinking, rather than simply considering particular tax controversies, is an unambiguously good thing. (Though the Committee’s grand vision isn’t limitless: other ‘big-picture’ solutions, particularly proposals for the formulary apportionment of the whole profit base of a multinational group, enjoy easily as large a fan-base as the Destination-Based Corporate Tax, albeit amongst a politically rather different crowd; yet the Committee’s report rejected such ‘unitary taxation’ proposals without much detailed consideration).

But what of the DBCT? (And we really need a better acronym…) A DBCT would have two features fundamentally different to the current corporate income tax. First, it would be ‘destination-based’: rather than being levied on a company’s income in that company’s country of residence, or by the ‘source’ countries where the value underlying a piece of income is deemed to be created (generally where it produces goods or services), it would be levied instead on income from the sales of goods and services in the country where that entity sells its goods or services. Close to a classic VAT, it would essentially apportion the tax base of a multinational according to where that multinational makes its sales.