Ian Read, the Scottish born chairman and CEO of Pfizer, must often have left his public relations advisers wringing their hands. But last week he surpassed himself when he expressed incomprehension that ‘the political class’ – you can almost hear the derision  – were not ‘applauding’ his company’s plan for a reverse takeover by Allergan through which Pfizer  would move its headquarters to Ireland.

Allergan (formerly known as Actavis and before that as Watson) describes itself as pioneering a new model in the drug sector. The ‘new model’ appears to be that of an investment company trading pharmaceutical businesses.  Dublin based Allergan is as authentically Irish as an empty bar on a Saturday night; its operational headquarters are in New Jersey.   The planned merger is a tax inversion, a device which enables a US company with accumulated profits overseas to utilise them more freely without incurring US tax liability.  What Mr Read found difficult to understand was that ‘the political class’ did not share his joy that the money the US Treasury would not be receiving as a result of the inversion would be available for Pfizer’s other purposes, including, but not confined to, the merged company’s research and development.

It is conventional to distinguish legal tax avoidance from illegal tax evasion.  But the reality is that there is a spectrum. The person who avoids the heavy taxation of cigarettes  by giving up smoking wins our approval; the gangmaster who employs illegal workers off the radar screen of government authorities goes to prison when he is detected. But most cases lie in between. HMRC has issued massive payments claims to people who invested in highly artificial film finance schemes which did not  qualify for the allowances they claimed. Were they  avoiders or evaders? The line between avoidance and evasion would be clear only if the law were clear, and it is not.  Tax law is complex and the legality of particular actions can only be firmly established if there is a decision by a court on the facts of a particular case.

HMRC identifies a ‘tax gap’ by reference to the tax unpaid when it loses cases in the courts, a strange definition which makes ‘tax avoidance’ the difference between what the law is and what HMRC thinks it ought to be. Yet that definition is not so different from the plausible one proposed by the Tax Justice Network; tax avoidance occurs when, if that is the law, most reasonable people would think the law should be changed.

Most tax avoidance is based on an assertion that profits are earned in jurisdictions where in fact little or no productive activity takes place or  from the anomaly that interest payable on purely financial transactions is generally deductible as it if were a trading expense, These problems have grown, not just as a result of ever more ingenious tax advisers, but as a result of the globalisation and dematerialisation of modern corporate activity.  When profits are earned, and financial transactions completed, in cyberspace, where is the territorial jurisdiction to which they are to be attributed?

Avoidance opportunities are thus inherent in the structural weaknesses of income tax and corporation tax themselves, and any comprehensive attack could only be part of a comprehensive reform of these taxes:  something we cannot anticipate any time soon, and certainly not on the global basis which would be required to deal with companies – like Pfizer – which manufacture and sell globally, or the internationally mobile individuals with wealth sufficient to make the employment of costly tax advisers worthwhile.

But does the failure of ‘the political class’ to address these issues justify statements such as those of Mr Read?  In a subsequent column, I will address the consequences of tax avoidance – and its implications for individuals, companies and ‘the political class’.