ICAEW endorses criticisms of the Fair Tax Mark

Anything the ICAEW said about the Fair Tax Mark was bound to stir up opinion. Now, I don’t think anybody would sit down and plan to achieve the current situation, but in many respects there has been a positive outcome.

If ICAEW had not been positive about the Fair Tax Mark, it is possible that the Fair Tax Mark would have not been overly concerned about the ICAEW’s opinion and any future criticism of method could have fallen on deaf ears. However, the fact that the Fair Tax Mark enthusiastically quoted the ICAEW is evidence of how valuable the ICAEW’s backing actually is.

As a result, now that the ICAEW has reiterated some of the criticisms that have been made of the new Fair Tax Mark methodology, it is more difficult for the Fair Tax Mark to ignore those concerns.

I am pleased to see we have a situation where valid concerns are no longer dismissed out of hand and accepted as an essential part of establishing an independent and objective benchmark.

Unfortunately, I think there is a presumption that all criticism is intended to undermine the Fair Tax Mark. That is something that I don’t think is the case.

People’s motives for giving criticism are irrelevant to the substance of that criticism. If the point is pertinent and valid, it doesn’t matter who said it. In that spirit, I offer this quote from “some bloke”:

Criticism may not be agreeable, but it is necessary. It fulfils the same function as pain in the human body. It calls attention to an unhealthy state of things.

My honest view is that to properly assess the usefulness of a Fair Tax Mark, we first need as healthy a specimen as possible

I should point out that I have never said that I think the idea of a Fair Tax Mark is necessarily bad. I don’t think it is necessarily a good idea either. I think it’s an idea that is dependent wholly on method and execution.

If it becomes useful, that’s a good thing. Heck, I might even look for it.

But if the Fair Tax Mark chooses to ignore substantive issues, I daresay the public will reciprocate. As some other bloke said:

Those who do not read criticism will rarely merit to be criticised.

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Fair Tax Mark and tax gap estimates

I cannot stress enough how relevant I think this post from Christie Malry is.

When I looked at the original Fair Tax Mark methodology, which is now referred to as the “pilot study”, I had a good idea of what the problems with the method would be. I alluded in my original post on the Fair Tax Mark that I thought the rate analysis element looked like it was copied from Richard Murphy’s corporate tax gap calculation and that any errors would have been duplicated.

Broadly, I concluded that the same mistakes were made in the FTM method as were made in Richard’s corporate tax gap estimates. This included the mathematical errors, including perfectly legitimate tax reliefs within the estimate of tax avoidance/unfairness and ignoring deferred tax (which is actually an extension of ignoring legitimate reliefs).

As Christie Malry points out, Richard appears to have acknowledged much of the criticism of that original method and considerably softened his rhetoric over what a business’s current rate of tax is “expected” to be. And that is something which Richard deserves credit for -I maintain that the real value in something like the Fair Tax Mark derives from the rigour of its method as opposed to how catchy the branding is.

But, an unavoidable implication of that acknowledgement is that the same criticism leveled at Richard’s corporation tax gap methodology is also valid. After all, if paying a lower rate of tax through intentional reliefs is now universally agreed to be “fair”, why would we include these amounts in estimates of “tax avoidance”?

Or, perhaps, do we now have a new category of “fair tax avoidance” to quantify and debate the morals of?

To echo Christie’s argument, I do not think the two concepts can co-exist. Some of the assumptions underpinning the differing methods are now mutually exclusive unless we accept that “tax avoidance” is “fair”. I don’t know about you, but I cannot see Richard making that argument.

Something’s definitely gotta give…

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Fair Tax Mark or Discriminatory Tax Mark?

If two thirds of UK businesses receive only 6% of UK sales, would you describe a scheme that encourages consumers to discriminate arbitrarily against those businesses as ethical?

For clarity, I do not believe that discrimination is intended by the Fair Tax Mark, but asking individuals to prefer Fair Tax Mark businesses will obviously disadvantage unincorporated businesses.

