Andrew Goodall

Most tax gap estimates are flawed, academics claim

Oxford researchers highlight 'shortcomings' but civil society groups were forced to produce estimates in the absence of research by international institutions, say campaigners

Information regarding revenue losses in developing countries caused by tax evasion and avoidance is very limited, partly due to a lack of data and partly due to "methodological shortcomings of existing studies," according to new research.

Clemens Fuest and Nadine Riedel of the Oxford University Centre for Business Taxation prepared the report – entitled Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the existing literature – for the UK's Department for International Development (DFID).

The report's publication came as the UK Treasury was reported to be preparing to voice support for country-by-country reporting. Christian Aid has been lobbying the big four accounting firms to use their influence at the International Accounting Standards Board to argue for the reform. The charity has estimated that tax revenue lost by developing countries due to "trade mispricing" by multinationals amounts to US $160bn a year.

Fuest and Riedel concluded that some of the existing estimates of revenue losses due to tax avoidance and evasion by firms – in particular, some studies on corporate profit shifting – "systematically overestimate the losses".

They added: "Other studies are based on assumptions which are so restrictive that the results are difficult to interpret. Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data.

The report recommended a number of possible directions for further research to "improve our understanding of tax avoidance and evasion and the implications of these activities for revenue mobilisation in developing countries".

The Tax Justice Network's research was among the papers reviewed in the Oxford report. Responding to the report, the TJN pointed out on its blog that "in the absence of any useful research emanating from the IMF, World Bank, and indeed academic bodies far better funded than we are, almost all of the literature under review here originates from civil society organisations".The TJN had been “forced” to produce estimates based on whatever datasets become available “in order to challenge those institutions which should be taking these issues seriously to produce estimates of their own,” it said.

The current issue of Tolley's Practical Tax newsletter (3 July) has more on this and other very recent developments including:

• Private residence relief claimants under fire – but HMRC guidance spells out how longstanding exemption written into tax law saves capital gains tax
• Finance Bill progress
• HMRC has 'serious problems' with online trust returns
• 'Vodcast' shatters accountant stereotype, claims ACCA
• New SAYE bonus rates offer 'almost no return'

HMRC’s tax guidance for MPs and ministers

David Grossman at the BBC's Newsnight seems to have his finger on the MPs' tax and expenses button, as Mark Lee mentioned here. In this video, posted last week, Grossman illustrated how some MPs have been able to save capital gains tax on their second homes. The CGT exemption is set out clearly in the legislation, and HMRC guidance to MPs (published by Newsnight) includes this statement:

"If you have more than one residence you can choose which one is to qualify for the exemption from capital gains tax. It does not have to be your 'home' for the purposes of [the MPs' additional costs allowance] and travel."

HMRC adds that:

"You can change your choice at a later date ..."

All very helpful, well known to tax advisers and hardly controversial until now. Suddenly the rules seem rather too generous, and people are starting to ask why.

On expenses, the HMRC guidance also seems perfectly clear. A list of items that are not allowed as a deduction includes:

"Accountancy fees incurred in the preparation of the self assessment tax return or related expenses claims."

That's the tax position. The really interesting question, though, is why on earth the taxpayer should be expected to pay a minister's fees for personal tax advice. David Cameron has said, according the Telegraph:

"It beggars belief. If any Conservative MP has used an accountant to do their personal tax return and has claimed that off the taxpayer I will make them pay that money back. They ought to pay that money back, it is completely wrong."

Expenses, personal tax advice and vilification of MPs

I was back at work yesterday after a fortnight's holiday that began on day two of the MPs' expenses scandal as revealed by the Daily Telegraph. Now I need another holiday. I am outraged, of course, by the behaviour of some of our MPs, and I worry about the effect of the scandal on our already weak democracy. If this "political earthquake" leads to more transparency and accountability, then some good will have come out of it. Scandal is the right word – even Jack Straw, the justice secretary, used it several times in a radio interview yesterday.

But there are limits and it would be completely wrong and dangerous to vilify politicians generally. As Joan Smith as pointed out, most of our elected representatives have not done "anything terrible". The danger is that "in this uniquely poisonous atmosphere, years of conscientious public service count for nothing".

