May 232013
 

Tax avoidance and multinational corporations have featured prominently in the news in recent weeks.

We have seen the likes of Google and Starbucks being called to appear before the Public Accounts Committee to explain their tax practices, Prime Minister David Cameron talking about the need for global action against tax evasion and aggressive tax avoidance, and even Leader of the Opposition Ed Miliband,  saying that he would rewrite the corporate tax rules (why? Doesn’t he think the new GARR will do the trick?).

Perhaps the phrase which best sums up the view of those who consider these companies to be engaging in suspect tax planning is that of Margaret Hodge, who chairs the Public Accounts Committee:

“We’re not accusing you of being illegal, we’re accusing you of being immoral”

Now it is all very well to have these debates about how and why these multinationals manage to minimise their tax bills. But what concerns me is that, reading the various press reports, it is never clear just what exactly the company involved has done that is so immoral. And if we don’t know what this is, how can we have a debate about it?

I came across one such example a few weeks ago, on Bloomberg.

Vodafone and Verizon

For years Vodafone has periodically appeared in newspaper stories speculating whether the company is going to sell its 45% stake in Verizon Wireless (“Verizon”). The majority shareholder Verizon Communications holds 55%, and would dearly love to boot Vodafone out of the picture. For years it refused to vote for a dividend payment from Verizon in the hope that Vodafone would sell out and go away. The only reason why a dividend is now being paid is because Verizon Communications needs the money to pay to its own shareholders.

There is a US tax issue involved in a possible sale, but as far as UK tax is concerned, Vodafone should benefit from the substantial shareholding exemption. This is because the stake in Verizon is large enough, and has been held for a sufficiently long time (more than one year).

This fact was reported in a recent story by Bloomberg entitled: Vodafone’s Verizon Payday Seen Leaving U.K. Empty Handed.

As one can see from the title, the story went further than simply stating the exemption as a fact, and gave the impression that by claiming the tax break, Vodafone were indulging in tax avoidance. This comment appears at the beginning of the article:

“Vodafone could get away with paying nothing because of the so-called substantial shareholding exemption.”

But of course, those of us in the industry know that this is a straightforward above the board tax break. Note how they describe it – the “so-called substantial shareholding exemption” – as if somehow the exemption is an imposter, who has no business to be in the tax legislation at all!

This is a copy of an email I sent to the editor and the two reporters involved:

Dear Sir

I am sorry to say that I have to take issue with your article on Vodafone, which mentions that the company is to have the benefit of a UK tax break if it were to sell its stake in Verizon Wireless.

In my opinion, the article gives a highly misleading impression that this is a piece of tax avoidance. It is not. Even the UK tax authorities would agree on this point. I am surprised that a leading business magazine should have got the wrong angle on this story.

I happen to be a tax lawyer, so perhaps you might say I would naturally favour the taxpayer. This is not the case here. While there are abuses in the tax world, this isn’t one of them.

The article rightly states that Vodafone are going to come in for a lot of flack with the public over this. This is not surprising given that they’ve come in for flack before. Once you’ve got a reputation for using loopholes (perceived or not), then anything that you do is bound to attract criticism.

But where the article falls down is that the reporters then decide to “run with the story” giving the impression that even claiming this legitimate tax break is somehow blameworthy.

“Vodafone could get away with paying nothing because of the so-called substantial shareholding exemption.”

The way it’s written – they’re “getting away with” it – as if they’ve just been caught with their hand in the cookie jar.

But the exemption isn’t a loophole. It happens to be one of those tax breaks that is expressly written into the tax legislation for the very purpose that Vodafone will be using it if they decide to sell. There isn’t any fancy footwork involved – all that’s required is to set up a subsidiary to buy another business, and if you get an offer you sell the company. In fact Vodafone don’t have a choice about claiming the exemption. It’s mandatory – you can’t actually opt out of it.

It is on the same level as the capital gains tax exemption for selling your home or an ISA investment. When you sell your home, no one says that you’re getting away with not paying CGT (note to the politicians mentioned in the article). If you invest your money in an ISA and are lucky or skilful enough to make a fortune, no one says that you’re getting away with it because it’s all in a government approved tax shelter.

The article also states that the exemption is a HMRC rule. Well, no it isn’t a HMRC rule, it happens to be the law of the land. This might sound trivial, but actually it is really important.

HMRC is a government department, responsible for collecting taxes – they also advise on tax policy, and yes, they do have a large input into what goes into the Budget. But it’s Parliament that enacts the rule.

Because it is a fundamental constitutional principle that no one can be taxed in this country without the consent of Parliament. This is such an important principle which lies at the heart of all the press reports we see on tax avoidance, and yet this is never explicitly mentioned.

This is a shame because the press has always had such a large part to play when it comes to constitutional issues. Reporters should be more informative about what they write – and to do this, they need to inform themselves first. So if a company’s tax affairs are abusive they should certainly say so – but the reporters need to make sure that this really is the case. Unlike what has happened in your article.

What about the politicians?

I fear that this has proved to be a long letter and I apologise for this. However, I cannot end this without mentioning the comments from the two Labour MPs mentioned in your article. Neither of them has understood the issue about the tax exemption.

Fiona Mactaggart has said that the tax exemption is a reflection of a government failing to be sufficiently precise to ensure that tax obligations operate in the interests of the wider UK economy.

Austin Mitchell has talked about the public being “shocked and horrified” and that the whole thing is a scandal.

Surely you must be aware that it was a Labour government who introduced this tax break in 2002. The exemption was introduced specifically to make the UK more competitive, compared with other jurisdictions such as the Netherlands.

Both of these people were in Parliament at the time. Did they state their concerns during the readings of the Finance Bill?

Mr Mitchell claims that he wasn’t aware of this rule. Why not? I can understand why anyone else outside the tax world wouldn’t know about this, but given his job as an MP, this is disturbing. We are talking about a money bill, the most important bill in the Parliamentary session. Going back to the rule of no taxation without representation, Mr Mitchell is one of the people whose job it is to give his consent on our behalf – so how is it that he knew nothing?

Yours faithfully

Satwaki Chanda

Surprisingly I received an acknowledgement to this email. I don’t know whether I’ll hear anything further.

What is crucial however, is that the press – and particularly the financial press – should report important issues such as tax avoidance and evasion in a way that is accurate and informative.  We cannot have a serious debate if a straightforward piece of tax planning is misrepresented as suspect behaviour, with the party involved  being described as”getting away with it”.

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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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