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Was Brexit About Tax Avoidance?

Updated: Jan 26



Several years ago I published an article “Is Brexit Really About Tax Avoidance?”, and it’s probably about time to revisit the topic, in the past tense, especially since the Anti Tax Avoidance Directive has now been implemented, and we have the EU/UK Trade and Cooperation Agreement to consider. I’ve used some parts of the previous article and other Politax articles, removed parts, improved parts and added parts to bring it up to date. There are a large number of references and articles which I've linked to within the article rather than leave them all to the end.


I've covered the following areas, which you may want to jump to depending on how much time you have!





This article is the most comprehensive I’ve produced so far on the topic and will not only argue that Brexit didn’t provide advantages for those wishing to avoid tax, but that the opposite is true.


This article takes some patience – I even suggested coffee and biscuits for the previous one, although I offer no advice as to any stimulants beyond that. Reading it in chunks is another option!


I’m going to cover all the popular conspiracy theories I have come across, plus certain publications by advocacy groups, including the “Direction of Travel” argument. There will be a little more emphasis on the EU impact on UK tax avoidance historically too, especially the “Freedom of Establishment” principle. It’s difficult to conceive of a worthwhile discussion on the EU’s impact on UK tax law without discussing freedom of establishment and artificiality, so I’ve included a separate section, but it really weaves itself through so much of the discussion.


I’m going to say from the outset, don’t just believe what I say – if at any point you think, “That doesn’t sound right”, Google any reference I make. This is a factual article – if anyone finds a material factual inaccuracy in this article I will delete the article in its entirety. By that I mean if there is anything in this article which causes the article to be dishonest or misleading, the whole article will be deleted. If you find a typo I’ll just correct it! If you think any aspect requires more evidence I’m happy to have another look.


Let’s consider the conspiracy theories.


“Brexit was only brought in after the EU introduced the Anti-Tax Avoidance Directive!”


"Brexit was to avoid a new EU rule that means rich Brexiteers have to disclose their offshore accounts to HMRC!"


“Brexiteers want to keep details of their tax avoidance schemes secret from the EU”,


“OK, we might have some of these rules already but there’ll be the first rules to go after Brexit” and


“Brexit is about protecting the UK’s tax havens. Did you know Rees-Mogg’s firm made £103million profit and paid zero tax?! Shocking!”


The success of the conspiracy theory lies in the complexity of the truth. “The truth is out there” as they say. Well in this case, it’s in here. If anyone has the patience, time and, let’s face it, sheer boredom threshold to get through this article you will know none of those theories make any sense at all.


Brexit Timing


Between the referendum and the UK leaving EU jurisdiction, many of the conspiracy theories revolved around the timing. “The referendum date was announced just after the EU announced the Anti-Tax Avoidance Directive (ATAD).” And “Article 50 was invoked so that the UK would avoid the implementation of the Anti-Tax Avoidance Directive in April 2019! You Brexiteers have all been conned!”


If you frequent Twitter/Facebook you may have seen a few memes about the timing too:





It’s as if global co-operation on tax avoidance/evasion began in about 2016. So let’s start by tackling that somewhat simplistic timeline. Jurisdictions have been collaborating on tax avoidance/evasion issues for decades, the Convention on Mutual Administrative Assistance in Tax Matters was founded in 1988, the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2000 and the Joint International Tax Shelter Information Centre (JITSIC) in 2004. The UK is involved in all three to varying degrees.


There have been various initiatives, such as the 2002 OECD “Tax Information Exchange Agreement” which was borne from the recognition of a lack of transparency and effective exchange of information between tax authorities, plus other commitments at the G20 and elsewhere.


So for a couple of decades at least the international tax community evolved from recognition of the problem of tax avoidance and a lack of transparency, to discussing shared ideas on policy.

However, global co-operation on corporate tax avoidance that led to the Anti-Tax Avoidance Directive, was a significant gear change and really began at the G20 summit in Los Cabos, Mexico, in June 2012, and perhaps even more so at the Mexico City G20 Finance Minister summit in November of the same year. There were signals from various Governments, including the UK and EU that tax avoidance would be getting some focus.


It may be worth putting this into the context of the sovereign debt crisis following the financial crisis in 2008-2010. On the one hand western Governments were inflicting austerity measures on their citizens, whilst at the same time Starbucks, Facebook, Amazon, Google and others were hitting the headlines for paying seemingly negligible tax on their income. “We’re all in this together”, remember. Politics demanded action.


At that Mexico City summit on 4-5th November 2012 the UK and Germany jointly agreed to combat Base Erosion and corporate tax avoidance, with Osborne and Schauble issuing a joint statement, “International tax standards have had difficulty keeping up with changes in global business practices, such as the development of e-commerce in commercial activities. As a result, some multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated, thus minimising their tax payments compared to smaller, less international companies.”


Later, France also agreed to push for action. The EU, not surprisingly since its 3 dominant economies had all already made statements, made its own statement in December 2012. Not to say the EU was in any way reluctant, but it wasn’t the instigator. The UK happened to be President of the G8 in 2013 and so included cross-border tax on the agenda for the May 2013 G8 meeting. Immediately following that meeting the OECD BEPS (Base Erosion and Profit Shifting) Project was launched at the G20 in July 2013.


Whilst the BEPS Project had been initiated by the G20 countries it effectively also applied to the other OECD Member States from the beginning. Engagement in the project was extended to other large non-OECD states and representatives of developing countries. The OECD published over 1600 pages in the ‘final’ reports in relation to 15 BEPS “Action” items in October 2015 and today there over 140 jurisdictions working on the BEPS Inclusive Framework.


Since the UK was pretty instrumental in starting the BEPS project, it is clearly not something we’re going to jump through hoops to avoid happening, and indeed, as an OECD member in our own right and a leading advocate of BEPS, the UK was literally years ahead of the EU in implementing BEPS. So unless you are very selective about what you include, the timeline of events don’t support the assertion that avoiding the new rules was a reason for holding the referendum. Once I go through the different measures it will be clear that the Brexit timing had nothing to do with BEPS/ATAD.


