Jake's View

Action plan on tax an impossible task

For the proposed scheme to clamp down on tax evasion to be effective, it will require tracking down the domiciles of ultimate beneficiaries

PUBLISHED : Tuesday, 23 July, 2013, 12:00am
UPDATED : Thursday, 06 July, 2017, 11:38am

The Group of 20 has fully endorsed an action plan to clamp down on tax avoidance which its creators say could lead to the biggest change in the global tax system since the 1920s

SCMP, July 22

I shall go back a little further than the 1920s. The first income tax in the world was instituted by Britain in only 1798 and in the United States it was only permanently adopted in 1913. Before then, taxes were levied on imports, property, commodities, or were just straight extortion.

Income tax, therefore, has only a very recent history and is actually still more of a social experiment than a proven social institution.

It is also increasingly a failed experiment and for one simple reason - national governments, and therefore national tax authorities, are defined by national borders and their writ does not easily run outside them. Money, however, knows no borders these days.

Governments instinctively recognise it, which is why they now increasingly rely on other forms of taxation, most obviously value-added sales tax. They then compete against each other for foreign investment by reducing their income tax rates. Effectively, they increase taxes on the poor and reduce those on the rich.

What can a government do in corporation income tax, however, with a company whose business is risk taking in aircraft leases? Leave alone that profit defies definition in such a business, if the company has its official headquarters in Ireland and the Irish government has agreed that, for tax purposes, the risk is taken in Bermuda, which has the right to say that the sovereign government of Ireland may not make such a determination within Ireland?

Spend the money more wisely and you may not find yourself so short

It may be a fiction but there is no hard fact here anyway. It is impossible to say where such a financial risk is taken when the papers can be signed anywhere and when the ultimate beneficiaries live in almost every country in the world and not only change with every airplane deal but change after each deal is done.

Among my investments I have a holding of a fund of funds, which, at several steps removed from me, probably has a small stake in the debt paper of a Dublin-based aircraft leasing company.

If a Turkish airline finances the acquisition of a Brazilian-made aircraft through this firm, is the Hong Kong government owed tax because a Hong Kong resident is to a minute degree a beneficiary of the deal?

If you say that there is no need to chase down all the ultimate beneficiaries and you only require that the registered holder of the debt paper pays the prevailing tax on its earnings in its place of registration, you will find that this holder is inevitably a fund registered in Cayman Islands where its earnings are not taxed.

So then you can try to declare all businesses registered in the Cayman Islands as illegal and never get out of a courtroom again in your life.

Alternatively, you may find that the world has many more islands than the Cayman Islands alone and you just have to start the game from the beginning somewhere else again. The G20 may be keen on this initiative but the United Nations has 192 member countries, all of them on the hunt for new ways of making money.

There is no getting around it. To close the loopholes effectively you have to chase down the domiciles of the ultimate beneficiaries. For some investments this can be more than half the population of the world. Stop short of this and you just find yourself in the Cayman Islands again. It's an impossible task.

And, frankly, I don't sympathise much with the objectives. Keep the money in private hands and it will generally be well invested. Give it to government and you get the likes of the United States spending US$650 billion a year on its death machine to fight an imagined war on terrorism.

Property taxes are easily collectible and in most of the world generally spent on public services that people really value such as water, sewerage and police. I'm happy with them.

But here is my advice to governments that complain about income tax revenue - spend the money more wisely and you may not find yourself so short.