Unincorporated businesses, that make up two thirds of UK businesses, who apparently receive only 6% of UK sales, are not permitted to apply for the Fair Tax Mark. Given that these businesses share significantly less income between more businesses, I think encouraging the public to frequent other businesses on the grounds of ‘fairness’ seems quite harsh.

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Fair Tax Mark? I still don’t think so…

Methodology is key for any recognition of quality.

For example, membership of the Chartered Institute of Taxation, entitling the individual to call themselves a Chartered Tax Adviser, is considered to be the “gold-standard” in professional qualifications in taxation. Its methodology is through a set of examinations which invariably have low pass rates. I think it was only about a third of applicants were accepted when I sat mine.

It is a bloody hard set of exams to pass. And you need to know your stuff to pass them.

In short, it is a rigorous methodology. And that is why people recognise the value in the qualification.

My main concern with the Fair Tax Mark has always been how rigorous its methodology is. What does the Fair Tax Mark objectively tell us about a business displaying it? Just how useful is it?

My first impression of the relaunched Fair Tax Mark is that it looks far too easy to pass without providing any real guarantee that the business is not behaving in “unfair” tax practices.

For starters, the Fair Tax Mark only considers corporation tax and that is really too simplistic.

It is a blinkered approach to taxation that overlooks far too much activity that can constitute avoidance. What about employment remuneration strategies? What about profit extraction to the owners? What about VAT? What about ownership structures for capital gains tax or inheritance tax?

Remember, corporation tax is only the fourth largest contribution to the UK coffers. From the 2012-13 HMRC accounts:

  1. Income tax – £150.9bn
  2. National Insurance – £101.7bn
  3. VAT – £101bn
  4. Corporation tax – £39.2bn

Corporation tax is less than 10% of total revenues (£475.6bn). All I am suggesting here is that equating “fair corporation tax” with “fair tax” is myopic, whether you are looking at an individual business or the UK as a whole.

Assessing corporation tax is obviously part of assessing “fair tax” but it is nowhere near the entire job.

In conjunction with this, on Mazars’ Tax Transparency blog I made the point that two-thirds of UK businesses are not companies. I think that is incredibly important.

If you are asking people to choose businesses that display the Fair Tax Mark, you are inevitably asking people to discriminate against businesses that do not. It is not readily apparent what legal form a business may operate and by not allowing unincorporated businesses to apply for a Fair Tax Mark, you will always be asking people to discriminate against them.

That seems inherently unfair. Especially when you consider that all those businesses are as fair and transparent as they can possibly be over their corporation tax affairs…

So, that’s what the method doesn’t cover: It doesn’t cover two-thirds of UK businesses and it ignores over 90% of UK taxation.

So what does it actually cover?

Well, the method only considers corporation tax and the focus is very much on the reporting of corporation tax. The rate “analysis” remains ineffective, though they have removed the questionable “mathematical” weighting and averaging.

As I understand it, they now calculate what the rate is over four years correctly, rather than adding the four years’ rates together and dividing by four, which is essentially how they were calculating their ‘average’ rate before.

Incidentally, this is the same mathematical mistake that is made in the estimate of total corporation tax avoidance that the Fair Tax Mark website links to. Averaging rates in this way is meaningless and pretty misleading. I have illustrated this point previously though. See Tax gap corporation tax rate analysis.

The Fair Tax Mark rate analysis just isn’t any analysis at all. It looks like the main effort has gone into hiding its effect by allowing other factors to claw back points. The problem remains, as I highlighted in my feedback, that it doesn’t discriminate between “fair” or “unfair” adjustments. The clawback compensates companies who have been unfairly docked points, but it does nothing to address the issue of companies who have unfairly received them.

Aside from that, the rest is a lot better than the original. One of my reservations in saying any more than this at present is that these criteria are aimed at completely different businesses to the “pilot study”. A better idea of what has actually changed might come out once we’ve seen the criteria relating to multi-nationals.

But, the main failing is still that the criteria predominantly relate to transparency, not whether the company pays a fair amount of tax, which is ultimately what people will think something called the Fair Tax Mark measures.