This is one timeline which gained some traction on social media. The first item was clearly key, given it has been helpfully circled. So is this true? Did David Cameron ask the EU to exclude UK trusts from tax avoidance legislation, only for them to refuse?



Categorically, no.


This actually refers to a letter David Cameron sent to Herman Van Rompuy, which was referring to the Fourth Money Laundering Directive (4MLD), not tax avoidance. He was referring specifically about abuse of entities to conceal beneficial ownership, but highlighted the difference in nature between companies and trusts. Beneficiaries of trusts may be vulnerable people, who may not know they are beneficiaries and it may not be in their interest to know. For example, it may not be in the interests of a 14 year old about to embark on their GCSEs to learn they are the beneficiary of a £2m Will Trust.


So that was the argument, did the EU say no? No, they didn’t. Beneficiaries of trusts, unlike major shareholders of companies, do not need to be on a public register, and that remains the case in the Money Laundering Directive. Tax authorities, like HMRC, are required to maintain a register of Trusts (see HMRC’s Trust Registration Service), but it is not available to the general public.


This particular conspiracy theory has become quite ironic since the CJEU ruled that public registers of beneficial ownership of companies were invalid. Luxembourg closed their public register immediately after the ruling. At the time of writing the UK's public register of beneficial ownership of companies would not comply with EU law because it doesn't have "respect for private life and to the protection of personal data". Anyone wishing to hide behind corporate structures would currently be better advised to do so within the EU than in the UK.


So, OK, making the timing argument is built on either being very selective about events, or just plain dishonesty, but what about the Anti Tax Avoidance Directive? Could there have been a motivation for tax avoiders to want to leave the EU to avoid these measures?



The Anti Tax Avoidance Directive – the Detail


Clearly the UK being a key player in the evolution of BEPS into ATAD, using many rules the UK already had, ought to dissuade people from thinking that Brexit was about avoiding the ATAD, but not everyone on social media concurs.


“Ah”, say the conspiracy theorists having not seen the ATAD, “the ATAD is DEFINITELY the reason why tax avoiders supported Brexit. The EU rules didn’t come in until 2019 so the UK didn’t already have these rules and anyway they go much further”.


Do they? Well, let’s have a look. We’ll go through every requirement in the Directive and see if there is a motivation to be found for Brexit in any of them. Here’s the Directive itself.


It’s worth noting from the outset why the EU implemented this directive – it is quite clear from the preamble that it is implementing BEPS across the EU which, remember, the UK helped kickstart?




It’s worth just considering why the European Union implemented BEPS with its own legislation. Why not leave the rules to the member states to implement based on the OECD Actions? Well, what do we mean by “Base Erosion and Profit Shifting”? We’re talking about eroding a jurisdiction’s tax base, and in particular using avoidance techniques to shift profits to a different jurisdiction – you shift the profit and erode the tax base. The European Union is a little unique – it is a Single Market, the integrity of which the EU will always seek to protect, plus it has 27 different tax jurisdictions. The idea of “cross-border” and “jurisdiction” becomes a little blurred. Whilst a Member State can exercise their sovereignty on almost every area of its fiscal policies and tax law, it also has to consider whether or not measures interfere with principles of the EU. As you will see, depending on how you implement BEPS, it could have some implications for the integrity of the Single Market. Moves by France, for example, to deter French companies from setting up business operations in Luxembourg are likely to be challenged under the Freedom of Establishment principle. So, as well as the EU ensuring that member states implement BEPS in a manner consistent with each other, they need to ensure they are implemented in line with the principles of the Single Market.


Anyway, we’ll come back to all that, whizz down the Directive, ignore all of Chapter 1, the measures themselves start with Ch II, Article 4 – Interest Limitation rule. If you’re happy to take my word for it, just read the title, which will tell you when the rule was effective from and what the UK was required to do to comply. If you want to know what the rule is, what it is designed to do and where it can be found in UK law, read the detail. It’s worth reading the detail so you have some idea how these are intended to work. Later I will discuss some legal cases where I try to explain exactly why Freedom of Establishment is so fundamental to any conversation about the merits of EU membership in relation to tax avoidance.


Article 4 - Interest Limitation Rule (Effective January 2019, already UK law – no amendments required. International standard, included in the TCA).


As a company, having debts means you have interest deductions which you can then use against your tax liability. It’s a classic tax avoidance method – create a debt, create an interest deduction, pay less tax. For example, you have a UK parent, and an offshore subsidiary. The offshore subsidiary lends the UK parent £100m, and the UK parent then needs to pay 4% interest on that loan. The UK parent makes £5m profit, but has interest liability of £4m owed to the offshore subsidiary. £4m of profit has been shifted from the UK to the offshore jurisdiction and, based on 19% corporation tax, £760K tax has been avoided.


There has been UK legislation already in this area for a number of years. We had the WorldWide Debt Cap (WWDC) in TIOPA 2010 (Part 7) and elsewhere we had Thin Cap rules in ICTA 1988 sch28AA, but in 2017 we introduced the “Corporate Interest Restriction” (CIR) to comply with BEPS Action 4, repealing the WWDC. The CIR rules apply to more groups than the previous WWDC rules as the old rules did not apply where the shareholding of the ultimate parent company in the UK subsidiaries was less than 75%. The CIR rules apply to all groups and in some circumstances to individual companies.


So very basically these rules limit the deductions to 30% of your profits - or “EBITDA” if you want to be technical. It’s not illegal to have more than 30%, but it’s just that beyond this level the deductions are disallowed. The ATAD application of BEPS Action 4 is not materially different and it’s largely taken from the German “Zinsschranke” model. You will find throughout BEPS, and other areas of tax legislation, that many of the initiatives are either of UK or German origin/inspiration. Anyway, the CIR complied with, and indeed exceeded, BEPS Action 4 and also complied with ATAD Article 4, so no further amendments were required to UK legislation.


So would a company using excess interest deductions to reduce its UK tax liability find a plausible motivation to support Brexit in Chapter 4 of ATAD?


No – the rules were already in place in their entirety, and were imposed because of BEPS, not the ATAD. I will refer later to the ability/likelihood of the UK to repeal this, and other, legislation later when I discuss the TCA and the multilateral instrument (MLI).


