Generally, tax evasion is a crime that can and should be prosecuted. Everyone agrees with that.
Tax avoidance, or tax planning, is in Wikipedia terms "the legal usage of the tax regime to one's own advantage to reduce the amount of tax that is payable by means that are within the law."
So, tax avoidance is the kind of behaviour that is explicitly and clearly legal. Now someone wants to make a "rule", apparently to somehow punish for it?
Of course there are loopholes and quirks in any tax system, and people are exploiting them. Particularly the rich. But the solution is to close loopholes and make the tax system simpler and clearer, not have a "general tax avoidance rule" which I take to mean arbitrary confiscation and punishment according to political whims.
Often, the purpose of a GAAR is to stop people from setting up artificial arrangements just for the purpose to avoid tax.
Let's say you sell something in the UK, and then route the money around the world to make use of loopholes in the laws of various countries, only to have the profit end up in the UK again.
Transactions for business purposes are generally accepted.
I heard (don't recall where) that a while back someone proposed a new tax in Sweden: "tax on work that was avoided with the intention of avoiding tax".
I.e. a doctor was working 40 hours a week and was paying >50 % of income as taxes, and decided that it's not worth it to work so hard if government takes most of the proceeds, so reduced working time to 35 hours a week.
The proposal was to tax him/her anyway on the calculated income of those 40 hours, because quite clearly working only 35 hours was an arrangement just for the purpose to avoid tax.
This is apocryphic, and anyway didn't go through even in Sweden.
Indeed. Those kinds of situations showcase the problems of taxation that is too high, not the other way around.
It gets quite ridiculous sometimes, especially since 2008. Governments are looking for cash everywhere, and they don't mind challenging whatever comes their way.
It doesn't cost them anything to challenge arrangements, so why not try? At worst, they lose and they will have lost some time. Civil servants are being paid anyway. At best, someone pays up because they realise it's not worth the fight.
I read about a case here in Belgium where there was someone who wanted to move to Spain for non tax reasons. The tax administration levied an additional tax on some of his income, because they said his move to Spain was motivated by tax avoidance reasons. A judge ruled on the matter, saying they have no right to keep taxing someone who just wants to relocate, especially when it was pretty clear tax wasn't the motivation.
The fact is, they tried anyway, costing this guy tens of thousands in legal expenses. He was only granted a few thousand by the court as compensation.
Quite. That case sounds frivolous, considering that we're talking about two EU countries, and the whole point of EU is that people (labour) and money (capital) can move from member country to other, without duties. But it does not surprise me that when a government starts a frivolous case, they incur frivolous expenses on others, and will not compensate. Belgium appears to be at the top end of world when it comes to tax revenue as % of GDP (after Denmark and Zimbabwe, of all places), and it is no wonder the system starts creaking at joints.
In a way, they always win if we’re talking relatively small amounts (<€50k).
If you have to pay €10-20k for a decent lawyer to deal with a case, that tax lawyer in turn will be taxed on that income at income tax/corporate tax rates (+ VAT tends to be charged as well).
It's a pretty decent strategy for a government, but not one I would appreciate if someone were to use it in a business setting.
That means shareholders will be taxed twice, once at the corporate level, and once at the individual level, leading to double taxation (unless a tax credit is given).
But, like you, I'm a big fan of a simple flat tax, with relatively little deductions.
As long as the flat tax applies to profit rather than revenue (for both individuals and companies), that wouldn't lead to double taxation. Salaries are an expense.
1/ Shareholder and CEO. My company generates €1M in profit. I pay myself a salary of €1M, and pay a flat tax on my salary. The business pays no tax.
2/ CEO, but no shareholder. The company generates €1M in profit, and pays flat tax on that €1M. Dividends flow to shareholders, and they're taxed again?
Situation one would mean that owner run businesses can be more competitive than non owner run businesses. After all, that owner could, after taking out his salary, just loan that money back to the business.
3/ What do you do with foreign companies that levy corporate tax, and then declare a dividend? Do you tax it again at the flat tax in the hands of the shareholder?