I’ve asked myself if I would have any problem with this venture if they dropped the pointless rate “analysis” and called it something like the Corporation Tax Transparency Mark. I think I probably wouldn’t.

But, by calling it the Fair Tax Mark, the campaign creates incongruity between what the method does and what the marketing says it does.

It comes across as a cut and shut product. They’ve used the front end they think looks most marketable and then stuck anything behind it to make it look like it is a whole car.

Now, I am being a bit harsh with that metaphor because, unlike a car, the Fair Tax Mark campaign can perform wholesale repairs and improvements whilst their product is being used on the road. So, I am interested to see how they will improve their method or reign in their claims.

Bringing it back to my original question, what does Fair Tax Mark tell us about a business?

Objectively, only three things necessarily follow. The first is that the business operates through a limited company.

The second is that they publish their accounts on their website. Which appears to be the only deal breaker in the method. Nothing else from the method is guaranteed about the company’s behaviour.

The third and final thing is that the business is willing to splash out a fair amount of money for a Fair Tax Mark sticker.

At this stage, the methodology is not rigorous enough to be useful, but I appreciate that this is simply to get a few sales in and get the product off the ground. Looking practically at this, the fact that new people bringing fresh views have been able to make significant improvements is welcome. And adapting to what people think is fair is important, rather than dictating what its owners think is fair.

The willingness to adapt shows that they may get there one day, but currently the Fair Tax Mark says too little about fairness or taxation to be considered a benchmark on either matter.

Posted in Fair Tax Mark | 2 Comments

Who accounts for the Accounts Committee?

The Public Accounts Committee’s report yesterday on HMRC Tax Collection got me thinking on the problem of accountability of the PAC.

I think it is quite right that questions are raised over the efficiency of HMRC and there are important issues relating to HMRC resourcing which were within the remit of the report. However, these issues were rather put in the shadows by the PAC’s penchant for indulging in sensationalism.

Personally, I don’t think the PAC is the forum for dealing with tax policy, to answer the question which Andrew Goodall asked in a post yesterday. I think the questions should be asked, but I do not believe that the PAC is the right place.

For starters, it is not within its remit. The PAC has complained of a lack of resources itself. So why is it wasting its limited resources on something that is dealt with by other committees (such as the Treasury Select Committee)? Why this duplication of Parliamentary effort?

Covering the same thing twice is, ironically, wasteful. And it means that the PAC is neglecting other areas it should be looking at. Given that spending is under such a universal squeeze, there is probably a lot of efficiencies they could be considering…

I’m inclined to accept that the answer lies purely in the political capital that the committee members seek to gain. It gives politicians, the committee’s chair in particular, the chance to moralise about a topic which produces strong, predictable, emotions from the public.

I’ll give you an example from Margaret Hodge answering why we should boycott Amazon….

It’s hugely important that we all take a stand and damage the reputation and business of companies that deliberately avoid paying their fare share of tax to the common purse for the common good.

But, this is Hodge’s problem: She doesn’t have a clue what a ‘fair share of tax’ looks like. And nor does the media or most of the populist commentators who get quoted.

Call me biased, but I think people who work in tax, in HMRC and the tax advisory profession, are a lot more qualified and a lot more objective in identifying what is a ‘fair share of tax’. And the PAC has disregarded most of the evidence of witnesses from those quarters.

Instead, it has preferred to accept untested and unqualified opinions based on incomplete facts from their more preferred witnesses.

Starbucks is a prime example of the shoddy reporting of facts and prevalence of inflated opinions that have dominated the tax avoidance debate. Margaret Hodge has no objective evidence for stating that Starbucks has not paid its ‘fair share of tax’ according to our system.

That is not to say our system could not be better. It needs to improve and evolve.

However, as far as I am concerned, and HMRC is concerned judging from its response, that ‘fair share of tax’ is established with respect to the law as it is enacted, not how we wish it might have been enacted. HMRC’s response to the PAC report goes to great lengths to point this out.