As an early warning, regardless of what it may look like, I cannot, here, go into extensive detail about any of these provisions. HMRC guidance on the Corporate Interest Restriction alone is almost 600 pages long – and there are many tax journals and academic publications which analyse these topics far more extensively. Try Googling ANGIE, QNGIE and NGIE in relation to the interest limitation rules and you’ll get a flavour of what I mean. All I’m doing here is touching on what rules we had before, the implications of BEPS and the ATAD, and the rules we implemented to deal with the new international standards, all the while conflicted between the desire for brevity and the avoidance of accusations of dishonesty by omission!


Article 5 - Exit taxation (Effective January 2020, already UK law since 1989 – minor amendments were required).


This is to do with ensuring companies don’t just move assets outside the UK taking an unrealised chargeable gain with them – so you pay an Exit Charge. Legislation was introduced in the Finance Act 1988, sections 105, 106 and 107, which were later incorporated into the Taxation of Chargeable Gains Act 1992 (TCGA) sections 185 to 188.


Now, whilst we did clearly have Exit Tax rules long before any EU Directive, there was an inconsistency here. In separate UK legislation, Taxes Management Act (TMA) 1970 Sch3ZB, there was an optional deferral period of 10 years, whereas ATAD Art 5(2) it specifically states it should be 5 years where the relocation is to an EEA member state.


Since the UK has already implemented these measures some years earlier it shouldn’t be surprising that some EU rules are different, and where they go beyond UK rules the UK would needed to amend its rules to be fully compliant with the ATAD. So, an amendment in the Finance Act 2019 included a change to the deferral period – HMRC states the impact is “negligible” (which means under £5million).


However! One Professor of EU Law (@DSchiek) seemed to think that this deferral period, and it’s restriction to EEA member states is more relevant than HMRC and I make out. To be clear, the deferral period was already restricted to EEA member states – the original legislation from 1992 was amended in 2013 to include this deferral period. – at the insistence of the EU! See National Grid Indus BV (C-371/10) (“NGI”). Whether the deferral period is 10 years or 5 years doesn’t, of course, raise another £1 in tax. Interested to see what, if anything, happens to this deferral period in the future.


So would a company moving an unrealised capital gain outside the UK find a plausible motivation to support Brexit in Chapter 5 of ATAD?


No. Clearly the UK has had Exit Tax rules for quite some time and if there is a Brexit change to come here it is just as likely that the deferral period for EEA relocations is removed, and our Exit tax rules are restored to their pre-CJEU standard.


Just a quick note on timing. Whilst the ATAD had an effective date of January 1st 2019, some aspects were deemed to require more changes than others, so there was a derogation such that the Exit tax and Hybrid Mismatch rules were effective January 1st 2020.


Article 6 - General Anti Abuse Rule (GAAR), (Effective in UK law January 2013 and already wider in scope than the EU rule effective 2019)


A GAAR means if an authority finds a scheme is designed to avoid tax, but is not contained in a specific or “targeted” rule, it can nevertheless seek to disallow the deduction under the GAAR. The GAAR, in the Finance Act 2013 s206, was announced by George Osborne in the 2012 budget, before the EU announced anything. The GAAR isn’t in my view something that we should seek to use very often, since it would indicate our targeted rules are rubbish. It’s just a backstop. However, for that one person still following if you look at the first sentence in Article 6(1) of the ATAD you will note the EU GAAR is limited to Corporate tax liability – the UK GAAR is applicable to:


Income Tax

Corporation Tax (including amounts chargeable or treated as Corporation Tax)

Capital Gains Tax

Inheritance Tax

Petroleum Revenue Tax

Stamp Duty Land Tax

Annual Tax on Enveloped Dwellings


So would a company wishing to avoid tax find a plausible motivation to support Brexit in Chapter 6 of ATAD?


No, the UK GAAR is wider in scope than the EU GAAR. I think people think GAARs are equivalent to a tax avoidance panacea which basically means tax avoidance is outlawed, and it really isn’t the case, and far from it. Germany has already seen a couple of cases where the courts have limited the effectiveness of the GAAR, and I expect there are and will be many more cases.


Article 7 Controlled Foreign Company Rule (& Article 8 CFC Computation. Effective in EU law 2019, originally in UK law in 1984. Minor amendments were required. International standard, included in the TCA)


ATAD Articles 7 and 8 are about CFC rules – “Controlled Foreign Companies”. We’ve had CFC rules in the UK since 1984, and they can be found in TIOPA 2010 Part 9A. They are pretty complex, with a number of different gateways your income flows through and if it flows through a gateway and doesn’t meet one of the exemptions on its way it will suffer a CFC charge. “What?” Yes, I know. Essentially, the idea is if a UK company controls a foreign company, then the profits of that foreign company can flow through a gateway and be charged to the UK company, provided it doesn’t meet an exemption on the way. “Ah, you mean a loophole!” Not really, the idea is that these rules are only ever to be used where the arrangement is being used to avoid tax. So a French subsidiary of a UK company would have an entity level exemption since the company is unlikely to be artificially shifting profits to its French subsidiary so it can suffer 33.33% corporation tax!


Again, there were a couple of amendments necessary to UK legislation in the Finance Bill 2019, to do with the definition of control including non-UK associated enterprises, but again HMRC determined the impact to the exchequer to be “negligible”. Scroll down this link until you get to the “Summary of Impacts” section (you can read it all if you want, but I really don’t recommend it).


CFC rules are another great example of membership of the single market being detrimental to our tax avoidance rules. See the “Freedom of Establishment” section below for a discussion about how the EU forced the UK to weaken our CFC tax avoidance rules following the Cadbury Schweppes vs HMRC case.


So would a company wishing to open an overseas subsidiary to avoid UK tax find a plausible motivation to support Brexit in Chapters 7 and 8 of ATAD?


Emphatically no. Again, the UK has had CFC rules since 1984 and, in my view, the biggest impact the EU had on the UK’s tax avoidance legislation whilst we were members was to force us to water these rules down as part of Cadbury Schweppes..


