Some call tax planning “legal sophistry” and others would term it daylight robbery. But however you look at it it’s not illegal.
That doesn’t stop there being uproar when the tax planning of major corporations is revealed. Not long ago the Double Irish Loophole was abolished and will be phased out by 2015, after mounting pressure from the public to get rid of tax havens.
Recently, a whole host of advance tax agreements between Luxembourg and more than 300 individuals were leaked and published by the International Consortium of Investigative Journalists (ICIJ). Among these taxpayers were Amazon, IKEA, Pepsi and Australia’s Future Fund.
These advance tax agreements are commonplace in many countries. When it comes to the UK. according to Manchester Accountancy firm Alexander & Co the government tries to make country attractive to businesses from a tax perspective: “What they [the government] don’t promote is that the taxpayer is legitimately entitled to try and arrange their tax affairs in an efficient manner and the Government, whilst publically disapproving of tax avoidance, has slashed the corporation tax rate, made the bringing of funds on shore for business purposes much more tax efficient, introduced and increased a number of tax reliefs, particularly relating to R&D and intellectual property and has generally made the UK a very tax efficient place to do business from.”
There are typical tax avoidance structures like using a group finance company in Luxembourg, a practice used by many multinational enterprises (MNEs) like Amazon.
According to Antony Ting, Senior Lecturer of Taxation Law at University of Sydney, writing for The Conversation: “A typical structure involves a subsidiary incorporated in Luxembourg with the sole purpose of lending money to its sister companies. Funds are often raised at interest rates reflecting the credit rating of the corporate group, for example, at 1%. The subsidiary then lends the money to its group companies in high-tax countries (like Australia) at, say, 9%. The interest payments made by the Australian group company effectively erode the tax base in Australia.
“The subsidiary in Luxembourg is often subject to very low effective tax rates due to the country’s preferential tax regime for group finance companies. This means the tax structure creates deductions in high-tax countries like Australia from internally generated interest expenses, but the interest payments are subject to a much lower tax rate in Luxembourg.”
The issue here is one of tax competition, countries trying to attract business and investment by making themselves as favourable as possible where tax rates are concerned. MNEs can easily minimise their tax liabilities thanks to the huge range of “preferential” tax regimes on the international market. Luxembourg is just one of the several countries, including until very recently Ireland, that help this avoidance, or “planning”, take place.
Apple’s international tax structure revealed that the United States has wittingly allowed many of its MNEs to escape foreign taxes by overlooking a glaring loophole in its tax law. The United Kingdom, as previously mentioned, is becoming one of the most preferential tax regimes for MNEs to locate their intangibles. And, once again, there should be no doubt that these measures were introduced to allow us to better compete with tax havens.
Recent tax reforms in most countries are driven by the aim of competing in the international market, always encouraging more investment. Yet the public is demanding more transparency, so where can we draw the line between legitimate tax planning and something much more harmful? Only the future will tell. But it’s certainly becoming more and more difficult to hide these practices from prying eyes.