Is it actually really simple?
Recently, there has been a lot of news about tax avoidance and new tax legislation.
Apart from the now clichéd decision of the EU Competition Commission against Apple for its tax policies in Ireland, recently Donald Trump announced his intention to reduce the US corporate tax to 15% to boost the country’s economy. This is seen by many as the usual politician’s rhetoric; sceptics have argued such a figure is unrealistic and will do nothing more than increase the national debt.
Indeed, tax law is not that simple.
Systems of taxation vary among governments, meaning tax law has been described as a Gordian knot that is very difficult to untie.
In simple terms, tax is an amount of money paid to the government, on profits for sales, procuring or for using goods and services. These charges are usually calculated on different rates, depending on the government or type of tax.
There are many different type of tax.
Corporate taxes are based on how the profits a company, for instance Apple, earns. Income taxes are based on how much a person earns (salaries and wages). Sales taxes are based on how much a person/entity buys (Value Added Tax). Stamp duties are paid when an official document is approved (e.g. when changing the title of a house). There are also more specialised types of tax such as inheritance or estate tax, property tax, etc.
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But it’s not as simple and distinct as that. Many countries charge taxes at different rates for companies, residents and non-residents. Corporate tax, for instance, in the United States is 30%, United Kingdom 20%, Ireland 12.5% and in some other countries — called tax havens — the rates are as low as 0% (Cayman Islands for instance).
Though citizens may grumble about the UK’s tax rates, the government uses the money it gets from taxes to pay for things, e.g. to pay for people who work for the government, to provide services such as education and healthcare, to maintain or build roads and for big projects such as the Hinkley Point C nuclear power plant in the UK.
It is against this backdrop that most criticisms against Apple’s actions have flared up.
About 90% of Apple’s foreign profits are earned by the Irish subsidiaries which are highly profitable because they hold rights to Apple’s intellectual property (IP). But these Irish entities paid little tax because they were not tax resident anywhere using a structure called transfer pricing, which allows companies to transfer the returns from sales of products from one country to a single country, in this case Ireland, with a relatively low corporate tax rate. However, the European Commission has argued this dubious profit-allocation deal allowed most of their profits to go to a ‘head-office’ which existed only on paper and was tax resident in no country, allowing Apple to shrink its tax rate in Europe to well below 1% (0.005%).
Though Apple has denied these allegations, it seems some other US companies such as Starbucks and Fiat may have been able to operate this system successfully because the US tax system operates a deferred tax system, whereby companies could defer the payment of its tax on profits to a convenient time in the future and which allows these companies to play around with the money and expand on its investments.
There have been recent clamp-downs on ‘tax avoidance’ and on parties that provide this sort of tax advice. In the UK, Her Majesty’s Revenue & Customs has recently issued a consultation to clamp down on accountancy firms, tax planners and law firms that provide advice on how to avoid tax. Under the plans, enablers could have to pay a fine of up to 100% of the tax the scheme’s underpaid.
That said, the uneven and complex nature of tax systems all over the world makes it easy for companies to manipulate and difficult for regulators to ‘legally’ clamp down on such practices.
Despite calls for a uniform tax rate in the EU, there is little evidence that this will become a reality. Others have argued rather than tax profits that companies declare, the government should place taxes on the sales made in each country, wherever it is declared. This will have the resulting effect of ensuring taxes are effectively paid, and that they go back to the proper authorities and customers. The general implication of this, especially as it relates to VAT and general accounting book-keeping principles, sums up the complexity of this thing called tax.
Omotayo Akorede is a final year law student at Bangor University.
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