The dangers of ever-closer tax scrutiny

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The Panama Papers have provoked yet more soul searching about tax avoidance. So over the weekend I read the guidance on Gaar recently issued by HM Revenue & Customs. For the benefit of readers outside the UK, and those within Britain who have a life, HMRC is Britain’s tax collecting agency and Gaar is the General Anti-Abuse Regulation, which has been part of Britain’s tax code since 2013.

Gaar nullifies any tax advantage gained from arrangements found to be abusive. It transforms, and perhaps eliminates, the traditional distinction between avoidance and evasion. It destroys the traditional argument that there is no morality in taxation, only the obligation to comply with the letter of the law and tax code. Regulations such as Gaar in effect say that if you ought to be paying tax, you are legally liable for the tax. Australia pioneered the idea of a general anti-avoidance statute approach a century ago, and France, Germany, Ireland and Canada (but not the US) have followed.

The declaration made in 1929 by Lord Clyde — “No man . . . is under the smallest obligation, moral or other, so to arrange his legal relations as to enable the Inland Revenue to put the largest possible shovel in his stores  . . . [and] the taxpayer is entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue” — has been overruled by statute. But it is easier to proclaim the goal than to make it operational. The guidelines subject a potentially abusive commercial arrangement to a “double reasonableness” test. The arrangement is not abusive if reasonable people would think it reasonable.

The primacy of reasonableness makes the outcry over the Panama Papers troubling. Reasonable is a matter of perception. While it seems reasonable to say that what is reasonable is what reasonable people would think reasonable, this circular definition breaks down if reasonable people have little knowledge of the complexities of modern finance and taxation.

I confess that I recently opened a brokerage account in Luxembourg, with a subsidiary of a Canadian bank. I have never been to Luxembourg except to visit Eurostat, the pan-European statistical agency (yes, I do get out sometimes, but not far). The purpose of the account is not to avoid tax, and the arrangement does not avoid tax. I opened the account to avoid excessive currency charges when buying foreign securities.

But I realise today that this arrangement might sound dodgy if it was described on the front page of a tabloid newspaper, and reasonable people might reasonably ask me to explain why it was reasonable; although no one in the City of London would raise an eyebrow, and many reasonable citizens with reasonably sophisticated investment portfolios would have similar arrangements (sometimes without knowing it).

There was nothing on David Cameron’s tax return that told us more than that the prime minister is a reasonably well-off bloke, which most of us know already. The obvious problem of transparency is that journalists, the general public and opposition politicians, who do not really understand what is going on and may not want to, are suspicious of complex-sounding transactions in which they do not themselves engage (or may not know that they themselves engage in).

Such scrutiny has two dangers. One is that having to explain your possibly complex financial affairs to unsympathetic journalists adds to the already too long list of reasons why able people might not want to go into politics. And the other is that such concerns draw attention away from genuinely serious and widespread tax evasion, corruption and money laundering, practices of which the Panama Papers provide yet further evidence.

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