Hugo Dixon: When is it OK to avoid tax?

By Hugo Dixon
January 21, 2013

When is it OK to avoid tax? And when should taxpayers refrain from actions that will cut their bills, even if their actions are perfectly legal? 

As the European economy remains sluggish, the public mood has turned against those who seem to be paying less than their fair share of tax. Last week, for example, saw Goldman Sachs abandon an idea to switch UK bonus dates to cut its employees’ tax bills and an escalation in the row about Greek tax cheating. 

The cases are, of course, very different. In Greece, tax evasion – which is against the law – is rife. The International Monetary Fund’s latest review on the country, published on Friday, says that the “losses to the state from tax evasion are enormous”. It estimates the black economy is 25 percent of GDP.

Three years after its financial crisis began, Greece has made little progress in cracking down on tax cheats. Although Athens did adopt a strategy of focusing on priority areas, the IMF says implementation has been stalled in part because the tax administration remains unreformed: “Anti-corruption efforts have been minimal, and efforts to remove underperforming staff have met stiff resistance.” 

But the rot extends beyond corrupt tax officials. In recent months, Greek politics has been transfixed by the scandal over the so-called “Lagarde List”, which contains the names of more than 2,000 Greek citizens who had bank accounts at a Swiss HSBC branch. Christine Lagarde, then France’s finance minister, passed the list to George Papaconstantinou, her Greek opposite number, in 2010. 

Insufficient effort was made to investigate whether tax had been paid on the money in these Swiss bank accounts. At some point, the original list was even “lost”. Further fuel was added to the fire when it emerged that three of Papaconstantinou’s relatives didn’t appear on a copy of the list that did survive. Parliament last week voted to investigate him. The former Greek finance minister says he did not remove his relative’s names, saying he is the victim of “a crass and blatant attempt at incrimination”. 

Whatever actually happened to the “Lagarde List”, Greece is at the extreme end of the spectrum of tax cheating in Europe. But even in the UK, where tax evasion is less common, the zeitgeist has changed. Individuals and companies have come under attack by politicians, officials and the media for tax-reduction schemes which are either in the grey zone or perfectly legal. 

One practice is the habit of people providing their services through companies they own rather than being classified as employees, which incurs higher tax. Last year the government discovered that 2,400 civil servants were being engaged in this way and tightened the rules. There has also been a row over how Starbucks cut its UK corporation tax. After a torrent of criticism, the coffee chain agreed to pay more UK tax. 

Now Goldman has buckled to pressure after it emerged it was considering shifting the date that it was to pay some bonuses to take advantage of the fact that the top rate of income tax will fall from 50 percent to 45 percent. Mervyn King, governor of the Bank of England, described the idea that Goldman would do this as “depressing”. 

Goldman misjudged the public mood and made a hasty U-turn. That was clearly the right thing to do to protect its reputation, given the hostility to the banking industry and the fact that banks were all directly or indirectly bailed out by taxpayers during the financial crisis. 

But what Goldman had been considering was not illegal. Under UK tax law, bonuses that are part of a contractual entitlement have to be paid on the due date. But companies are free to pay discretionary bonuses whenever they wish. Indeed, many businesses will be delaying their bonuses this year to take advantage of the lower tax rate. 

Taxpayers should, of course, abide by the spirit as well as the letter of the law. Indeed, there is even a UK code of practice for the banking industry which says precisely this.

But it is hard to argue that “bonus-shifting” even contravenes the spirit of the law. The government, after all, knew that this was likely to happen. When the top tax rate of 50 percent was introduced in 2010, many companies accelerated their bonuses to avoid the higher rate. Last year, the government estimated that 16-18 billion pounds of income, not all of it bonuses, had been brought forward in this way. It also factored such income-shifting into its estimate of what would happen when the tax rate was cut. 

If parliament had really wanted companies to refrain from such behaviour, it should have said so. But it didn’t. The Conservative-led coalition government even took apparent pleasure from the fact that the previous Labour government, which introduced the 50 percent tax rate, got its maths wrong. 

The key ethical principle that taxpayers should adopt is that they will abide by both the spirit and the letter of the law. But, as the Goldman case shows, this doesn’t necessarily protect one from being pilloried. Public attitudes about what is fair when it comes to avoiding tax are hardening. Companies in the public eye should therefore add a further practical principle: abide by the spirit of the times.

4 comments

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Aside from blatant cases like the Goldman bonuses, it’s ridiculous to imply or state that taxpayers should attempt to comply with the “spirit of the law” or the “spirit of the times”.

It’s already extremely difficult to comply with the law, especially in countries like the USA, with its horribly convoluted tax code.

Perhaps US taxpayers should start filling out their tax returns in the “spirit of the US Constitution” and in the spirit of the revolutionary war rallying cry “No taxes without representation”.

As I see it, US citizens overseas have no representation, yet are expected to pay US federal taxes. Is that in the spirit of the times?

Posted by LoveJoyOne | Report as abusive

U.S. citizens have taxation WITH representation no matter where they live. They receive the benefits of being a citizen of the greatest country of the world. U.S. citizens and corporations receive credit for foreign taxes paid against their U.S. taxes. If you feel that you don’t want to be a U.S. citizen, become a Russian citizen (like some tax dodgers) and enjoy their brand of democracy. Just be sure to get rid of all your investments in U.S. companies and property, your U.S. passport, and never visit our shores again. Maybe participating in a Russian election will make you feel represented.

Posted by QuietThinker | Report as abusive

QuiteThinker,

“U.S. citizens have taxation WITH representation no matter where they live.”

Sorry, but that’s not really true. Longtime residents in foreign countries do not belong to any constituency. They can vote in Presidential elections but in reality, they are not represented by a congressman or a senator, unless they list a town in the US as their residence, which is ridiculous and plain wrong, for someone who has lived overseas for years or decades.

As for taxes, the US is the only country in the world which taxes income earned by citizens who reside and pay taxes in another country. No other country does so, not even Russia (on which you seem to have some sort of fixation), the Chinese or Zimbabwe.

The US tax code requires citizens living abroad to recognize theoretical changes in the value of their overseas assets, such as their homes, due to exchange rate fluctuations as capital gains – even if the home has not been sold. This is one of the most ridiculous features of the tax code. Can you imagine paying taxes on increases in your home price every year, even if you haven’t sold the home?

As the US Dollar has hovered at a near record low levels, this has made foreign income and assets appear artificially high in US Dollar terms. In some countries the exchange rate effect is great enough to have literally doubled the theoretical income and asset values in US Dollar terms in the last 10 years for someone who has not had a penny of salary increase.

The result is, someone could literally be living below the poverty line in a European country, but the income in US Dollar terms could place them in a high tax bracket in the US. Also ridiculous. We have to pay because the US shot the Dollar to smithereens?

As for your suggestion to give up US citizenship, unfortunately thousands are being forced to do so, not because they don’t love the US, but because the administrative and fiscal burdens make it impossible for them to maintain their passports.

This is a great loss to America, which misses out on the cultural diversity and representation oversees, which have brought many benefits to countries like Great Britain and France, which have expats in many countries who often are industry leaders which bring home lucrative business.

Meanwhile, the US outsources millions of jobs to India, Pakistan or whatever, and yet discourages through fiscal policies its own citizens from living and working overseas. Doesn’t that seem perverse?

Posted by LoveJoyOne | Report as abusive

It is ok to not pay taxes if you are wealthy.
Paying taxes is for working people who need the money.
That answers the question.

Posted by americanguy | Report as abusive