Ultimately, a ‘fair share of tax’ is determined by democratically enacted statue as interpreted by an independent judiciary.

And before you attack the straw man, this is not saying “it’s legal so it’s ok”. I am simply saying that Parliament should not be a hypocrite. Its voice is first and foremost statute and committees should not become venues for politicians to grind their personal axes.

This isn’t a new opinion. I commented on an LSE post entitled “Select Committees are becoming the ugly face of Parliament: it’s time to rein them in“. In her call to damage businesses, there is one part which Hodge inadvertently echoes. Adam Lent writes:

Select Committees have effectively become public courts where individuals are tried not on the veracity of their case but on how well they manage to perform in the Committee Room bear-pit. And the sentence, should one’s performance not be up to scratch, can be a severely damaged reputation or even loss of employment. In truth, some now appear before Select Committees not as witnesses but as the accused but without any of the protections usually offered to those appearing in the dock.

In private I have previously referred to the PAC as a kangaroo court. It is regrettable that I now feel it is appropriate to express this view publicly.

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A few comments on the TUC’s GAAR research

So, I got a little bit angry at reading the TUC’s research on the GAAR.

The first thing that irked me was the TUCs claims about HMRC’s estimates of how much the GAAR will raise. Now, I would guess that the purpose of the GAAR is to ensure that other pieces of legislation collect the amounts of tax intended, rather than directly raise revenue itself.

As such, the amount directly raised by it should be minimal. If the GAAR works perfectly, it won’t raise any money directly whatsoever.

Also, do you honestly expect the people who prepared the impact assessment to put down a large figure which they would have to show they have delivered on?

And how are they ever going to calculate the amount of tax on behaviours that haven’t happened because they have been deterred by, and only by, the GAAR?

But onto the specific points they raise:

  1. “The Rule’s definition of tax abuse is far too narrow” – that’s a subjective call, but it is too narrow for what? The cases highlighted don’t appear to be avoidance at all. I am comfortable that Starbucks isn’t avoidance, though they’ve made their own bed by offering to pay tax voluntarily. I haven’t looked in depth at the other two, but I wouldn’t categorise it as avoidance. I’d say a change in permanent establishment and transfer pricing rules is needed to rectify whatever people are upset about there. Any legislation that tackled those situations would, by definition, not be anti-avoidance legislation. Of course, the mention of these “stories” might just be for the benefit of somebody who might have a sensationalistic book to sell regarding these companies at present.
  2. “There is a complex test to determine when the Rule can be used by the government” – the fact that double reasonableness test can be put in this bullet point shows that it is not complex. It is a simple test. It just happens to be slightly abstract. And besides, it is literally asking the question “could the man on the Clapham Omnibus possibly think that the action taken is reasonable?” Which is pretty much what many people have asked for, isn’t it?
  3. “The Rule is adminstered [sic] by a panel of experts – who are all drawn from the tax avoidance industry and can be expected to have a broad view of what ‘reasonable’ action might be” – Dealing with the substance of the point, you need to have people who sufficiently understand the tax system and have a degree of commercial awareness. I cannot see how somebody who doesn’t work in tax could fulfil the role. Besides, as the panel’s view is not binding, it’s power only exists if both taxpayers and HMRC respect its view. Otherwise it will render itself redundant. Partly for this reason I was OK with the idea of having HMRC representation on the panel.
  4. “The Rule requires HMRC to show that a scheme is abusive, rather than requiring the corporate taxpayer to show why it is not”  – good. I do not think that HMRC should be given arbitrary judgement over what is abusive or not. This is a natural safeguard to protect the taxpayer and I think it is necessary. I would rather accept that some abusive practices slip through because the action may reasonably be considered not to be abusive, rather than punishing many non-abusive practices which might seem to be abusive. No system is going to be infallible and I prefer the option which sees innocent people not subject to injustice. I consider it to be more morally acceptable.
  5. “There is no penalty regime attached to the Rule” – not a new one, no. But the GAAR is within self-assessment and subject to interest and penalties as with other disclosures on the tax return. Therefore people could receive penalties of up to 100% of the tax due in certain circumstances. Maybe even 200% if it involves an offshore element . Yes, I am sure people will then complain that the individual is not banged up for evasion, but the penalties are there.
  6. “There is no ‘clearance system’ attached to the Rule” – the whole point of this is that it is a deterrent: the uncertainty is intentional. Otherwise, it would be easy to do things that are certainly not caught instead of things that certainly are. And, much more importantly, I genuinely do not think HMRC could cope with the administration in a clearance system. And as for the argument that “this also means that the rule fails to prevent tax abuse before it happens”, I disagree. That’s the point of the uncertainty – it deters tax abuse and behaviours that are approaching tax abuse. And we cannot prevent all tax abuse before it happens. Come on, what do you want, something similar to Minority Report and have Precog Inspectors of Taxes?