Article 9 Hybrid Mismatch Rules (and 2017/952 EU “ATAD II”. Effective in UK law in 2017, EU law in 2020. Minor Amendments were required. International standard, included in the TCA).


Lastly, in the ATAD, we have the Hybrid Mismatch rules, which are in UK law TIOPA 2010 Part 6A, and appear briefly in Article 9 of 2016/1164 EU, but substantively these are in “ATAD II” 2017/952 EU (effective January 2020 remember!)


These rules are to prevent the use of entity classification arbitrage between jurisdictions. So, for example, you find a jurisdiction which treats a partnership as transparent (not taxable) and another which treats the same partnership as opaque (taxable) and arrange your affairs so the profits aren’t taxable anywhere.


Some people may have heard of a “Double Irish with a Dutch sandwich” where you basically use a combination of domestic rules and treaty rules to create “stateless income” which no-one taxes. These rules are designed to ensure that if an entity isn’t taxed in one jurisdiction, it will be taxed in the other regardless of whether it is considered opaque/transparent etc.


Again, the UK has amended the rules we had since 2016 to accommodate the EU variances, and again this was allowed for in the Finance Bill 2019 and again HMRC have deemed the impact negligible. Same drill as before, scroll down to "Summary of Impacts".


If you’re interested (well you might be!) the minor amendments can be found in the Finance Act 2019 attached. This should take you to ‘international matters’, the amendments are in sections 19-23, and further in sch. 7 and 8.


Now, whilst the UK didn’t formally have a section of legislation specific to “Hybrid Mismatch rules” we did have rules which had the same objective. If we look at an OECD analysis of Hybrid Mismatch Arrangements from 2012 you get some impression of how advanced UK tax law is, despite what you may hear to the contrary. This goes through the key provisions, and what OECD countries had in place.



Multiple deduction of the same expense


Denmark

Germany

New Zealand

United Kingdom


Deduction of payments which are not included in the taxable income of the recipient


Denmark

United Kingdom


Non-inclusion of income which is deductible at the level of the payer


Austria

Denmark

Germany

Italy

New Zealand

United Kingdom


Abusive foreign tax credit transactions


Italy

United Kingdom

United States


The United Kingdom was the sole OECD member to already have the key measures, as identified by the OECD, covered in legislation before anything became an OECD standard, let alone an EU Directive. I only mention this because it’s a good example of the reality of the UK typically being well ahead, globally, of tax avoidance mitigation initiatives.


So would a company wishing to open use hybrid mismatches to avoid UK tax find a plausible motivation to support Brexit in Chapters 9 of ATAD or ATAD II?


No. The UK has had most of the measures for many years, and the rules are an international standard, being BEPS Action 2 and it’s also part of the TCA.


Everything in the ATAD, and we have covered every measure, was already UK law if not entirely, then materially and that is still the case. As far as I’m aware at the time of writing the only aspect of ATAD I and II (I’ll look at ATAD III in Direction of Travel later) which we will not be in compliance with in the ATAD is in relation to hybrid regulatory capital instruments. This is where Banks issue regulatory capital to comply with capital requirements legislation which may include some features which may mean there is a mismatch in tax treatment across jurisdictions. There is a policy objective that Hybrid Mismatch rules don’t end up counteracting the Capital Requirements initiatives. The EU had this exemption until the end of 2022, but in the UK the exemption will continue. It’s still compliant with the OECD BEPS requirements which allow jurisdictions the choice.


In reality, the Anti-Tax Avoidance Directive is by and large the EU implementing a global standard in a manner compatible with the Single Market. It has been said that the OECD BEPS Actions are not binding. This is true, but it’s not that simple. The UK was one of the first signatories of the BEPS Multilateral Instrument (MLI). The MLI is designed to change thousands of bilateral tax treaties to include BEPS measures, such as Hybrid mismatch rules, without each treaty having to be separately amended. The UK has one of the most extensive tax treaty networks in the World, which we have built up over time and which help the UK create cross-border investment opportunities, both inward and outward. Leaving the civilised world of international tax cooperation just isn’t going to be on the agenda.


In truth, the UK has some of the most advanced anti-tax avoidance legislation in the World. We are thought-leaders in the field, and it comes as no surprise that the rules the OECD, and the EU, have introduced are closely aligned with much of what we already do anyway.




How the European Union Causes Tax Avoidance - the Statistics


I’m going to look at a detailed analysis, a report entitled The Missing Profits of Nations [Missing Profits] by Thomas Tørsløv (University of Copenhagen) Ludvig Wier (UC Berkeley) Gabriel Zucman (UC Berkeley and NBER) which can be found on their, quite interactive, website.


The Missing Profits report is interesting because it wasn’t explicitly designed as a commentary on the EU at all. Sometimes there is a suspicion that academics have a conclusion and then they find statistics to support that conclusion, but that isn’t an accusation that can be levelled at Missing Profits. This was a statistical analysis of global profit shifting trends, but because there wasn’t designed with an underlying EU narrative we can attach extra objectivity to their findings.


Missing Profits used a relatively new macroeconomic tool, foreign affiliate statistics (FATS). Foreign affiliates are enterprises resident in one country but controlled or owned by enterprises which are resident outside that country. So they use these statistics to calculate the profitability of local (domestically head-quartered) and foreign-owned firms and found that “foreign-owned firms in tax havens are always far more profitable than their domestic counterparts. Contrary, foreign-owned firms are always less profitable than local firms in high tax countries”.


What are we saying here? So they’ve looked at foreign subsidiaries in, say, BVI, and they’ve looked at local based companies in BVI and noticed something stark – the foreign companies are, by a large margin, more profitable than local firms. If there’s a subsidiary of Sainsbury’s in BVI it will be far more profitable than a local BVI supermarket. Then they have looked at the same situation the other way round. If, say, a foreign subsidiary, such as Amazon, is in the UK it will be far less profitable (on average) than a local firm, say Royal Mail.

