A capital dispute

The blogosphere has enthusiastically embraced the funny distinction the Treasury made last week about controlled foreign companies. Embraced in that it has caused a few good and provocative debates.

For those of you who haven’t read about it, the government basically said that offshore CFCs’ profits should be taxed in the UK where the profits were derived from ‘capital’, and not from ‘labour’.

I made the point, which I stand by, that that distinction is old-fashioned. I suggested it was Marxist, which I might retract, but only on the basis that I might be doing Marx a disservice by attributing to Marxism such a crude distinction.

The idea that profits from capital are not economic activity, whereas profits from labour are, seems silly at best and at worst wholly contradictory to the New Labour project, which is all about being more relaxed about what capitalists get up to. It’s funny to see Gordon Brown’s Treasury show such distaste for ‘the profits of capital’.

Dennis Howlett thinks that there is an Old Labour/New Labour distinction here that may help us to understand the future direction of the tax avoidance debate. I think he’s on to something there, certainly if you consider Stephen Byers’ views on tax, which imply a far more relaxed attitude to rich people not paying tax, if not commenting specifically on tax avoidance. (The extent to which he represents New Labour is of course open to debate.)

Richard Murphy takes the view that the Treasury is right, on the basis that all these offshore Treasury functions are a try-on. He quotes recent research showing that such functions have an average of zero employees, for instance (one quibble I have with this is that the research refers to a ‘median,’ a type of average which is, of course, critically different from the general perception of an average…).

I have no way of assessing whether or not any or all treasury functions are try-ons, and Richard may well be right. The examples he cites, if they are accurate descriptions of how people do business, certainly give rise to criticism.

My point would be that the Treasury is unlikely to be able to make those fine distinctions as to what is a try-on and what isn’t by using this labour/capital split.

It will be challenged at every stage, because it is not a particularly intelligent or finely tuned point. And the Treasury will get no closer to achieving its aim of stamping out abuse.