Did Panorama uncover the whole tax truth?

by Elspeth Orcharton, ICAS

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15 May 2012

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TO WATCH PANORAMA on Monday would suggest to most that big business (one pharmaceutical in particular) wasn't paying its fair share of tax. That Luxembourg is a country of featureless office blocks where fictitious businessmen conspire with a complicit tax authority to steal from the UK taxpayer.

And, incidentally, parliament complained that HMRC wasn't accountable to them, so it must all be that big business is too close to the government.

Whilst no apologist for any point of view, here are a few truths about tax.

In the UK, it's not just this government, it's been all governments over the past decade at least, who have been making the UK tax system more internationally business-focussed.

They have all understood that there is a global marketplace for large businesses and, in parallel, a global marketplace has arisen for tax jurisdictions around the world.

The UK governments may not like this, but they can't control it, only put out their best stall and package. Otherwise businesses leave the UK take tax revenue with them.

Luxembourg has set its stall offering tax efficient holding company operations (as featured), with advance tax clearances giving companies certainty of tax treatment, which is highly valued.

Successive UK governments have increased the attractiveness of the UK by reducing its holding company tax burdens, including restricting the controlled foreign company regime, reducing the corporate tax rate, and proposing a patent box tax regime.

It has been a realistic response, reflected in the tax laws they have passed; the odd loophole from badly written legislation aside, that's why it's legal. The proposed general anti-abuse rule (GAAR) is aimed at giving an extra law to make the artificially-applied loopholes not legal.

I also note Glaxo's effective tax rate for 2009 was 28.2%. What is a fair rate? If it's not being paid in the UK, it's being paid somewhere else. Is that fair? All this is reflective of the fact that jurisdictions around the world act in competition rather than collaboratively on many tax issues, and until that is fixed (and it is perhaps a bit like fixing global warming - consensus is an issue) this is reality.

As regards the tax authorities, it's not all one way; they often do enforce legislation with sometimes harsh effects. In a matter of some irony, it was Glaxo who in 2006 gained significant publicity because they had to pay tax in both the UK and US on the profits from some key drugs - the mutual agreement procedure whereby our two great nations sought to ensure profits earned by groups in both jurisdictions paid - fairly - tax in only one, failed. The cost was reportedly some $3bn. That's not a typo, and if you're arguing fairness in tax systems, a taxpayer in Glaxo's shoes might just offer support.

And as for UK parliamentary scrutiny, PAC chairman Margaret Hodge was right about the operational approach in HMRC and changes are afoot - it is clear that confidence in the outgoing leadership of HMRC was shaken and it is vital that the new HMRC board and the National Audit Office work together to meet the taxpayer confidentiality concerns whilst at the same time, demonstrate rigour and fairness in collecting the right amount of tax as required by law.

Elspeth Orcharton is assistant director of tax at ICAS

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