That shouldn’t be all that surprising – mobile capital will be attracted to the jurisdiction that will tax it the least. Profits will be attracted to low tax jurisdictions, losses will be attracted to high tax jurisdictions. So the most profitable parts of your business are placed in low tax jurisdictions, the low profit part of the business are placed in high tax jurisdictions. Clearly Sainsbury’s in BVI isn’t running supermarkets! Anyway, that’s just the economic reality – what this analysis has done is put values on those tax losses.


Missing Profits provides a startling illustration “…foreign firms in Ireland (a low-tax country) have a profits-to-wage ratio of 800%: for $1 of wage paid to Irish employees, foreign multinationals report $8 in pre-tax profits in Ireland. In the UK by contrast, foreign firms have a profits-to-wage ratio of 26% only.”


The Missing Profits analysis is basically arriving at their tax avoidance figure by hypothesising that every country in the world equalised tax rates and rules perfectly, such that there would be no attraction of profits/losses and stating how much tax is currently lost (avoided) based on that hypothesis.


Their methodology enables us to generate bilateral estimates of profit shifting, i.e., amounts of profits shifted out of, say, France to Luxembourg, or Germany to the Netherlands.


What does their analysis show for the EU? Let’s look at the four biggest EU economies at the time of the analysis (2018) and see who lost profits and where they went to.




Overwhelmingly, for all four jurisdictions, most of the tax lost is within the EU – UK 75%, France 81%, Germany 81% and Italy 87% with the major beneficiaries being Ireland, Luxembourg and the Netherlands. To illustrate the scale of the issue, based on this analysis, 7% of all UK Corporate Tax is lost to Ireland alone. The scale of the tax avoidance is far beyond anything that can be explained by trading relationships. Just under 50% of UK international trade was with the EU, yet it accounted for 75% of UK corporate tax avoidance.


It’s worth a passing mention that the amount of tax avoidance in the UK, as calculated by HMRC, is only £1.7billion. The amount of UK tax avoided in this analysis is over 10x that figure. They are clearly not measuring the same thing. HMRC are looking at the domestic economy and analysing how much is saved by successful tax avoidance practices. It isn’t considering the fact that the mere fact of having an overseas subsidiary is tax avoidance. Indeed, referring to setting up an overseas operation in a tax efficient jurisdiction and calling it tax avoidance can be quite irritating to tax lawyers because it isn’t exploiting a loophole in legislation – leaving the country isn’t a loophole. That said, for the purpose of this discussion, it is a valuable analysis.


The Missing Profits findings were echoed in Tax Unfairness in the European Union by the Polish Economic Institute [PEI] presented at DAVOS. The red portion of the line is the revenue loss outside the EU, the blue portion is inside.





So it’s clear there is evidence of extensive cross-border tax avoidance within the EU which is disproportionate to the amount of cross-border trade, so let’s look at a key reason as to why that might be.


How the European Union Causes Tax Avoidance - Freedom Of Establishment


In a similar vein to the interest limitation rules, the UK has “Thin Capitalisation Rules” or Thin Cap rules, again designed to restrict debt to that which is required by the firm, rather than that which generates a tax benefit. HMRC defines Thin Cap in its International Tax Manual (see INTM511015) as when a company “has more debt than it either could or would borrow without group support and acting in its own interests”. This leads to the possibility of “excessive” interest deductions i.e. a greater quantum of finance costs than would arise if the parties to the loan were acting on arm’s length terms.”


[“Arm’s length” as a tax principle is where associated enterprises, such as a parent and subsidiary, must have arrangements which operate as if they are not associated enterprises. So “arm’s length terms” means normal commercial terms.]


So this is firms over-leveraging in an artificial, or at least non-commercial, manner to generate interest deductions. If a company has found to have breached the thin cap rules their interest deductions may be disallowed – these are beyond specific requirements of BEPS and ATAD, but that’s not the point I wish to make here. This seemed as good a place as any to introduce my first “Freedom of Establishment” case, Lankhorst-Hohorst, CJEU case C-324/00. From the case summary, “Lankhorst-Hohorst GmbH (LHG) was a limited liability company resident in Germany. It was wholly owned by Lankhorst-Hohorst BV (LHB), which in turn was wholly owned by Lankhorst Taselaar BV (LTB). Both LHB and LTB were resident in the Netherlands. The total share capital of LHG was 2 million DEM. In December 1996 LTB granted a 3 billion DEM loan to LHG.”


You see the German tax authority’s issue here? A company with a share capital of DEM2m borrowed DEM3bn. So the German tax authority attempted to disqualify some of the deductions and impose a 30% (prevailing rate of tax) on the interest payments. LHG challenged their decision and ultimately it was referred to the CJEU. The CJEU decided for the taxpayer, saying:


“…it is important to note that the legislation at issue here does not have the specific purpose of preventing wholly artificial arrangements, designed to circumvent German tax legislation, from attracting a tax benefit, but applies generally to any situation in which the parent company has its seat, for whatever reason, outside the Federal Republic of Germany. Such a situation does not, of itself, entail a risk of tax evasion, since such a company will in any event be subject to the tax legislation of the State in which it is established.”


The CJEU also dismissed any justification for the legislation from a tax avoidance perspective. Remember this “wholly artificial” principle – it comes up frequently.


The Thin Cap litigation didn’t end there, however. Under pre-2004 UK Thin Cap rules, a domestic group company’s risk of being denied interest deduction depended on the residence of the group creditor, providing a UK exemption. The point being, HMRC don’t really care how you are capitalised, as long as you’re not using it to offshore your profits. UK lawyers saw an opportunity here and decided to test the compatibility of pre-2004 UK Thin Cap rules with the Freedom of Establishment, which led to C-524/04 (Also known as the Thin Cap GLO (Group Litigation Order) case). The CJEU again found in favour of the taxpayer:


“In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.”


Generally the EU will not allow one member state to discriminate against a company from another member state – this is the heart of the Freedom of Establishment principle from TFEU Article 49 (ex Article 43 TEC).


“…restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.”


A company using a subsidiary in a lower tax EU jurisdiction isn’t, by itself, any justification for imposing cross-border tax avoidance measures. If the arrangements were wholly artificial then they are considered abusive and mitigation may be applied.


