Why tax avoidance is like porn

I know it when I see it.

I know it when I see it.                                                                                                                                                        

Justice Potter Stewart of the US Supreme Court gave one of history's least fulfilling answers when he was asked to define "hard-core pornography"; but the grain of truth contained within is important.

The same temptation to throw one's hands up at the difficulty of defining complex phenomena is everywhere. The Economist's Daniel Knowles, for instance, suggests that it applies to poverty while the Sorites paradox – a close relative – attaches the problem to bald men and heaps of wheat.

It also applies, pretty much perfectly, to tax avoidance.

We all know it when we see it. Take, for example, Polly Toynbee's column from the Guardian today:

The big sell is trusts, special ones devised for this company's clients, guaranteed to protect almost all your wealth from inheritance tax. They are right, it can be done easily. Put all moveables and all cash and investments into a discretionary trust, and it passes to your heirs without tax as soon as you die, not even waiting for probate. It counts as a gift so the beneficiaries need pay no tax either. Called a "discretionary trust", as technically St James's are the legal trustees, the discretion in fact remains in all but name with you: the company will do whatever you ask, so you still control the fund and you can still take money from it. But for reasons that defy basic tax fairness, it avoids all inheritance tax. Why?

Or this example from the New Yorker back in March:

Since New York City tax laws don't apply to people who are deemed to be nonresidents, even if they own a residence in the city and work there, Robertson was allowed to spend no more than half a year – a hundred and eighty-three days – in New York City. This exile was self-imposed. If he had paid New York City tax, which in the top bracket reaches a rate of 3.6 per cent of taxable income, he could have spent as much time in the city as he wished...

Friday nights were particularly risky, since Robertson or his wife often had social events scheduled in the city. In order to "earn a tax day," as he put it, he usually left town on Friday before midnight, even if his wife stayed at the apartment. Robertson's driver had to be on alert: as long as they crossed the Queens border en route to Locust Valley by midnight, Robertson didn't have to "waste" a Saturday as a New York day. Even one minute of a day spent in the city counts as a day of residence. (Exceptions are made for people who are in transit from one destination outside the city to another – from Newark airport to Long Island, for example, or to LaGuardia for a flight.) Robertson said he never missed the midnight deadline, although when he couldn't get his driver or a limousine service in time he occasionally had to hail a cab. On one occasion, Robertson came back from a trip and found himself crossing into Manhattan at 11:45 P.M. That mistake cost him a full New York City day, which he could have avoided by whiling away fifteen minutes at the airport.

Or the three multinationals hauled up in front of the Public Accounts Committee, about whom Richard Murphy writes:

For Amazon things were much worse. Their rep could not justify how an order made in the UK for a product in a UK warehouse, shipped by UK staff through the UK post and with a bill enclosed printed in this country could somehow have anything to do with Luxembourg when so very obviously it hasn’t. Despite this he had the gall to claim tax must be paid where the economic substance of the deal is – even though Amazon does nothing of the sort…

Google tried harder but they had created one insurmountable obstacle for themselves. Their argument was profits should be taxed where they are earned and they said US technology drove their European profits. But for their admission that the payments made from Europe for that technology never reach the USA and instead get parked in tax-free Bermuda ended whatever shred of credibility they’d tried to create.

All of these things are as clearly tax avoidance as Reader's Wives is clearly pornography. The problem comes when you try to come up with a definition which encompasses all of these examples while not also covering whatever the taxation equivalent of Last Tango in Paris is.

You can try to define it as acting to deliberately minimise your tax take – but then, what is taking out an ISA? That is an action which is performed for no other reason than the tax benefits, but it's clearly not tax avoidance.

There must, then, be some definition of the spirit of the law. Loopholes in tax are put there for a reason, but sometimes that reason is tricky to specify completely. So, for example, the loophole that investment income in taxed less that earned income exists to encourage people to invest their money (which is good for growth) – but when hedge fund managers are payed through "carried interest", that gets classed as tax avoidance, because it is technically investment income, but hasn't actually required any investment from the people benefiting.

Unfortunately, that definition doesn't work either. The absence of VAT on books, for example, is to promote an educated, well-read population; but even though 1001 reasons Britain is shit doesn't do that, we don't call it tax avoidance.

The problem persists even if you just look at specific examples of avoidance. Multinational corporations, for instance, sometimes headquarter themselves in of tax havens. Other times, they leave their headquarters where they are, but manipulate their accounts so that it looks like all their profits come from tax havens. Tempting as it is, it's very tricky to come up with a catch-all definition of avoiding behaviour in this situation.

Is it "not paying tax where you are headquartered"? Or is it "not paying tax where the money is earned"? Or is it a third, "pretending money is earned in one place, when it's really earned in another one"? Or a fourth, "paying tax in a tax haven"? Or even just "operating out of a tax haven"?

Perhaps the real solution is to just stop trying. Call out egregious examples of tax avoidance, but resist the lure to dictate a full definition of the term. Make clear to those who set policy that building a tax code which is easily abused will result in protest, and that avoiding tax will result in bad press. But save definitions for the courts, because it's a fight which seems nearly impossible.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.