Anyway, when I read it (initially via Tim Worstall’s blog), I felt compelled to write something about it. I was particularly upset about the use of the term “tax avoidance industry” in the third point.

I do not recognise the term “tax avoidance industry” in association with the individuals on the panel. I don’t know them personally, but I find the term particularly insulting and appears intentionally inflammatory.

I don’t know if it is just me, but I take real offence at the use of terms like that about my fellow professionals. Or if the term “tax avoidance industry” was meant to refer to the tax profession in general, I find it completely ignorant.

I am not a tax avoidance adviser. I am a tax adviser.

The TUC talk about the negative nature of uncertainty in tax in a context where uncertainty is intended. But there is plenty of uncertainty where it is not intended or desirable.

The self assessment system would not work without tax professionals providing advice to taxpayers on how to actually comply with the law. The tax system works thanks to both tax professionals in the private sector and within HMRC administering the system.

Rant over.

Posted in Ranting, Starbucks | 5 Comments

A bit on Boots, but mainly on interest deductions in general….

I’ve been reading a bit about the claims against Boots using interest deductions to “shift profits”. War on Want say that this has occurred because Boots “has been able to deduct its finance costs from taxable income in its most profitable market.”

I didn’t get past that point in all honesty because I suddenly felt the need to point out something quite obvious.

If you’re going to suggest what Boots might have paid without the interest deduction, you also need to ask yourself how Boots would have performed without the investment into it.

If Boots has been able to legitimately take a deduction for its finance costs, three things follow:

  1. the interest is being charged at an arms length rate
  2. the interest is allowable under debt cap rules
  3. the loan is being used in the UK business

I wanted to focus on the last point simply because it is one of the most fundamental rules on calculating taxable profits.

If the loan were being used only to shift profits, the interest wouldn’t be an allowable deduction for tax purposes. It wouldn’t meet the criteria of CTA 2009, s 54, as per HMRC’s guidance on interest deductions.

The cash provided by the loan is therefore being used. It is being used to pay for all the things that are a part of the trade: paying employees, buying and manufacturing stock, paying overheads, purchasing assets for use in the trade, etc. All those sort of things that are generally considered to be beneficial aspects of business occurring in the UK.

Now, personally, I’d rather have that investment than not have the interest deduction in calculating taxable profits. That interest deduction comes because the capital is being put to use in the UK, in a way that is hopefully beneficial to all.

It seems a fair quid pro quo in principle.

From a quick glance at the Boots story I know there is a bit more to it than interest deductions, which is why this is a more general point here:

Allowable interest deductions do not tax avoidance make.

Posted in Boots | 6 Comments

Arms length profit is fiction – an ignoratio elenchi?

Amongst my favourite theories in philosophy is what became known as Meinong’s Jungle. It’s mainly that I like the name. The theory is principally used where metaphysics meets epistemology to ascribe facts concerning non-existent subjects.

Yup, it’s a real useful theory in taxation…

Anyway, I think I’m correct in saying that people agree that a unicorn is basically a horse with a horn coming out of its forehead. So a unicorn has four legs. From a certain epistemological point of view, however, this isn’t actually a fact. There is no real thing called a unicorn. The problem is one of assigning truth (which appears to be widely agreed upon with regard what unicorns are) to a statement about something which does not exist.