As I say HMRC doesn’t really care how you are capitalised in a purely UK context, so when they implemented Thin Cap rules UK-UK arrangements were given an exemption but in response to the Lankhorst-Hohorst case the UK removed it. This happens from time to time – HMRC implements unnecessary rules on UK firms/arrangements to circumvent the requirement for non-discrimination. It is possible that the UK could reinstate the exemption post-Brexit but to my knowledge there have been no plans announced.


I don’t want to infer that the Thin Cap GLOs had any significant impact on the UK – ultimately the UK legislation was found to be broadly compliant with freedom of establishment. However, I think this case law is an important starting point when we’re talking about the freedom of establishment.


One of the most famous freedom of establishment cases, and certainly the most famous CFC case, is Cadbury Schweppes vs HMRC. As mentioned in the ATAD discussion above, the UK has had CFC rules since 1984, but in around 2004 we ran into a problem. Cadbury Schweppes had a subsidiary in the International Financial Services Center in Dublin called Cadbury Schweppes Treasury International (CSTI). HMRC imposed a CFC charge on Cadbury Schweppes based on profits made by CSTI in 1996 but found itself in court. I think every UK international corporate tax professional will be aware of the case – I would hope so.

As with the Thin Cap rules above, the complaint was that HMRC’s CFC charge was against the Freedom of Establishment principle. HMRC, they contended, could not impose a tax which could impede Cadbury’s ability to set up operations in any EU member state. No, said HMRC, if the purpose of the subsidiary was to avoid tax, then Member States are permitted to impose measures to protect their tax base. Setting up a subsidiary in another member state in order to avoid UK tax was an abuse of the Freedom of Establishment and the charge should be allowed to stand. So the case went to the CJEU in 2006.

The EU case if you want to see the full details is “C-196/04”. The CJEU decided that member states could not impose CFC charges based on profits made anywhere in the EEA even if the purpose of the subsidiary was primarily to avoid tax. This is an extract from that Opinion:

“…the establishment by a parent company of a subsidiary in another Member State for the purpose of enjoying the more favourable tax regime in that other State does not constitute, in itself, an abuse of freedom of establishment.”

Perhaps read that sentence a couple of times. “For the purpose”. This is the principle that is now in the Directive. You are absolutely free to have a subsidiary in Luxembourg/Ireland or any EU member state PURPOSELY to avoid domestic tax in the parent company’s jurisdiction. So if you have some very lucrative, profitable, taxable, contracts then that business can be directed to your Luxembourg/Irish subsidiary. This is the reality of the impact of the EU on corporate tax avoidance. Look up Vodafone vs HMRC CFC cases for an idea of the amounts involved. The EU would only allow a CFC charge if the arrangement is wholly artificial.

You may think 2006 was a long time ago, with the Anti Tax Avoidance Directive the EU will surely have used the opportunity to mitigate the problem. If you still have the Directive open – go to Article 7 (2).


“This point shall not apply where the controlled foreign company carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.” The CJEU’s Cadbury Schweppes ruling is now in explicitly contained in a Directive. The Directive goes on to make clear that member states can apply these rules to non-EEA countries.


Now there is a school of thought that says that, since the UK rules comply with 7.2(b) rather than 7.2(a) the wholly artificial doctrine doesn’t apply, but this isn’t quite correct. It’s perhaps beyond the scope here to go into further detail, but if you wish please see this Francisco Alvarez article.


The point here isn’t really about these two cases at all, it’s the principle. If you have a number of competitive tax regimes, such as Ireland and Luxembourg, and you’re in a higher tax jurisdiction, you may want to mitigate the threat of these tax regimes by imposing some legislation to defend your tax base. Even for non-tax professionals, conceptually, if you cannot discriminate against operations in Luxembourg and Ireland you can see that this is an impediment to imposing defensive tax legislation. Think about this principle, and perhaps revisit the statistics above in the Missing Profits and Polish Economic Institute above.


There are tax professionals who will say that this isn’t the problem that I’m making out, in spite of Cadbury Schweppes and Vodafone, and they may even have data from freedom of establishment cases to back them up (although it would still amount to billions of pounds). The issue is the legislation you don’t see, not just the legislation quashed. Every time a policy discussion happens at HMRC to deter intra-EU tax avoidance it had to begin with the parameter that we cannot discriminate. How much legislation doesn’t exist and never existed because of the freedom of establishment principle cannot be quantified. Leaving this principle behind, for me, is a key Brexit benefit.


DAC6


The EU has introduced Mandatory Disclosure rules in an initiative called DAC6. Many (non-tax professionals) remain supporters heap an enormous amount of praise over these rules, and the EU for introducing them. This is basically why we need to stay in the EU because the UK alone would never introduce anything like this. As I say, the more extreme amongst them may even say tax avoiders supported Brexit for this very reason – especially since the UK repealed the legislation before it was even enforced.


Don’t get me wrong, this is a very sound initiative – so let’s look at it more closely. This is the Directive.


Intermediaries/promoters and beneficiaries of tax avoidance scheme must disclose the scheme to their tax authorities. E.g., intermediaries must report “reportable cross-border arrangements with the competent authorities within 30 days”. The original proposal was actually 5 days. But anyway, how do you know if you have a reportable scheme? Go down to Annex IV and it will describe the “Hallmarks” of a tax avoidance scheme. So if your scheme meets the definition of cross-border and one of these Hallmarks, it needs to be reported.


This is amazing, right? There is no way the UK would do anything like this? Well, actually we introduced something called DoTAS (Disclosure of Tax Avoidance Schemes) 15 years ago. See the UK rules here.


“Where a promoter is required to disclose he must do so within 5 days”. So the EU is doing something similar to the UK – probably a coincidence. Also, in the UK rules, “A tax arrangement should be disclosed where… …it is a hallmarked scheme by being a tax arrangement that falls within any description (the ‘hallmarks’) prescribed…”


Basically, the EU has introduced an existing UK initiative, and the more extreme remain supporters, aided by the Guardian et al, say this is why the UK wants to leave.