There are a few important tax angles here, with possible implications for all taxpayers. I trust we can expect HM Revenue and Customs to conduct a thorough investigation into MPs' tax returns – including those of government ministers whose fees for personal tax advice have been funded by the taxpayer. More on this soon. But I'm going to see MPs' scrutiny of the current Finance Bill in a new light, I think.

Tax avoidance – exploiting design faults, or fiscal polo?

Tax practitioners and senior figures in the tax industry have begun to engage in the tax avoidance debate prompted by the Guardian's recent "tax gap" series. Recent articles in Tolley's Practical Tax newsletter reviewing the series were reproduced in the Tax Journal, also published by LexisNexis, and experts have responded in both publications. The following extracts, from two contributors with opposing views, give a flavour of the debate so far.

'Much avoidance exploits design faults'

Robert Maas of Blackstone Franks set out to challenge some of the Guardian's contentions. His own position on avoidance was that "I see it as a moral issue and have no desire to seek to impose my own moral standards on others". He argued that "if there are EU tax havens there is nothing that either the government or HMRC can do about them". He questioned whether the Netherlands or Ireland was "any more of a tax haven that the UK is", adding that "the real issue is not the rate of tax but rather tax incentives. All countries give tax incentives".

Writing in the Tax Journal, Maas went on to question the Guardian's "objection" to companies holding intellectual property through offshore entities. Commercially, he said, it is sensible for any organisation to hold all of its brands in the same place. "Provided that each country in which the product is sold obtains the right tax to reflect such sales … why should it matter if the most convenient place for a multinational to hold its brands is a tax haven?"

Maas pointed out that transfer pricing "is not a way to avoid tax" – but considered that "HMRC and the IRS ought to devote resources to training the tax authorities in developing countries to challenge transfer pricing methodologies and to clamp down hard on tax evasion". Tax rules are not well-designed, he contended, and "much tax avoidance exploits the design faults".

'A kind of fiscal polo'

Anne Redston is a visiting professor in the law department at King's College, London and sits on the ICAEW Tax Faculty's technical committee. Writing in the Tax Journal, she said critics of the Guardian's series adopted four positions: "justification, exculpation, suppression and silence, with the favourite by far being silence".

It was wrong to assert that avoidance was a symptom of some underlying problem in the tax system, she said. "I disagree: if the tax regime was so systemically flawed that avoidance was inevitable, tax scams would be rife throughout the population. But this isn't the case. Instead, structured avoidance is a game played by the rich, a kind of fiscal polo."

Redston argued that companies with "merely a brass plate or a skeleton administrative staff overseas" are not seeking to take advantage of a better designed system [than the UK's system]; they are simply exploiting a loophole". "Commercial considerations" were often a mere fig leaf for tax avoidance, she claimed.

She challenged Robert Maas's views on several issues including transfer pricing. "What is uncertain is the quantum, not the existence of transfer pricing as a mechanism for stripping tax revenues out of poor countries," she wrote.

This week's Tolley's Practical Tax newsletter has more on this and other developments, including a summary of the 22 April budget proposals and:

• Brown sets sights on avoidance via tax havens;
• SA online filing headaches;
• Employers' returns – a reminder;
• A quality standard for forms P11D; and
• The 'service company' question.

Tax policy, tax havens and the professional bodies

Further to his comment on my post The ICAEW, tax avoidance and the quality of public debate, Richard Murphy has posted Let's get real – accountants are to blame for poverty in which he claims that my comment about the conduct of the tax avoidance debate is absurd. I think we'll have to agree to differ on that. We do agree, clearly, that the role of the professional bodies is a matter of public interest. I have responded to his post as follows:

As I have said, Richard, the role of the professional bodies is an issue and is a matter for public debate. Some practising tax advisers and other key figures in the tax industry are beginning to engage in the wider debate about avoidance, but others are reluctant to take part because they anticipate your "blunt" response. Some have indicated to me privately that this is why they prefer not to defend themselves. Others, no doubt, keep silence for other reasons – eg. those using tax havens and wishing to avoid drawing attention to their own activities.