Alexius Meinong essentially argued that these nonexistent objects, whilst not existing, were being in some way. So, whenever you refer to a unicorn, you are referring to something that subsists in some sense, but doesn’t actually exist.

Thus, it can be a fact that a unicorn has a single horn. And that the golden mountain is actually golden.

Now, following my post yesterday, I had a brief conversation on twitter with David Quentin. He was, I think, arguing the fictitious nature of determining the profit using the arms length principle. That is, the profit of an individual entity within a group is a fiction.

I should point out I’m going off the general criticism I’ve heard from various people, so I’m not addressing any specific points he raised, more the general argument I’ve heard before.

I think that somebody arguing this view should distinguish between the profit of the group and the profit of entities within that group. The group profit may not be regarded as fictitious because it measures the interactions of the entity with unrelated parties. All intragroup transactions cancel out.

The argument for unitary taxation is that it focuses on real numbers. The group profit is real and that numbers of employees, staff, assets are real.

From this point of view, I do appreciate the fiction argument against transfer pricing and the arms length agreement. The profit allocation is considered to be an internal fiction of the group.

However, I don’t think this argues in favour of unitary taxation. Unitary taxation adopts a different fiction, the unitary allocation formula. I have drafted a post which I may or may not publish exploring this idea, but I essentially think the whole ‘fiction’ reference is misleading and irrelevant.

Returning to Meinong’s Jungle, we are looking at the criticism that the ‘arms length profit’ is ‘fiction’, it does not exist. So let us take it as a fact – the arms length profit is a nonexistent object.

So what?

Existence is no impediment to something being logically sound. Just as Meinong argues that the golden mountain is golden, I would argue that if the ‘arms length profit’ is the correct profit to be taxed, it really doesn’t matter whether it actually exists or not.

I think that correctness applies morally too. If an arms length profit is morally the ideal profit to be taxed giving up the attempt to determine it is a moral failure.

Of course, it is arguable whether an arms length profit is morally the ideal profit to be taxed, but I do not think there is a better candidate using a deontological principle-based approach.

I can see how consequentialists might arrive at a different conclusion.

But all I wanted to do with this post is to make the point that the fictional nature of something does not preclude its being logically sound or useful. Or being full-stop.

The discussion of whether an arms length profit is a fiction or not is somewhat of an ignoratio elenchi.

Posted in Unitary tax | 3 Comments

A general criticism of unitary taxation

At the end of last week, I was trying to piece together what concerns me about unitary taxation. I was thinking about specifics and the detailed proposals that I’ve read in passing, mainly from Richard Murphy.

Now, whilst I would say that my criticisms applied to the formula I’ve seen used as an example, they don’t necessarily apply to all forms of unitary taxation. If you change the formula or fix the problems with each variable in the equation, unitary taxation remains viable.

But I knew there was something more fundamental about the approach that I didn’t like. And this is where reading other people’s responses and thoughts, as well as putting down my own, really helps. Having said that, I had written a lot of this post prior to reading Andrew Jackson’s excellent post on unitary taxation and I’ve tried to maintain my original line of thought whilst editing. I’ve approached this from a different angle, I think, but I might be meandering in his footsteps.

This may seem totally obvious to others but I started thinking about what is necessarily true about corporation tax. The main thing is that corporation tax is a tax on profits and this continues to apply under the proposed unitary taxation.

Our current system tries to do the most obviously equitable thing with regards to allocating taxing rights on those profits: it tries to levy the tax on profits where those profits actually arise.

Now, whether our current system does this successfully or not, the principle seems appropriate. A tax on x is charged on the quantum of x occurring in any jurisdiction. Which is the basis of many forms of taxation.

But this isn’t what unitary taxation does. A tax on x is charged according to the proportions of ab and c in a jurisdiction.  So the direct causality is severed between profits and the tax arising on it.

