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Taxing issue

If we needed reminding, the Paradise Papers have shown how attractive it can be to keep money offshore. Wealthy individuals do it, companies do it. So can governments do anything about it?Can they get big firms and the rich to pay what many regard as their fair share of tax? In some cases the appeal of going offshore is to hide illegal behaviour from the gaze of law enforcement authorities. But much of what has been revealed in this massive leak of documents is lawful.In many cases it’s about avoiding tax, which is legal, though it involves gaining a tax advantage in a way that the legislation did not intend.What are governments doing about it?Much of the effort needs international co-operation to be effective, and the forum where it’s taking place is the Organisation for Economic Co-operation and Development (OECD), an international agency whose members are mainly the rich countries. An important part of this initiative involves the exchange of information between tax authorities. The OECD initiative has two systems.

Under one a tax authority gives information about an individual’s finances if the person’s home tax authority asks. The drawback is they need to know who to ask about. There is also a system, which is more recent and has fewer countries involved so far, of automatic exchange of information. That might catch more cases, but it can also create a huge volume of information that tax authorities might struggle to assess. Countries can also check schemes that wealthy people use more thoroughly to assess whether they conform with the law. There have also been initiatives on the roles of tax advisers. The UK, for example, has legislation that means advisers can end up paying hefty financial penalties if they recommend schemes that are subsequently ruled against. There is another initiative in the OECD, designed to address some types of tax avoidance that are used by multinational corporations. How do multinationals limit their tax?One technique for minimising tax bills has a very long history and goes by the name of transfer pricing. Different subsidiaries of multinational companies located in different countries buy and sell things to one another.

It may be components, raw materials or sometimes intangible things such as the right to use a trademark, a patent or copyright – known as intellectual property. The choice of what price to charge affects the amount of profit each subsidiary makes, and companies can set these prices with a view to ensuring that the profits appear to be made in the country with the most favourable tax regime. Another technique is for the subsidiary in the low-tax country to lend money to one facing higher business taxes, which can use the interest payments to reduce its tax liability. The OECD’s latest plansThe OECD has produced a package of proposals and is monitoring the implementation by its members.It’s quite a technical initiative, but there are some broad principles involved. One is the idea that tax should reflect where economic activity really takes place.Another is the idea of arm’s length transactions. That is the notion that transactions between a multinational’s subsidiaries should be at prices that would be charged if they were entirely separate businesses. Many campaigners and experts say that the work being done in the OECD is useful but doesn’t answer all the problems. The Tax Justice Network described the OECD’s work on corporate tax as a huge step forward. But it also said: “The process has been continually undermined by the army of paid corporate tax advisers and lobbyists, as well as governments seeking to protect some of their pet tax breaks to business.”The view of a tax expertProfessor Rita de la Feria, a tax expert at Leeds University, says that much of the action taken so far is a temporary fix until firms find new ways to get around the rules. There are options, she argues, that could reduce the scope for avoidance.One would be that countries could tax a multinational’s profits on the basis of the proportion of its sales in each state.

It would work better if all countries agreed that approach, she argues, but small groups or even individual states could do it. What we have now though, says Prof de la Feria, is more modest reforms undertaken by countries – with help from the OECD framework – and some incentives on companies, such as “naming and shaming… and fear of a reputational impact”. In one famous case that led to the coffee shop business Starbucks agreeing to pay more corporation tax in the UK. The Paradise Papers are potentially another example.Prof de la Feria says: “Until we have a global tax reform this is probably the most effective way of making individuals and corporations behave slightly differently.”In Europe some companies have been ordered to pay taxes following investigations by the European Commission, and Apple was on the receiving end of this type of action over its tax affairs in the Republic of Ireland.These were investigations into what’s called state aid, where the company concerned was found to have had a competitive advantage as a result of its tax arrangements with the EU country concerned. The EU Commissioner for Competition Margrethe Vestager put it like this: “The large majority of businesses, which pay their fair share of tax, shouldn’t have to compete with rivals that get special favours from government.”Still it’s easy to believe that it was not just about tax, that she was also motivated by a more general desire to see large firms pay their share.

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The papers are a huge batch of leaked documents mostly from offshore law firm Appleby, along with corporate registries in 19 tax jurisdictions, which reveal the financial dealings of politicians, celebrities, corporate giants and business leaders.The 13.4 million records were passed to German newspaper Süddeutsche Zeitung and then shared with the International Consortium of Investigative Journalists (ICIJ). Panorama has led research for the BBC as part of a global investigation involving nearly 100 other media organisations, including the Guardian, in 67 countries. The BBC does not know the identity of the source.Paradise Papers: Full coverage; follow reaction on Twitter using #ParadisePapers; in the BBC News app, follow the tag “Paradise Papers”Watch Panorama on the BBC iPlayer (UK viewers only)
Source: BBC News

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My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups. I am an author of various websites including Franchise UK https://www.franchise-uk.co.uk

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