Fair Tax Mark – fairness testing

I’ve just been playing with Richard Murphy’s new Fair Tax Mark (no apparent relation of the old one).  I was surprised by how little of it actually relates to tax, and how many points are available simply for complying with company law – I’d have thought that sort of thing should be taken as read, to be honest.   But if one views it as a Tax Transparency Mark it seems to heading along the right sort of lines.

Anyway, the point of this post is that as so many points are essentially sent up with the rations, it occurred to me to try to see how obnoxious one can be and still get 13 points.

It looks as though it would be surprisingly easy: if you want to be cynical about it, you can deliberately miss out on 7 points and still qualify for the mark.  If we assume a company set up with a primary aim of avoiding as much tax as possible, then it will spend 4 points straight away by having a low ETR.  However, it can get 2 of those back again by explaining the low tax rate in detail.  It can then explain that it has a policy of seeking the absolute minimum tax rate, which is enough to preserve 1 point (the policy doesn’t has to be nice, it just has to be clear); if it goes on to say that it will not avoid artificial structures or tax havens, it looks as though 4 points are spent on those factors.

If you’re happy to set out the names, addresses and incomes of directors and beneficial owners, then there seems to be no need to lose any further points: you can score 14/20 and get a comfortable Fair Tax Mark despite avoiding as much tax as you like, so long as you’re up-front about it.  I can see how this is laudable transparency, but it seems odd to call it Fair Tax.

The way the policy marks are lost is possibly a bit loose, too: you lose 2 points for not declaring that you won’t “abuse” tax havens, but if the whole point of a tax haven is to reduce your tax bill then one might argue that this isn’t “abuse”: 2 points back straight away.  I can’t see that you’re actually measured against your policy, anyway, so nothing seems to stop you saying that you won’t abuse tax havens but then doing something can someone else might see as abuse but which you argue is in fact in accordance with your policy.  One could then spend three points to conceal names, addresses and incomes and still get the 13/20 required for the Fair Tax Mark, even if there is no tax being paid on profits which then accrue to anonymous beneficiaries…

I feel the points should be weighted more towards the actual tax being paid; or alternatively, and probably better, there should be some sort of assessment of the reconciling items.  At present, due to the favouring of transparency over fairness, the points you lose because of the fact that you have carefully structured your business to ensure that profits are treated as arising offshore can be more than off-set by boasting about it.  To me a better methodology would be to look at the reconciling items, establish the reason for them, and only allow the points if the reason is acceptable.

I appreciate that this would make the mark more subjective than objective, but it should be possible to set up some assessment criteria so people can understand why a view has been taken – you could mark the reconciling items against the model tax policy, for example. 

At present, “Fair” seems to involve almost no moral element, which is a serious deficiency in my view.

So: Transparency Mark, yes; Fair Tax, not necessarily.

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Are pension funds necessarily tax avoidance?

I have been having a slightly heated debate with Richard Murphy on his blog.  Or rather, not on his blog, as he has deleted the salient comments.   He says the question is “neoliberal trolling”; I think it is a valid question.

To recap: 

Talking about Alliance Boots and the fact that there is a tax deduction for financing costs, Tim Worstall claimed that the interest would be taxed in the recipient’s hands: the implication being that there is therefore no avoidance.  That is, I think, the key issue under discussion.  Murphy replied that the interest would not be taxed as it might be moved offshore. 

“Portemat” said that in fact some Alliance Boots debt is held by UK pensions, to which Murphy replied that pension funds do not pay tax – the clear implication being that if tax is not paid then there is still a problem regardless of the reason.

I pointed out that that this is by design and so is hard to see as avoidance, to which Murphy then brought up arbitrage.  I have no idea why he considers that to be related to the issue under discussion (pension schemes not being taxable).  He then deleted my comment that I was talking about pensions not arbitrage, and has since then been a bit selective about what he lets through.

So essentially Murphy seems to have derailed a discussion because he has realised that his line of argument was not going anywhere.  He then deleted my comments, and started bandying round terms such as trite, nonsense, and demeaning, rather than address the previous thrust of the discussion.  To my mind this does not make him look as if he has a strong coherent argument.

My simple question I put to him, which he has refused to answer, was:

Going back to the core point of the discussion, then: if a pension fund lends money to a business, the business gets a tax deduction for the interest but the pension fund pays no tax on it.  Put simply: I consider this to be a reasonable position which is in line with Parliament’s intentions.  Do you?