Unitary tax relies on there being indirect causality between the variables of the equation and profit. So, the idea is that x is directly caused by a combination of ab and c.

Of course, unitary taxation doesn’t need to be restricted to three variables. It can be any number of variables you choose. But the more variables you introduce, the less simple unitary taxation becomes. And simplicity appears to have been one of the USPs in unitary tax’s favour.

But the fundamental point is that the relationship between x and will be prescribed for everybody. And is not necessarily a principle cause of x for all businesses. The same logic applies for each variable. It is not necessarily a cause of profit.

If you look at any variable, it is possible to consider an extreme case of a business where profit is not caused at all by it. Including sales. Including employees. Including tangible assets.

Purely as a thought experiment, this suggests that there is no necessary link between profit and any other variable for all businesses. Even if you don’t accept the extreme position, you are likely to accept the lesser position that the relationship between any one variable and profit may be very different from business to business.

Looking at it from another angle, an independent company that has exactly the same variables a, b and c, and even the same amount of profit x, will most likely not pay the same amount of tax as a company that is part of a group because it is the proportions of the variables, rather than their quantum. If we’re not careful, we may be selecting for the business that is part of a group.

Ultimately, that means that if unitary taxation is a “good” system, it is only incidentally so, not necessarily so.

Unitary taxation is no longer trying to establish the right amount of profit in each jurisdiction and basing tax on that. It is giving up on that altogether. Instead the approach it adopts appears primarily aimed at creating a system that will fairly allocate profit amongst jurisdictions for an “average” business.

Given that many of the problems we are trying to address relate to the taxation of exceptional businesses (as suggested by media coverage), businesses that deviate from the “average”, there is a risk unitary taxation will adopt a skewed view of what an “average” business.

Failing that, businesses that deviate from the “average” most will probably be taxed least appropriately by unitary taxation.

Essentially, my previous post’s criticisms relate to symptoms of severing the link between the tax on profits and the profits themselves. The tax is alienated from its subject partially, if not completely.

For me, I would say that alienation is the defining feature of unitary taxation.

Posted in Rambling, Unitary tax | 7 Comments

Some thoughts on unitary taxation…

Here is a reply I started writing to a comment made by Christie Malry on Andrew Jackson’s blog… It got a bit long and off topic as I was also trying to capture some of my thoughts from a conversation I had on twitter earlier (starting with this comment).

So it is a bit of a mess but I’m loathe to delete it. Anyway here it is…

I agree that Richard has a point over IP being problematic.

But his purpose in arguing to remove IP appears to be making unitary taxation a workable solution. Whilst simply removing IP might appear an attractive solution in terms of simplicity, I am sure it would open the door on a whole raft of abusive practices. But I don’t think you even need to consider using the word “egregious” or “scheme” for detrimental effects to occur.

If you have this situation where the value of IP is ignored in determining allocating the tax base, you’ll just end up with IP being moved into high tax jurisdictions in exchange for assets that do alter the tax base. I wonder where we’ll see tangible assets accumulating instead? Low tax jurisdictions, perhaps? That’s one third of Richard’s formula taken care of right there. Probably do wonders for property prices by increasing demand too…

I’m thinking that Ireland has a lot of land which is cheap right now. Worth a punt for when Google want to increase their tangible assets base there?

If you then allocate taxation partly based on employment, another third of Richard’s formula, low tax jurisdictions will be further rewarded with higher employment.

Higher tax jurisdictions currently have the incentive of encouraging costs to be incurred there through increased CT relief. UT will just mean that low tax jurisdictions get the benefit of the costs occurring there and also the taxation on profits.

And where do the sales occur? That’s a big thorn in UT’s side and one which we currently can’ t deal with either. That’s the digital economy for you, creating ambiguity over where a sale occurs. I don’t think that ambiguity will disappear if you start determining taxation of profits on that basis as well as for VAT purposes. I think it might just get worse…

All in all, I think unitary taxation will be a shot in the arm to the competitors in “the race to the bottom”.

Posted in Unitary tax | 5 Comments