Monday, January 14, 2013

UK's Labour party too timid on the big issue in corporate tax avoidance

Ed Balls of the UK's opposition Labour Party has written an article in the Huffington Post about how the party intends to tackle the tax avoidance scandal. He says many good things (as shown here) but at the end of the day he has committed his party to tinkering at the margins of the system. Some of these tinkerings would doubtless improve matters, but they would not get close to solving the underlying problem - which is that the international tax system is completely broken. The rules cannot be enforced.

We highlight the offending text in Mr. Balls' statement below, in bold:
"We're going to have to reform the current rules that allow companies to make profits in Britain but pay no tax. That means reform of our corporation tax system. In the 21st Century value is now often in brands, intellectual property, customer loyalty and ideas which can be traded globally between different parts of a company group. The rules need to be clearer, tighter and properly enforced.

That is why, as part of the policy review, we will also be looking at the rules underpinning the taxation of multinationals. We will examine international lessons on how we can improve transfer pricing rules, learning from countries where rules are more strictly applied. Shadow exchequer secretary Catherine McKinnell and I will be publishing a consultation document in the coming weeks and we will gather evidence from experts across the corporation tax field."
As we have clearly demonstrated, it is time to abolish transfer pricing rules and move to a unitary system. If Labour are saying that they want only to 'improve transfer pricing rules' - rules that cannot adequately be enforced -  then they are committing themselves to failure. It really is as simple as that.

Read more about Unitary Taxation - which many top experts agree is the only sane, long-term alternative to the current and growing mess of the international tax system - here.

Perhaps the biggest argument against unitary is the "Qwertyuiop" argument (an expanded version of the 'Qwerty' argument which holds that this is the way things have always been done, and it's hard to change, so let's not even bother to try). This argument is, at the end of the day, a tacit admission that you are wrong. As the FT just put it in an otherwise somewhat lukewarm editorial on unitary tax:
"As governments contemplate the crisis of confidence in the international tax system, they may conclude: if not now, when?
OK: we accept that this is a pretty big ask of the Labour Party, at least at this stage. Outside specialist circles the issue has only seriously been raised on this in the UK in recent months, notably by Prof. Picciotto's paper. We recognise there's a long campaigning haul ahead . They will get there, we believe. But still, if this is the right course of action, and the changes to the transfer pricing rules that they are talking about will take several years anyway - then why wait?

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