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Courts in the UK have historically had very narrow interpretations of tax laws. The classic example is a House of Lords case called Commissioners of Inland Reve

Courts in the UK have historically had very narrow interpretations of tax laws. The classic example is a House of Lords case called Commissioners of Inland Revenue v. Duke of Westminster, where one of the judges gave this great judgment: "Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable." The influence of this case is still strongly felt today in courts, and this leaves the British Parliament with little power to make "strong" tax laws that have no "loopholes". American courts and laws do far more to assert jurisdiction and prevent tax avoidance, but as we know American tax rates are much lower than most countries.

narcissus 14y ago
I may be missing something in that quote, but I don't see how it follows from that judge's statement that parliament ends up with little power to make "strong" tax laws that have no "loopholes". I mean the way I see it, the judge is saying "hey, if someone follows the law, you can't complain if they're able to reduce their tax payable". But what I don't see is them saying "and you can't make laws to change that".
- unavoidable 14y ago
  See the gist of the reply I made to the other commenter. The reason this arises is generally because of the back-and-forth between Parliament and the courts. When a court gives a restrictive meaning to a given provision, it incentivizes Parliament to introduce more laws to capture the activity they wanted to capture in the first place. This has gone on for decades, and as a result, the British tax laws are a mess. When you have a massive number of provisions trying to capture essentially the same thing, then you are bound to run into inconsistencies, which lead to "loopholes".
  - narcissus 14y ago
    That makes sense... the context definitely helps. I love how laws remind me of some of the really bad code I've written in the past, with all sorts of broken patches trying to fix it, even though I know I just have to throw it out and start again...
    - keithpeter 14y ago
      Yup: Value Added Tax regulations on food. Is a scone a cake or a biscuit? The most recent was the government deciding that warm take away food would attract VAT. Cold food is zero rated except for cakes that are 'luxury' items. That lead to the infamous 'pasty tax', serious debate as to what temperature could be described as 'warm' and a hasty climb down. There is however a strong feeling that certain Large Internet Related Companies ought really to pay some tax on their UK operations.
      - Silhouette 14y ago
        There is however a strong feeling that certain Large Internet Related Companies ought really to pay some tax on their UK operations. I think it's not so much Internet-related companies as multinationals, who (unlike home-grown, smaller businesses) often have the scale and geographical diversity to play funny money games where all of their profits conveniently wind up being earned in a location where a very low tax rate is payable, even though the money was blatantly earned elsewhere. That creates a huge barrier to competition for those smaller, home-grown businesses, and obviously deprives the government of a lot of tax revenues they "deserve". The catch is that these businesses do pay a lot of tax in the originating countries: in the UK, for example, they probably collect VAT, make Employer's National Insurance contributions, and pay all kinds of consumption and property-related taxes. Additionally, these businesses typically employ a lot of local people. Consequently, if you sharply change the rules so they can't play their funny money games on Corporation Tax and as a consequence it really does become relatively expensive/unprofitable to operate within a certain country, then if they scale down or outright leave, it still hurts, a lot. So far, I don't see any happy ending to this impasse for the government that doesn't involve an unprecedented and IMHO implausible level of international cooperation. The more likely alternative seems to be governments realising that taxes on local profits are effectively a competitive