“Ah”, say the eagle-eyed remainers, “DAC 6 requires that information to be shared amongst all EU tax authorities. That sort of cross-border co-operation can only be achieved in the EU”. Again in 2004, the UK with the USA, Australia and Canada formed an organisation called JITSIC (which you will no doubt recall from earlier, obviously) “to facilitate the ongoing work of tax administrations in countering abusive tax schemes and tax avoidance structures.” They basically shared intelligence and provided “administrations with an agile mechanism for… information exchange and collaboration”. That organisation now includes 38 tax authorities around the globe, including 19 EU member states, the USA, Japan, China, India – literally billions more people than captured within the EU. The Common Reporting Standard which the OECD introduced covers even more than that – all possible without EU membership, especially as more and more treaties include expanded exchange of information articles.


There are people who will say the scope of DAC6 is wider in scope, and captures more schemes and requires more reports than DoTAS. This is undoubtedly true – but it isn’t an advantage of DAC6. HMRC can control the scope of DoTAS so that it receives reports about schemes it actually wants to see. DAC6 would have led to HMRC receiving reports about schemes it has already legislated against, or is comfortable with.


DAC6 also required reports from service providers, as well as promoters. Service providers, such as custodians, have no connection to the scheme, they just provide an account for the scheme user. Either this results in duplicate reporting for HMRC to sift through or the custodian and the scheme promoters, who hitherto would have no reason to have a relationship at all, have to share a reference number (ARN) resulting in more needless administration.


There were single service providers preparing to issue thousands of initial reports to HMRC in the knowledge that HMRC are comfortable with the arrangements, at huge cost to them and HMRC with no benefit to anyone. It was an administrative nightmare which would have been best avoided 12 months earlier!



Tax Haven Blacklist


"OK, you’re just avoiding the topic. Stephen Fry (?) on youtube has told us that Brexit was about rich people using tax havens. The UK has loads of tax havens. The EU has a tax haven blacklist, and wants to impose sanctions on them.”


You’ve got me. The UK does have a number of “tax havens” – BVI, Cayman Islands etc. So what is the impact of Brexit on the tax haven blacklist, could this be the reason UK tax avoiders wanted to leave the EU? Er no – quite the opposite.


This is Sven Giegold, Green Finance spokesman, “The British are particularly sceptical about the EU’s black list of tax havens, for self-protection. It takes a lot of British humour to understand that Caribbean islands with a corporate tax rate of zero per cent should not be tax havens, according to the EU definition. We must make best use of the Brexit negotiations to close the UK’s tax havens.”


Think about what he’s saying here. Whilst in the EU the UK wouldn’t allow a corporate tax rate of zero per cent to be a factor when defining a tax haven. We had an effective veto on the parameters for inclusion on the list. Now, there’s no way the UK is going to want to find herself in a position where it is imposing any kind of financial sanction or penalty on our own territories.


Again, this is UK Green politician and former MEP (and super-remain) Molly Scott Cato suggesting that very thing…”Once we leave the EU, the UK will no longer be able to use the EU to hide their dodgy tax practices. The EU should use the opportunity of Brexit to blacklist the UKs overseas territories”.


If I was trying to avoid tax by having operations in BVI like, say, Richard Branson, it is imperative the BVI doesn’t end up on the tax haven blacklist – I need the UK to be in the EU. The tax haven blacklist is a motivation for tax avoiders to support remaining in the EU, not leaving.


Rees-Mogg Avoids Tax – the Great Twitter Legend


"Yeah, but what about Jacob Rees-Mogg, with his Cayman Islands company. It made £103million profit in 5 years and paid no corporation tax at all!”


You may have seen this meme, the purpose of which is to convince anyone who will believe it that since Rees-Mogg clearly avoids tax, it follow his motivation for supporting Brexit must be driven by the new EU rules.




We know that's nonsense based on the above, but is there any truth in it?


The firm Jacob Rees-Mogg receives income from is Somerset Capital Management LLP. It’s a UK registered partnership. The reason why we know it made £103million profit without paying any tax is because its accounts are on Companies House! The reason why it doesn’t pay Corporation tax is because it is a Partnership, and not subject to Corporation tax. It’s not a loophole or a big scandal. An LLP is “transparent” for UK tax purposes – that means that tax is payable by the partners, not by the partnership itself. The profits available for distribution to you as a partner are taxed as if you earned them yourself. If you are an additional rate individual taxpayer you will pay tax at 45%, if you are a Corporate you pay tax at your corporate rate etc etc.


OK, so why would Somerset Capital Management use notorious low tax jurisdictions if not to avoid UK tax? Surely I’m not claiming it’s some kind of coincidence? It is not. So Somerset Capital Management are a fund management company, specialising in Emerging Markets. They make their money by managing portfolios on behalf of investors. They take a fee, in the region of 0.5-1%, on the value of these funds. This is their revenue.


Some of these funds are based in the UK, which is fine if you’re a UK resident. However, if you’re a US person you’re not going to be able to invest in a UK domiciled fund. So SCM have a problem. They want to export their fund management services to the largest market in the world, but the people there cannot buy their UK funds. So they create a fund structure, LLCs based in Delaware with a managing partner based nominally in the Cayman Islands.


What they are doing is creating a means to export their fund management services to the US in a cost effective manner, both in terms of regulatory costs AND tax. So they will minimise tax where they can. But this next bit is absolutely key to understanding why this is all OK – remember this bit. The UK does not, generally, tax investment funds, nor do we tax distributions from investment funds.


So you could move that entire Delaware/Cayman Islands structure into an equivalent UK structure and it will result in not £1 of extra UK tax. What it will mean is that, again, SCM could not export their fund management services to the US. SCM will lose their revenue, their profits will be reduced, and ultimately the partners will pay less UK tax.


[One of many Rees-Mogg allegations. If anyone's interested, he didn't move his company to Ireland (they launched a couple of funds in Ireland), he doesn't have an Irish passport, hasn't been insider dealing and he didn't avoid tax by taking undeclared loans etc, etc.]


Offshore Accounts


"Ah, I see you’ve ignored the EU rule about scrutinising offshore accounts! This whole thing is a charade. A deflection! You Brexit-supporting charlatan!”