I don’t know why he won’t answer this question.  I can only conclude that it is because if he says yes then he is a) agreeing with me and b) suggesting that maybe Boots isn’t so bad after all, and thus contradicting himself; and if he says no then he is adopting a rather extreme view that few people would agree with.  So he’s written himself into a corner.

I’m posting this mostly because I’m a bit peeved that he calls me a troll for asking a simple question, but refuses to engage in any sort of meaningful debate, so I’d like to call him on that.  He is of course not obliged to join any debates (or leave them visible) on his own blog, but then if he is going to be territorial about blog posts then so can I be 🙂

Also: if anyone can tell me what “neoliberal” means, I’d be interested to know what my political views apparently are.  I understand there is some sort of conspiracy involved, but no-one’s invited me to any meetings…

Richard Murphy on IP

Richard Murphy has a post on his blog about IP, and why it should be disregarded for tax purposes: http://www.taxresearch.org.uk/Blog/2013/11/13/why-intangibles-should-very-largely-be-ignored-in-international-tax/

I posted a response but as he’d apparently deleted it I thought I’d stick it up here for comment.  (EDIT: actually it was my mistake: he hadn’t deleted it, just hadn’t moderated it in yet.)

His argument basically comes down to:

– It is hard to get an accurate assessment of the value of IP to a business
– Some IP (like his blog) has no value
– Therefore IP doesn’t really add value
– So no profit should be attributed to it (beyond perhaps a nominal amount)
– So for tax purposes it should be disregarded

This would mean that multinationals would be unable to manipulate profit flows, to avoid tax.

I think that by setting the value of IP to nil in all cases you introduce just as many problems – or more, even – than you remove.  You are basically guaranteeing that the value will be wrong.

The examples I gave in my response were (I’m reconstructing here, as the post was deleted, so this is not exactly the same):

– A UK firm builds a brand in the UK, then sets up a subsidiary in France which uses that brand.  If the IP has no value then France gets to tax all the profit of the French company, which is therefore getting profit for nothing.  The UK company will have had a deduction for the costs of building the IP, and so will pay less tax: Murphy’s proposal therefore shifts taxable profit from the UK to France.

– The same firm also licenses the brand to a third party franchisee in France.  There will be a commercial royalty: no firm it its right mnd would allow IP to be used without payment.  If the IP must be ignored for tax purposes we deny a deduction for a cost in France, so the franchisee has a much higher effective tax rate and the UK licensor gets tax-free income.  Alternatively, if we allow a deduction in a third-party situation we introduce a major asymmetry between intra-group and third-party positions, which will mean the tax tail wagging the commercial dog.

I suspect Murphy’s response would be that Unitary Taxation would do away with all these problems, though I note that it would give a very different result: if you include the headcount and costs in the UK of developing the IP, Unitary Taxation would allocate profit to the UK that under the normal rules (but where the IP is considered to be worthless) would stay in France.

The whole suggestion seems somewhat incoherent.  What am I missing?

The case against Starbucks

I’ve been having a brief discussion with Richard Murphy on his blog.  He says that Starbucks was clearly going against the spirit of the law and avoiding tax.

I have asked him for details of this, but he simply asserts that “The case against Starbucks is well known” and “The case was absolutely clear”.

Incidentally, he then deletes my further comments, which I find disappointing given that I am pains to comply with his comment policy, such as by using my real name rather than a pseudonym, and taking care to explain why I reach the conclusions I do.

Unfortunately, although last year I did have a good look at the Starbucks position I didn’t then, and don’t now, understand the detailed case against them.

I know that Murphy and others say they were avoiding tax, but that is a very vague accusation.

I know there were references to coffee beans and royalties, but it is clear that HMRC have reviewed the amounts paid and agreed the rates, so the letter and the spirit of transfer pricing law have been observed.

So far as I am aware there is no permanent establishment issue, as with Google and Amazon – Starbucks was not selling into the UK in a manner taxable elsewhere, but was trading here.

So what is the actual accusation against Starbucks?

The closest I can come to is that Murphy is on record as saying that tax avoidance includes structuring operations so as to follow the law, while not complying with what the law ought to say.  I have serious issues with that contention, but if we assume it to be true for the sake of argument then the only way I can find Starbucks to go against the spirit of the law is to look past the letter of the law, look past the agreed intention of the law, and adduce some deeper spirit which is not apparent.

So when transfer pricing law is considered: the letter is that one should apply the arm’s length principle; the spirit is that a group should not set prices so as to shift profits and erode tax bases; and the deeper spirit is… what?  Do we need to look at tax law in general, rather than transfer pricing, and say that there is some spirit of tax law that says large companies must always pay UK tax?

