Who among Sunday Telegraph readers has not tried to avoid paying tax? I should imagine that most married readers keep their assets in the name of the spouse with the lowest tax rate.And I would be surprised if readers did not make use of pension tax reliefs and the tax-free lump sum we receive from pension funds.
Those readers who are self-employed will, no doubt, do their best to ensure that they claim the maximum expenses against their income. All this is absolutely right and proper. Our first responsibilities are to our families, not the state, as long as we give the state in taxation what we legally owe.
However, as soon as we see companies making use of special allowances and schemes to reduce their tax bill, there are furious denunciations. Google, Starbucks and many other companies are vilified for trying to reduce their tax bill by using “tax havens”.
It might be thought that the use of tax havens by companies is against the spirit and letter of the tax law – way beyond the examples of personal tax avoidance we are all involved with. Sometimes this is true. Whilst tax havens can – and should – be defended, they should not be used to shelter illegal activity and they should not be used by companies to pay less tax than they legally owe.
For example, if a fictional company, We Make Widgets PLC, were to operate in only two countries – the UK and Ireland, it could register its intellectual property (a special method of polishing metal, for example) in Ireland.
The Irish subsidiary could then charge a very high price to the UK subsidiary for buying the rights to polish the metal. The UK subsidiary would make very small profits and the Irish subsidiary would make very large profits – and be taxed at Ireland’s low corporation tax rate.
These internal “transfer prices” should accord with the rules. To artificially reduce profits in high-tax countries would be like a self-employed person taking his wife out to dinner and charging it as expenses to his company. It would be legally and ethically wrong.
Of course, there is a continual battle between HMRC and international companies over these type of issues and that is inevitable. It should also be remembered that, if companies pay more tax than they need, then it is all of us savers who own shares who suffer.
Tax havens are in fact essential, especially international financial centres. Tax rules are often unjust, with non-taxpayers (such as investors in ISAs) often paying tax or taxpayers from overseas being taxed twice when they save money in investment funds.
Non-taxpayers should not pay tax and nobody should be taxed twice on investment returns. Of course, the offshore funds designed to avoid unjust tax are often used by very rich people who are mobile and have complex tax affairs across several countries. However, they are also used by our own pension funds and ISA products to prevent investment returns being taxed when it is very clear under UK tax law that they should not be taxed.
Indeed, it would be to the detriment of us all if there were no tax havens.
Most predatory activity is actually undertaken by governments and not by companies. Governments are trying to spend more and more with the UK government now spending 50 per cent of national income – in common with other European Union countries. This is deeply damaging to general welfare and business in particular and it is very difficult to hold the elites who continually expand the size of the state to account. Elections are very imperfect mechanisms.
One effective method by which we can keep the size of government in check is if labour and capital can exercise its freedom to move to lower-tax jurisdictions. Capital is much more mobile than labour and so tax havens do us all a favour by ensuring that governments have to keep tax rates lower – thus creating a better environment for business.
There is certainly a case for a much simpler tax system and perhaps for a radical reform of corporation tax so that shareholders and not companies are taxed directly. But tax havens perform a useful function. They keep a check on governments and they prevent double taxation of investment returns. This benefits us all. It is true that there may be some shady behaviour designed to reduce taxes, but this is inevitable in a world where taxes are so complex and governments try to extract so much from their citizens.
Indeed, Britain should become a tax haven – both for companies and for people.
Professor Philip Booth is the Editorial and Programme Director at the Institute of Economic Affairs
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