We love to blame others for all our economic woes. Multinationals are playing the tax system to their advantage, too many immigrants taking jobs and claiming benefits, families dependent on the welfare state receive support that is sometimes higher than the average wage. You know the score.
I’m going to start with tax avoidance, a major current topic in the media and with politicians. The multinationals are being slated for not paying their fair share of tax. It is hard to be happy if you hear that in 2011 Google paid £6m corporation tax on a turnover of £395m and Amazon a miserly £1.8m on a £3.35bn turnover. Since corporation tax is based on profits it assumes that we believe their UK profitability is virtually zero. If that really was the case, I think Google and Amazon would be selling up and shutting down in the UK.
This doesn’t seem fair or reasonable and it smacks of tax evasion, which is one of three categories for avoiding paying tax.
The three categories are:
- Tax avoidance
- Tax planning
- Tax evasion
1. Tax avoidance, according to HMRC, is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law.
Some claim it is difficult to close all the loopholes since that would require international agreement, but surely it is not beyond the UK government’s capability to ensure the rules are adjusted so that it is able to tax a fair share of the profits earned by multinationals operating within its territory. HMRC has a briefing sheet on this topic stating that tax avoidance deprives the UK of around £5 billion a year which is only in fact one percent of all tax due.
2. Tax planning, however, is using tax relief for the purpose for which they were intended. For example the government encourages people to save in tax free ISA accounts and make tax deductable contributions to personal pension schemes. Tax planning is a good thing.
3. Tax evasion is when people and firms illegally avoid paying taxes they owe. The hidden or black economy in the UK is estimated to be around 10% and is where people will work for cash in hand. It also includes cash sales where no VAT is paid.
Tax evasion also involves people claiming benefits and not declaring that they are employed. The black economy in any country is likely to be higher during a recession, when tax levels are very high and where legislation is weak.
So how does the UK compare to other countries?
In Spain the black economy is 19% of GDP and in Greece it is 25% of GDP.
In Spain hundreds of thousands of people claim unemployment benefit when they actually have some kind of work; millions are not registered as working, which means that neither they nor their employers are paying social security contributions. When unemployment in Spain fell to 8.5 per cent at the height of the boom in 2006-07, they could find no workers to hire. Strangely that figure is higher than the current UK unemployment rate of 7.8%. So in reality many more people work in Spain than the official statistics show and it means that the Spanish government is losing out on valuable tax revenues.
If you think that is a problem then consider the view of Christian Aid. The charity thinks the tax situation is actually much worse in lower income countries, which on average collect 13 % of their GDP in tax revenues, compared to around 35 %in countries in the OECD. The economy is a little different in these lower income countries, because as well as having large informal sectors, many farmers do not earn enough taxable income from their small holding. The multinationals companies investing in these countries could afford to pay their fair share of taxes to help alleviate poverty, but the lower income countries have often given them tax breaks to prevent these companies going to even lower tax havens.
There is a mood many countries to clamp down on both tax avoidance and tax evasion, but is there the will? Large multinationals seems to have more power than elected governments simply by the fear of them investing elsewhere.