Tuesday, 2 December 2014

Moral tax evasion?

Jean-Claude Juncker
Is it right to minimise your tax bill legally? Should you ignore incentives inadvertently built into complicated tax systems and effectively volunteer more assets to the government, to spend according to its own political priorities?

The consensus answer to this seems increasingly to be no. Notwithstanding Jean-Claude Juncker’s Luxembourg, which was recently outed for arranging sweetheart tax deals with the likes of Amazon and Pepsi, Western capitals have conducted an unprecedented assault on tax havens in the last few years.

Decades of innuendo about artwork stolen by the Nazis and African dictators’ millions have finally turned into policy prescriptions amid the general tide of anti-bank fervour, and the only surprise is that it took so long. The Swiss private banks have been debagged, accused of abetting American citizens’ tax evasion and forced to drop their partnership model as the potential liabilities mount.

While the pressure on financial institutions has grown, the debate has taken a different course: the cause of moral but illegal tax evasion has received a boost with the news that London’s mayor, Boris Johnson, refused to pay a capital gains tax demand from the US Internal Revenue Service. The tax related to the sale of Johnson’s UK home, but because he has a US passport, he is subject to that country’s tax regime. ‘Absolutely outrageous,’ Johnson said.

The American principle of taxation by citizenship rather than location goes back a long way, but passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 has raised a lot of hackles, as it put the onus on banks around the world to act on the IRS’s behalf. And the industry has seen an opportunity to make its aversion known again. Nigel Green, founder and CEO of financial advisory firm deVere Group, said: ‘Boris Johnson’s noble and brave stance against this fatally flawed, imperialistic and economically dangerous law, means he is legally in the wrong, yet morally he is right.’ deVere recently published the finding that 73 per cent of US expats are considering renouncing their citizenship due to FATCA. Presumably aware of this, the US has recently made it much more costly to do so, raising the administrative fee from $450 to $2350.

Whether or not it is morally right to break the law in these circumstances, the burden of FATCA is undeniable. Politicians who focus on legislation as an answer to tax avoidance and aggression as an answer to tax evasion might be better served by making their own tax regimes more competitive. This is the surest way to eliminate tax havens.

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