Tax Analysts Blog

Is Aggressive Tax Avoidance Moral?

Posted on Feb 1, 2013

In a cramped and drab committee room four highly-compensated tax partners from the world's largest accounting firms looked like they would rather be mopping floors than answering the questions of Committee Chair Margaret Hodge. The senior UK legislator did a good job of expressing the frustration of the British public with multinational corporations--like Starbucks, Google, and Amazon--that have shifted taxable profits out of the UK and into tax havens. But she did little to shed light on the real cause of the problem much less set the stage for the development of any meaningful solutions. Mrs. Hodge did her best to paint the Big Four firms as manipulative, greedy, clever, connivers who show clients how to plunder the UK Treasury. Whether or not that is true is besides the point. The world's international tax regime is fundamentally flawed. As PriceWaterhouseCoopers' Kevin NIcholson said at the hearing:

    One of the challenges now is we're seeing a lot of discomfort, unrest and unhappiness around the fact that businesses are selling a lot in the UK but they are not seeing the profit [in the UK]. And part of the reason for that is the way the international rules were designed puts the value in different places. One of the debates we need to have now is how do you get tax and profits in the right places.

To-date UK laws have allowed many foreign multinationals to pay little or no tax. That will be easier now that under Cameron's leadership the UK has relaxed its laws even further. With a little skilled help from tax professionals like those at the Big Four, it is standard practice --by adjusting prices that different parts of a multinational charge each other or having one part of a multinational charge interest on a meaningless loan to another--to shift profits out of the UK directly or indirectly into low-tax jurisdictions like Ireland, Luxembourg, and Bermuda. Like the unhappy quartet who took the heat in front of the committee, the overwhelming majority of practitioners will tell you it is their duty to minimize clients taxes as long as it does not violate the law. Even if you agreed with Mrs. Hodge and Prime Minister David Cameron that "aggressive" tax avoidance raises "ethical issues," how in the world are practitioners and businesses to know when acceptable tax planning becomes unethical avoidance?

But accounting firms and their clients are hardly blameless. Guess who relentlessly pressures the politicians that make those laws? Accounting firms and their clients cannot act as though tax laws and regulations are like the tablets Moses brought down from the mountaintop unless Moses had with him a dozen Gucci-clad lobbyists handing out $2,500 checks.

Read Comments (7)

e. pluribusJan 31, 2013

This is what "global competitiveness" looks like -- big business earning a ton
of profit and not paying tax. Get used to it. We're next.

Rusty SteeleJan 31, 2013

Separate-entity accounting is an artifice. It needs to go. The aforementioned
problems go away if governments enacted laws that disregard dealings between
related enterprises. The answer is mandatory combined reporting.

Brother TheloniousJan 31, 2013

File this episode under 'utterly predictable.' The UK government signed up for
these outcomes -- eggregious as the are -- when they adopted a territorial
system without any meaningful backstops. And now some MPs are scratching their
heads wondering how the corporate tax base has been so thoroughly eroded. Go
figure?

This is a cautionary tale about 'cartoon territoriality'. And, yes, this is
precisely why the Camp draft includes those base protectors that the Chamber
hates so much.

West Coast OffenseJan 31, 2013

If we are intellectually honest, we will all recognize that non-taxation of
business profits is part of a political calculus. Parliament feared a corporate
exodus with resulting job losses, so they made deal with industry: We lighten
your tax burden, you stay put. British businesses stayed (some even returned
from havens in continental Europe); and these very low effective tax rates
we're now seeing are just the other half of the deal. The same thing happens
among the US states, where politicians are reduced to offering shameless tax
breaks to firms just to incentivize them to remain in state. The policy
obviously stinks, but politics trumps policy. Sullivan doesn't like it. I don't
like either. I suspect nobody likes it. But what ya gonna do. This is the way
of the world.

vivian darkbloomFeb 1, 2013

The PWC rep summarized the problem nicely. But, I'll make it even more
concise: It's the transfer pricing, stupid.

While Sullivan has identified big accounting firms as responsible for a lot of
the international tax and transfer pricing planning---and he's right---it's
really the opinions of economists that are enabling most of the transfer
pricing plays, whether those economists are inside those firms or contracted
for their "expertise". Some of them are even inside governments issuing APA's,
and those folks, like Captain Renault, are expressing shock that all this has
been going on. If those profits are not in the right place, then those
economists have been issuing a lot of lousy studies.

PS. The fact that Google et al pay little UK tax has nothing to do with the
UK's territorial tax system.

The VAT BastardFeb 2, 2013

I will take this opportunity to remind everyone that the political leadership
of Great Britain knew from the start that their adventure in territorial
taxation would produce significant revenue losses. That's why they increased
the VAT rate to 20% at the same time they undertook these ambitious corporate
reforms. Their VAT hike paid for their territorial regime.

von GneisenauFeb 2, 2013

"Mrs. Hodge did her best to paint the Big Four firms as manipulative, greedy,
clever, connivers who show clients how to plunder the UK Treasury. Whether or
not that is true is besides the point."

Of course. Government officials not telling the truth - who cares about that.
I mean, unless, of course, they are Republicans or Tories.

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