We have, we have to admit it, at times been less than respectful of the ideas of Richard Murphy, the noted tax campaigner. We certainly thought that his genesis of Corbynomics was worth a giggle or two at the time. But here we have to admit that we all owe a significant debt to him. For it has been a most vexing question, this one of well, just what actually is tax avoidance?
Tax evasion we know about of course: that's whatever is illegal. Avoidance though is a blurry area. At times it has seemed that the definition is anyone paying less than the respondent, say Richard Murphy, thinks people should be paying. Fortunately we now have clarity in this matter.
As background Richard Teather, a long time friend of ours here, had a look at Oxfam's rather tortuous process of claiming Gift Aid at the IEA blog. It's obviously not tax evasion as we're not hearing the clang of prison doors closing on the perpetrators. But it does look very like avoidance: a complex process with no economic or business justification other than to claim a tax relief. Others have been accused of tax avoidance on less evidence than this.
Thus confusion and Richard Murphy has come to our aid here and that's why we owe him our thanks. For he has given us a written in stone definition of what actually is tax avoidance:
So the test for Oxfam is whether or not the government intended, or knowingly permits, the arrangements that Oxfam uses.
Which is excellent. Because this equates to our own definition of tax avoidance. Avoidance not actually being a thing or a state, but something a little quantum. There are two states: there is obeying the tax law and not obeying the tax law, being tax compliant and tax evading. Tax avoidance is that uncertain state before we open the box to see if the cat has died. And here the test is not the dead cat but whether the arrangements have been looked at and found not to conflict with the law. Avoidance collapses down to the state of tax compliance.
This is extremely useful of course. Starbucks and the royalties to Holland, margins on coffee beans to Switzerland. Both have been looked at by HMRC, both are within that law, both are thus tax compliance, not avoidance. Boots loading up on debt: entirely legal thus not avoidance. Vodafone and the CFC rules: legal, not avoidance. David Cameron and the Panama fund: wholly and absolutely legal and thus tax compliant.
And of course Amazon, Google, Facebook and Uncle Tom Cobleigh selling into the UK from Ireland and other points:
Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.
Which is why we really must thank Richard Murphy. Because we've now got a strict measure of what tax avoidance is, one we can all agree upon. If HMRC looks at it and says that's fine then that is fine. It is not avoidance.
And so thanks to Richard Murphy. There's pretty much no tax avoidance going on, only some criminal amount of tax evasion and the vast majority of the economy is entirely tax compliant. And, of course, if we cannot believe the noted tax campaigner, inventor of country by country reporting and the Professor of Practice in International Political Economy at City University on such a point then who can we believe?