Anyone who googled ‘tax avoidance’ this week will have been confronted (between adverts for accountancy firms) with endless stories about Google’s own tax avoidance schemes. If the company’s reputational management team was striving to stem the flood of bad publicity, it was not succeeding. Salvation for -Google arrived only when Apple’s tax avoidance became the big story instead.
That is what the internet has created: a sometimes frightening, uncontrollable world in which information flows from place to place almost instantly and (mostly) unimpeded. Few would deny, however that the internet has had a benign and enriching influence on our lives overall.
Government officials often become bogged down in discussions to promote free trade, but the internet allows producers and consumers to leap bureaucratic barriers. If you are in London and want to buy a book, a holiday or a packet of exotic seeds, you no longer have to wait for someone to import it for you; you can do the importing yourself. If the product is one that can be digitised, such as a piece of music or a book, there is no need for your product even to pass through a port. The world is becoming one big marketplace in which we can shop anywhere that we wish, at any time of day or night.
It ought to come as no surprise that paying tax has itself been revolutionised in this electronic, borderless environment. If you can move production and sales quickly around the world, then you move tax jurisdictions easily too. And yet an awful lot of people this week, from BBC reporters to US senators, seem to have been shocked at the financial ingenuity of Google and Apple. Did they really think that at the heart of these empires lay plodding accountants who hadn’t worked out how to make the best of international outsourcing? Or maybe they assumed that both companies were run by philanthropic CEOs who, in a spirit of generosity, had voluntarily decided to pay more tax than they knew they needed to.
The fact that governments, including our own, are still using the term ‘tax avoidance’ shows how little they have understood the issue. Viewed from a global perspective, businesses are not so much avoiding tax as choosing where to pay it. It is impossible to separate the process by which a business searches the world for the cheapest raw materials and the cheapest labour — which all but the anti-globalisation lobby accept helps to create wealth — and the process by which they scour the world for the most efficient tax regimes. And it’s not just that businesses have the option to do this, it’s that they have a duty — to their shareholders, and to their consumers who like low prices.
If you run a London-based company and you decide to relocate some operations to Dublin because labour is cheaper there, do you deserve to be labelled a tax-avoider on the basis that taxes are also lower in Ireland? Tax is just one more item which has to go down as a cost on a balance sheet — it would be hard in many cases to attribute relocation decisions to one cost in particular. That said, the mobility of modern business presents a serious challenge for governments. They now need to compete for people, and they hate it.
Quite properly, any government will investigate and prosecute companies who break the rules. But if the tax system is addled with loopholes, can it really blame a company — or a stand-up comedian — that (legally) takes advantage of them?
Any sensible government can make the whole job a whole lot easier by levying low tax rates. One of the wheezes revealed this week involved Google selling advertising to British customers from an operation based in Ireland. Why? One of the reasons is that corporation tax in Ireland is only 12.5 per cent, compared with 23 per cent in the UK.
It is now almost certain that Google is to move its European headquarters from Dublin to London, encouraged by the declining rate of UK corporation tax. It was 28 per cent and is heading to 20 per cent — perhaps George Osborne’s best single policy. His restraint on taxing overseas profits is just as productive. This is how to increase revenues: compete for new corporate clients, rather than hound those we already have.
This week David Cameron wrote to the leaders of ten crown dependencies and British overseas territories asking for help in opening up the accounts of offshore companies which may be evading tax. That is fair enough: the tax system depends on everyone paying what they are due to pay, and no offshore regime should be sheltering those who break the rules — least of all British dependencies which benefit from the implicit -guarantee that Britain will defend them, and some of which receive help from Britain in other ways.
But it won’t do to carp at companies who legally and legitimately reduce their tax bill. Societies are fairer and stronger when people are allowed to keep more of the money they earn, and low corporation tax brings lower prices to the high street. The Prime Minister must appreciate that the best way to compete with countries with low tax regimes is to emulate them. This is, as he points out, a global race — and to win, we must have low taxes.