Sunday 23 October 2016

Tax avoidance culture still thrives despite clampdown

Published 30/04/2015 | 02:30

deposit photo cash
deposit photo cash

The game of cat and mouse between tax authorities and citizens has been played for a very long time. People have been dodging taxes for centuries. But the more nuanced and sophisticated game of avoiding tax is a more recent phenomenon. Indeed, when it comes to tax avoidance the game is played between the tax authorities and the financial advisers who come up with scenarios, schemes and constructs, to help avoid tax being paid.

  • Go To

The late British politician Denis Healey once said the difference between tax evasion and tax avoidance was the thickness of a prison wall. It is a useful quote because it illustrates the sizeable gap between something legal and something illegal, but it also places both activities on a similar moral plain.

I remember asking a very successful Irish tax adviser how he got started. He said he used to go to England and see what loopholes the British tax authorities were closing down. Then he would put a scheme together in Ireland for a client, based on that loophole. He knew the Irish tax authorities were years away from identifying and then shutting them down compared to their counterparts across the water.

Thankfully things have moved on. But not as much as they should.

Across Europe and the US, the debate about tax avoidance is dominated by the international tax structures put in place by global corporations.

Ireland features heavily in that debate too. The row is quite unique because it involves reducing tax bills with structures that have the backing of a government in one country but that might be frowned upon in another.

In some countries tax legislation is drafted with the achievement of international avoidance in mind. It isn't so much about finding the loophole and building the rules around the loophole.

But that only seems to apply to large global corporations whose contribution to the country will be greater than the loss of taxes.

You would almost think that old- fashioned tax avoidance arrangements, peddled by accountants for high net worth individuals, were a thing of the past here. The Revenue Commissioners' recently published annual report says otherwise.

The tax authorities are locked in a legal battle with around 89 wealthy individuals over a particular scheme. It involves a €100m loss of Capital Gains Tax for the exchequer.

Basically, individuals entered into contracts for difference or spread bets on foreign currency exchange movements. They claim that any profits arising are exempt from tax, while any losses that arise, create a loss for Capital Gains Tax. It's a kind of "heads you win, tails they lose", type structure.

The revenue may argue that the losses generated are artificial, but undoubtedly the beneficiaries will argue they are fully legally compliant.

In another scheme under investigation, a syndicate of 123 people moved financial instruments and dividends through secretive offshore tax havens. The individuals are claiming they bought a right to a dividend from a company in a tax haven, and losses from the trade can be offset against their tax bill here.

Then there were the €20m in tax settlements by medical consultants, mainly due from schemes where there was cross-charging between the consultants and their companies that lacked any commercial basis.

Avoidance is about putting in place legal schemes which use tax law in a way that it was never intended in order to avoid paying tax.

Get it wrong and you will be hit with a sizeable tax bill. However, there is little or no sanction for the brains behind these schemes - the accountants and tax advisers who dream them up.

If the scheme stands up to scrutiny, then they haven't done anything wrong. If it doesn't, then they may be sued by their client for telling them it was legal. That is it really. It is hardly a disincentive for dreaming up some pretty creative and elaborate tax avoidance schemes. Do it once and it may have been a mistake or an overzealous interpretation of the law.

Do it several times and they become a massive waste of public resources. First there is the lost tax and then there is the cost of challenging the scheme and pursuing the individuals.

Perhaps the lack of pressure on the architects of the schemes is because Ireland Inc needs those very same brains in those same firms to come up with ingenious structures around tax legislation, which have government backing, and will help attract inward investment.

The guys who came up with the Double Irish for example, were hardly seen as pariahs, even though the Irish government had to close it down in the end. This ambiguity around what is acceptable and unacceptable tax avoidance creates its own moral vacuum.

One of the driving forces for it is tax competition. When it comes to making Ireland attractive for foreign direct investment, we have to do it. Because others will.

It is as if the Government wants Irish tax practitioners to show tremendous ingenuity in facilitating corporate tax structures for big multinationals but not for individuals. Come up with a Double Irish structure for a global giant and it is "ingenious". Put together a scheme enabling some guy with €500,000 to €1m to avoid paying tax on it, and it is "devious".

Where does that leave the PAYE guy on the average industrial wage or the average self-employed person who is discriminated against in the tax code because they are wrongly seen as on a financial par with these high net worth individuals?

The medical consultants settlements plus the 89 guys in the contracts-for-difference probe (who may be shown to have acted legally) account for around €120m in taxes forgone. It involves around 130 people or so.

Yet that €120m is equal to the entire PAYE tax bill for five years of 3,300 workers earning €36,000 per year.

The Revenue Commissioners have been given greater powers and greater resources in the area of tax avoidance. Most of these schemes are uncovered when the accountants inform the Revenue of how they work, something they are obliged to do by law.

Tax law is complicated but it shouldn't take a genius to work out whether laws are being applied contrary to the purpose for which they were intended. Acquiring a right to a dividend from a company in a tax haven doesn't look like the normal course of business except in very rare circumstances.

These schemes are very much alive and well. The Revenue Commissioners have beefed up on skilled resources but they simply cannot pay what top accountants can earn from coming up with the schemes.

The Revenue are hiring an extra 400 staff this year across a diverse range of specialist skills areas such as tax and legal professionals, data analysts and information technology experts. The deterrent for tax advisers who put these schemes together is quite low.

Many clients will not sue. It is a win/win for the tax advisers.

The cat might be sharpening its claws, but the mice still have the advantage.


Indo Business

Read More

Promoted articles

Don't Miss

Editor's Choice