[Disclaimer: this is a rough idea, not a tax code. Almost certainly needs further thought to make sure there aren't any unwanted incentives for strange behavior.]
> 1/ Shareholder and CEO. My company generates €1M in profit. I pay myself a salary of €1M, and pay a flat tax on my salary. The business pays no tax.
Right.
> 2/ CEO, but no shareholder. The company generates €1M in profit, and pays flat tax on that €1M. Dividends flow to shareholders, and they're taxed again?
Dividends don't magically appear out of nowhere; they're paid out of profits, just like a salary. (Some companies pay out the majority of their profits as dividends, others pay none at all.) They'd either get taxed at the business because they're not paid out, or taxed at the shareholders because they are, not both.
As much as I'd hate to point at it as an example of anything, think VAT, with its notion of "where was the value added", but on the income side, as "where was the profit extracted". Either a VAT-style sales tax (with less doublespeak) or a flat profit tax seems like a workable model. And much like VAT's presumption of paying sales tax unless you show that you bought something taxed, the presumption is that you're paying tax on every dollar of income/revenue, unless you provide evidence in the form of having paid that dollar to someone else who then paid tax on it (or who provided evidence that they paid it to ...).
Interestingly, that then means that if you take money out of the country and out of the economy, you get to pay all the taxes on it at that point. That seems like a nice side effect.
The structure ends up looking a lot like VAT, with a key difference: it affects all transactions, without requiring any kind of code defining taxable/non-taxable items. But apart from that, I think your questions just demonstrated that a profit tax effectively turns into VAT.
Half of the tax code for a flat tax on profits would probably end up being absurdly precise definitions of what "profit" means. (Then again, the other half, or the whole tax code for a flat tax on income, would probably end up being absurdly precise definitions for what "income" means.)
(To preempt the obvious response: yes, there are companies, such as the one-off shell companies constructed to make films, that intentionally construct their books such that they don't actually make any profit. However, that money has to go somewhere, and it'll get taxed there.)
That said, it wouldn't be the end of the world to just make it a flat (and much lower) tax on income rather than on profits. That'd be a much simpler system; it would, however, be much more of a drag force on the economy, like the current tax system. Hard tradeoff.
> 3/ What do you do with foreign companies that levy corporate tax, and then declare a dividend? Do you tax it again at the flat tax in the hands of the shareholder?
[I'm assuming you mean "foreign companies in a jurisdiction that levies corporate tax"?]
The situation definitely gets more difficult with a non-self-contained economy and multiple tax structures. It's a flat tax, so it shouldn't have a complex set of deductions and loopholes, especially that only apply to large multinational businesses. So yeah, I think you'd have to just ignore the foreign corporate tax, and treat the money paid as a dividend as income entering the economy.
> Dividends don't magically appear out of nowhere; they're paid out of profits, just like a salary. (Some companies pay out the majority of their profits as dividends, others pay none at all.) They'd either get taxed at the business because they're not paid out, or taxed at the shareholders because they are, not both.
This is not how it works. Salaries are not paid from profits. After the salaries and all the other costs of the business are paid, the company gives the state its share of what is left and keeps the rest (profits). Dividends are paid with this money that is left after taxes. And then (in general) are taxed again when the shareholder receives them.
I'm well aware of how the situation works today; this was a hypothetical different structure. And I'm specifically suggesting that dividends and salaries should both effectively be treated as "costs" that reduce profits.
I'm sorry, I misunderstood your comment. I assume you would not consider costs other uses of capital as buybacks, acquisitions or investments? In any case, I think it would be easier to tax dividends together with the rest of the profit and make it tax-free for the receiver. Otherwise you would have a problem with foreign shareholders and in particular with foreign-owned subsidiaries that would otherwise pay no taxes. There are already mechanisms to tax these distributions, but if you move the taxation of dividends fully to the shareholder side the resulting system would become even more complex.
I also think taxes on business and taxes on individuals should also be harmonised.
Add in a general tax avoidance rule and you are good to go.