I really am at a loss.  If anyone can point me to a clear case against Starbucks, such as Murphy assures me exists, I would be very grateful.

Duchy of Cornwall 2

Following up from my last post, I caught the discussion on Radio 4’s PM yesterday, which didn’t really seem to add much to the debate.

One thing which caught my ear though: Richard Murphy was adamant that the Duchy ought to be paying capital gains tax on property disposals, as all other property trading businesses would do so.  This is clearly wrong: a property business might pay CGT, but a property trading business would not: any disposals in the way of trade would be subject to income tax.  I don’t know anything like enough about the Duchy’s affairs to determine whether it’s trading or not, but the bigger a business is the more likely it is to be trading.

In addition, CGT is levied at lower rates than income tax.  So this point about CGT parallels the point about corporation tax: people are complaining that the Duchy isn’t paying 24% or 28% tax, and completely overlooking that fact that any income taxable at those rates would escape income tax at 50%.

The other point Murphy made was that the effective tax rate the Prince pays is around 25%, not 50%.  Quite apart from the fact that this is about what you’d pay in corporation tax or CGT, if one were to recategorise the Duchy as a corporation or all the income as gains, this seems to be of income before deductions.  Determining what costs should be allowable in this sort of area is always going to be horribly complicated, but it would seem odd to say that nothing would be deductible.  After all, if you only get income because you’re heir to the throne, then surely the costs of acting in that capacity should be deductible from that income?

I haven’t had a chance to go through the PAC sssion yet – I’ll probably have to wait for the transcript, as I don’t really have time to watch the whole thing at the moment. 

One thing which has come out is this bizarre idea that anything which makes income from investments must be a corporation.  I know partnership taxation is under review at the moment, but that seems like a major step!

 

 

Fair Tax Mark

Richard Murphy has launched a new campaign, the Fair Tax Mark, which rates UK retailers on tax and transparency measures.

I have some concerns about the methodology – it only looks at corporation tax, it assumes wrong-doing unless strong evidence to the contrary is presented, it takes no account of materiality, and it ignores (or misunderstands) deferred tax.

But putting them to one side for the moment, a bigger issue I have is that it seems to have a mismatch between what it wants to tackle and what it’s actually doing.

Ben Saunders has made a number of criticisms which I think are very pertinent, to which Murphy has responded in a long blog post on the Fair Tax site.  Picking a few interesting quotes from Murphy out of that posting, I find a worrying trend:

“We are not seeking to record behaviour within the system as it is. We are seeking to assess behaviour against the standards that we think would apply.”

This seems odd: companies are surely constrained by the system as it is.  Saying they are acting unfairly because they follow the law that applies to them rather than the law that Fair Tax would like seems a bit harsh.  The fairness of the tax they pay would seem to be a reference to the system as much as to the company.

“Remember what our definition of fair tax is: it is paying the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. “

This definition of “right” seems to entirely ignore any reliefs that Parliament might wish to give.  I appreciate the broad thrust of the Fair Tax argument, but it does seem to be incomplete.

“We think tax deferred for forty years is something we have to ignore when assessing fair tax. Saunder’s comments simply do not make sense when the system can and does deliver such anomalies that we successfully highlight.”

Such deferred tax arises largely from the acceleration of reliefs.  So again, Fair Tax seems to mean ignoring Parliament’s intentions.

“If we assume, as we have to, that accounts reflect economic performance but that on average that income is under taxed, as rising deferred tax balances would imply, then by our criteria we do not have a fair tax system”

“…if we followed Saunder’s suggestions we would get the maths wrong and so not show real distortions that exist in the tax system”

This seems to state quite strongly that part of the point is indeed to challenge the tax system, not the companies’ place in it.  This goes further than ignoring Parliament’s intention: it’s describing reliefs as “distortions”.  Consistently investing in plant and machinery gives a rising deferred tax balance, so your income is “undertaxed”.

This quite ignore any permanent differences like R&D tax credits (which are probably not too significant for retailers, to be fair) and the substantial shareholdings exemption (which could well be) where Parliament has explicitly decided to reduce companies’ tax bills.

So overall the Fair Tax methodology, although it purports to rate companies, is actually using them as example of why the system as a whole is unfair.

That seems very odd: in the case of capital allowances, for example, it seems to mean that you can do exactly what Parliament wants you to do, and yet be acting “unfairly”.  That’s not a definition of “unfair” I can easily endorse.

And to publicly mark companies down for it seems to a) be a bit mean, and b) conceal the real message.