international market, and having to learn to live within their means, probably rebalancing the tax system heavily in favour of consumption taxes and then making a whole round of adjustments to avoid screwing poor people because consumption taxes are regressive by nature. I can believe this would work, if you had sufficiently smart people figuring out how to balance everything properly, but for sure it would look very different to the tax landscape we have in most first world countries today. Of course there are also the more draconian options: windfall taxes, economic annihilation of tax havens until they stop undercutting everyone else, and the like. But I suspect the long term costs of breaking the rules because you're a government and you can would far outweigh any short term increase in tax revenues, so I don't see any of these as particularly likely.
lucian1900 14y ago
The UK tax code is also the most complex on Earth. A much simpler one would be much less likely to have "loopholes".
- unavoidable 14y ago
  The reason it is so "complicated" is the court ruling I mentioned above along with its progeny - narrow interpretations of tax laws (i.e. a strict "letter of the law" interpretation that the UK has followed) necessitates more lines of law in order to achieve a desired result. However the more words and sections in a law, the more complex it becomes, and after a certain point it leads to a great deal of conflicts. So yes, I think the tax laws need to be better written - but it's very difficult to do so given the historical developments and judicial attitude towards tax.
  - AnthonyMouse 14y ago
    >So yes, I think the tax laws need to be better written - but it's very difficult to do so given the historical developments and judicial attitude towards tax. I think you're hanging too much on the courts. The quote you provided is what courts are supposed to do. The fact that they don't do it in other cases is more of an attestation to the lack of justice available to those accused who lack economic and political power than to anything wrong with what they do with tax law. The real trouble is that profit-based tax accounting is highly subjective. If it costs you $90 to provide a service that you sell for $100 then you're supposed to pay tax on the $10 of profit. But things only cost what you pay for them. If you're selling for $100 and buying your raw materials from a corporate sibling in a lower tax jurisdiction, what is the "cost" of those materials? The customers are willing to pay about $100 for them; that seems like a reasonable total for the sum of your costs -- if you were making anything more then your powerful multinational supplier/franchisor could squeeze it out of you if you were independent, so the same goes for you as a subsidiary. Take an example: Suppose you're a franchisee who owns a coffee shop. You have to pay Multinational, Inc. to use their trademark and fly you to their location to get some training. They're in Ireland (or whatever) and pay tax on that money there. By the time you pay them and pay your employees and rent and utilities and all that, you have just enough to pay your own salary. Then you have nothing left as taxable income for Starbucks on Third Street, Inc., but that's perfectly alright with you because you're happy to be making a steady salary, so indefinite corporate break-even is a stable equilibrium. If Starbucks International then comes in and offers to buy your franchise, it makes no sense for that to change your now-subsidiary's corporate tax liability. And if it did, it just wouldn't happen -- instead of having subsidiaries they would continue to have franchisees "owned" by managers who make no more from the franchise than they could be expected to draw as salary from the manager position. They call this problem "transfer pricing" -- you get to deduct costs from taxable income, and you get to decide (within reason) how much your costs are. But when profit margins are thin, a (very reasonable) couple of percentage points difference in the cost paid to a corporate sibling can easily erase all of your in-country profits. I haven't heard anyone come up with a reasonable solution to it, other than to stop trying to tax profit and tax something else instead.