Back to the professional bodies. I believe that many of their members feel strongly that evasion is just simply wrong, and that there is little need to "state the obvious" in, for example, budget submissions. But the world has changed, as they say.

It's interesting to reflect on how much – or how little – things have changed in recent years. When I wrote six years ago for Accountancy Age, about accountants selling secret bank accounts in a blacklisted tax haven, I asked the Society of Trust and Estate Practitioners for its view on the OECD's warnings about "the misuse of corporate entities for money laundering, bribery and corruption, shielding assets from creditors [and] tax evasion". The STEP chairman's response was to voice "very serious concerns" that models proposed by the OECD and the FATF on money laundering did not meet "a number of requirements", including client privacy.

More recently, I reported in Tolley's Practical Tax newsletter that as Gordon Brown joined calls for international action against tax havens, the Chartered Institute of Taxation – which had just created a new post of tax policy director – had signalled a reluctance to enter public debate about tax havens. I asked the CIOT whether it supported Brown's call (on 18 February) for "the whole of the world" to "take action against regulatory and tax havens in parts of the world which have escaped the regulatory attention they need". A spokesman told me that the CIOT focuses on "the mechanics of tax law, not the merit of one policy or another". But it would always support proportionate measures to tackle evasion. He added that "practical implications and administrative burdens are always a key focus for the institute".

It would be interesting to know where, in the view of the professional bodies, helping government to formulate "better" tax policy and legislation begins and ends.

The ICAEW, tax avoidance and the quality of public debate

Having noted Richard Murphy's "world first" question to the prime minister at the G20 summit, I am intrigued by two developments in the past week. The second – see below – concerns the conduct of public debate about tax evasion and avoidance.

Gordon Brown wrote on Maundy Thursday to all the UK's "tax havens" and "offshore financial centres" to warn them that they must deliver on their commitments to the OECD's standards on tax information exchange, aimed at tackling tax evasion. He also indicated in the letters to the heads of government of Jersey, the Cayman Islands and others that international efforts to counter "harmful" tax practices will begin to refocus on "the issue of tax avoidance".

This raises several questions, including whether and how the 80-plus countries on the OECD's white and grey lists (there is now not a single country on the black list) could ever agree on a definition of avoidance (which is – by definition, actually – not illegal). Having said that, governments have a duty to protect tax revenues from attempts to undermine the clear intention of tax legislation by means of structured avoidance.

This is something that the UK's leading professional bodies seem to recognise – they would be in trouble if they didn't. For example, the Institute of Chartered Accountants in England and Wales (ICAEW) said nine years ago, in its paper "Towards a better tax system", that:

"The government has a legitimate interest in maintaining tax revenues. This means it will from time to time need to repair legislation which has failed to capture the necessary tax revenues."

The ICAEW cited this paper in its recent submission, ahead of next week's budget, calling on the UK government not to put "unnecessary burdens and costs on business through taxation policy at this critical time". And in that submission it said, in a discussion on the need to improve tax policy formation, that:

"The ICAEW accepts that there are times when the government may need to act swiftly and that consultation is not always advisable, for example where measures need to be announced to counter known tax avoidance schemes."

This brings me to the second development. Richard Murphy has taken the absence of any reference to tax havens in this ICAEW submission to mean that the ICAEW is saying "do not go near tax havens". He claimed – despite what the ICAEW says about avoidance – that the ICAEW is also saying "do not tackle evasion ... please ignore avoidance," among other things. He concluded that the institute's submission was "thuggish, blatantly partisan, anti-democratic and clearly anti-social ..."

Mark Lee, a former chairman of the ICAEW's Tax Faculty who has not been afraid of voicing his support for much of what Richard Murphy has said and done, has protested that to point out that the budget submission does not focus on revenue loss through tax havens is one thing, but Richard Murphy's assessment of the ICAEW's real message is "without foundation".

Mark Lee is right. In my view the role of the professional bodies in relation to the public interest – as well as the impact, particularly on developing countries, of the activities of some (not all) of their members in tax havens – is a matter for public debate. But that debate will be a very poor one, likely to alienate many people including supporters of "tax justice" who have something worthwhile to say, if it is conducted in an aggressive and brutish manner.