narcissus 14y ago

I may be missing something in that quote, but I don't see how it follows from that judge's statement that parliament ends up with little power to make "strong" tax laws that have no "loopholes". I mean the way I see it, the judge is saying "hey, if someone follows the law, you can't complain if they're able to reduce their tax payable". But what I don't see is them saying "and you can't make laws to change that".

unavoidable 14y ago
See the gist of the reply I made to the other commenter. The reason this arises is generally because of the back-and-forth between Parliament and the courts. When a court gives a restrictive meaning to a given provision, it incentivizes Parliament to introduce more laws to capture the activity they wanted to capture in the first place. This has gone on for decades, and as a result, the British tax laws are a mess. When you have a massive number of provisions trying to capture essentially the same thing, then you are bound to run into inconsistencies, which lead to "loopholes".
- narcissus 14y ago
  That makes sense... the context definitely helps. I love how laws remind me of some of the really bad code I've written in the past, with all sorts of broken patches trying to fix it, even though I know I just have to throw it out and start again...
  - keithpeter 14y ago
    Yup: Value Added Tax regulations on food. Is a scone a cake or a biscuit? The most recent was the government deciding that warm take away food would attract VAT. Cold food is zero rated except for cakes that are 'luxury' items. That lead to the infamous 'pasty tax', serious debate as to what temperature could be described as 'warm' and a hasty climb down. There is however a strong feeling that certain Large Internet Related Companies ought really to pay some tax on their UK operations.
    - Silhouette 14y ago
      There is however a strong feeling that certain Large Internet Related Companies ought really to pay some tax on their UK operations. I think it's not so much Internet-related companies as multinationals, who (unlike home-grown, smaller businesses) often have the scale and geographical diversity to play funny money games where all of their profits conveniently wind up being earned in a location where a very low tax rate is payable, even though the money was blatantly earned elsewhere. That creates a huge barrier to competition for those smaller, home-grown businesses, and obviously deprives the government of a lot of tax revenues they "deserve". The catch is that these businesses do pay a lot of tax in the originating countries: in the UK, for example, they probably collect VAT, make Employer's National Insurance contributions, and pay all kinds of consumption and property-related taxes. Additionally, these businesses typically employ a lot of local people. Consequently, if you sharply change the rules so they can't play their funny money games on Corporation Tax and as a consequence it really does become relatively expensive/unprofitable to operate within a certain country, then if they scale down or outright leave, it still hurts, a lot. So far, I don't see any happy ending to this impasse for the government that doesn't involve an unprecedented and IMHO implausible level of international cooperation. The more likely alternative seems to be governments realising that taxes on local profits are effectively a competitive international market, and having to learn to live within their means, probably rebalancing the tax system heavily in favour of consumption taxes and then making a whole round of adjustments to avoid screwing poor people because consumption taxes are regressive by nature. I can believe this would work, if you had sufficiently smart people figuring out how to balance everything properly, but for sure it would look very different to the tax landscape we have in most first world countries today. Of course there are also the more draconian options: windfall taxes, economic annihilation of tax havens until they stop undercutting everyone else, and the like. But I suspect the long term costs of breaking the rules because you're a government and you can would far outweigh any short term increase in tax revenues, so I don't see any of these as particularly likely.

lucian1900 14y ago

The UK tax code is also the most complex on Earth. A much simpler one would be much less likely to have "loopholes".

unavoidable 14y ago
The reason it is so "complicated" is the court ruling I mentioned above along with its progeny - narrow interpretations of tax laws (i.e. a strict "letter of the law" interpretation that the UK has followed) necessitates more lines of law in order to achieve a desired result. However the more words and sections in a law, the more complex it becomes, and after a certain point it leads to a great deal of conflicts. So yes, I think the tax laws need to be better written - but it's very difficult to do so given the historical developments and judicial attitude towards tax.
- AnthonyMouse 14y ago
  >So yes, I think the tax laws need to be better written - but it's very difficult to do so given the historical developments and judicial attitude towards tax. I think you're hanging too much on the courts. The quote you provided is what courts are supposed to do. The fact that they don't do it in other cases is more of an attestation to the lack of justice available to those accused who lack economic and political power than to anything wrong with what they do with tax law. The real trouble is that profit-based tax accounting is highly subjective. If it costs you $90 to provide a service that you sell for $100 then you're supposed to pay tax on the $10 of profit. But things only cost what you pay for them. If you're selling for $100 and buying your raw materials from a corporate sibling in a lower tax jurisdiction, what is the "cost" of those materials? The customers are willing to pay about $100 for them; that seems like a reasonable total for the sum of your costs -- if you were making anything more then your powerful multinational supplier/franchisor could squeeze it out of you if you were independent, so the same goes for you as a subsidiary. Take an example: Suppose you're a franchisee who owns a coffee shop. You have to pay Multinational, Inc. to use their trademark and fly you to their location to get some training. They're in Ireland (or whatever) and pay tax on that money there. By the time you pay them and pay your employees and rent and utilities and all that, you have just enough to pay your own salary. Then you have nothing left as taxable income for Starbucks on Third Street, Inc., but that's perfectly alright with you because you're happy to be making a steady salary, so indefinite corporate break-even is a stable equilibrium. If Starbucks International then comes in and offers to buy your franchise, it makes no sense for that to change your now-subsidiary's corporate tax liability. And if it did, it just wouldn't happen -- instead of having subsidiaries they would continue to have franchisees "owned" by managers who make no more from the franchise than they could be expected to draw as salary from the manager position. They call this problem "transfer pricing" -- you get to deduct costs from taxable income, and you get to decide (within reason) how much your costs are. But when profit margins are thin, a (very reasonable) couple of percentage points difference in the cost paid to a corporate sibling can easily erase all of your in-country profits. I haven't heard anyone come up with a reasonable solution to it, other than to stop trying to tax profit and tax something else instead.