This is a strange one. This appeared first, to my knowledge anyway, in a “London Economic” article written by Jack Peat which stated in January 2020 the EU “will bring in a law instructing anyone with offshore accounts and investments to disclose them to enable full scrutiny so they can no longer get away with tax avoidance and evasion.”


Hmmm…I thought, I wasn’t aware of that. I challenged it, and people said “yes it is, it’s the Anti Tax Avoidance Directive”. Well, no it isn’t (as you well know by now!) the ATAD is nothing to do with individuals, or anyone else, hiding money in offshore accounts.


As it happens, there were ”3 new criminal offences relating to offshore income, assets and activities” which require any inaccurate tax returns, where you have omitted any offshore accounts, to be amended. The first deadline for amendment was January 31st 2020. This is the only piece of legislation that remotely resembled the claim.


However, the key piece of information about this legislation is that it is UK – it is nothing whatsoever to do with any EU Directive. It could have been repealed whenever we wanted to. It is nothing to do with our EU membership. It’s not even BEPS. It’s just us. This is the law itself.


Following a bit of a challenge, the Jack Peat article was amended. It now says Brexit was about DAC6 instead. But we all know better, don’t we?


Fullfact did a reasonably good job of debunking this theory, apart from this line “Three of the five provisions of the new tax avoidance directive are already in place”, when as we know all five provisions were in place.



Direction of Travel - Introduction


There will still be some die-hard conspiracy theorists who will state, “OK, but I bet they’ll get rid of these rules as soon as we leave.” Or “The EU was tightening up on tax avoidance and rich UK people wanted to go in the opposite direction.” It becomes a little implausible that even the most determined of tax avoiders would go to the lengths of leaving the EU on the presumption that the UK would repeal their tax avoidance legislation. Even so, would it be possible?


Well, as I say, this is an OECD initiative, so as an OECD member in our own right we would have implemented any measures we didn’t have anyway. Article 5 of the Trade and Cooperation agreement with the EU contains a specific commitment to continue to implement these rules to the standard set by the OECD (doesn’t include the GAAR or Exit Tax as they aren’t an OECD standard). Sure, the UK could repeal all our tax legislation, leave the OECD, JITSIC and the rest of our international commitments and become an international pariah.


Is that what is intended? Logically, if it is the intention then surely the Theresa May Government would’ve repealed our existing legislation and transposed the ATAD in full as an EU directive, bringing it, in its entirety, into scope of the Henry VIII clause in the EU Withdrawal Act and the Retained EU Law initiative.


If it is the intention why did the Government introduce, without EU prompt, the Profit Diversion Compliance Facility in January 2019? Bit of a waste of effort wasn’t it? If the Government is intending on repealing tax avoidance legislation, why did it bring in new Profit Fragmentation laws from April 2019? That one piece of legislation will, by some distance, raise more tax than all the amendments we had to make to comply with ATAD combined!


In 2021 the UK strengthened existing legislation by allowing HMRC to impose certain obligations on UK entities involved in tax avoidance schemes on behalf of offshore promoters. Where these obligations are not met, the UK entities will be liable to a penalty, so the UK associate is penalised for assisting the offshore promoter's activities, with implications for the Directors of the firms directly, and not just the firm itself. Just this year the UK introduced a power for HMRC to present a winding-up petition to the court for firms operating against the public interest by promoting, managing or facilitating tax avoidance with additional powers to publish information about tax avoidance schemes and persons suspected to be promoters of those schemes.


Back in June 2017 the UK signed the Multilateral Instrument (MLI) in Paris, part of the coordinated response to the OECD’s recommendations arising from the BEPS Project.


The MLI enables participating jurisdictions to implement recommended changes in relation to tax avoidance to double taxation agreements (“DTAs”) in an efficient way, without instigating new bilateral negotiations between jurisdictions on individual DTAs. Consider if you were trying to resist advancements in international tax cooperation – would you encourage tax avoidance legislation to be part of international treaties, such that it can’t just be repealed as part of domestic legislation? There are multiple examples of the Government taking action which would make no sense if its intention was to renege on these commitments.


Direction of Travel - Agreement on the Global Minimum Corporate Tax


The UK, along with other jurisdictions, have been working on the taxation of the digital economy. The digital economy causes specific problem because of the ease of moving the business. A UK business could transact with an automated server in Luxembourg with very little manual support required. Is it fair that the business is deemed to have taken place for tax purposes in Luxembourg? If there are people in Luxembourg agreeing to sales and contracts it would be fair to consider the business to be based in Luxembourg - replace those people with a server and a computer program and it doesn't seem so fair.


So the UK, amongst other jurisdictions, went down the route of introducing a Digital Services Tax. This would have imposed a 2% sales tax on search engines and digital market places, so Google, Amazon etc who are often in the news for paying far less tax than the size and success of their operation would suggest is due. This didn't go down well with the United States, but the UK stood firm despite the threat of retaliatory measures.


This no doubt put some pressure on the United States who agreed to address the issue with a global agreement, and as part of that agreement the various Digital Services Taxes were to be removed.


"We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies."


There is now a broad agreement amongst to implement this new global standard, with the EU agreeing to Pillar 2 in December 2022:


"The reform of international corporate tax rules consists of two pillars:

  • Pillar 1 covers the new system of allocating taxing rights over the largest multinationals to jurisdictions where profits are earned. The key element of this pillar will be a multilateral convention. Technical work on the details thereof is ongoing in the Inclusive Framework

  • Pillar 2 contains rules aimed at reducing the opportunities for base erosion and profit shifting, to ensure that the largest multinational groups of companies pay a minimum rate of corporate tax. This pillar is now enshrined legislatively in an EU directive which was adopted unanimously by all member states voting in favour

On 22 December 2021, the Commission therefore presented a proposal for a directive which aims to implement Pillar 2 in a way which is consistent and compatible with EU law."


So what we see here is global tax measures moving on from the foundation of the OECD BEPS agreement and onto the OECD Global Minimum Tax agreement. Again, as with the OECD BEPS project, post-Brexit UK was every bit the enthusiastic promoter, and we have, of course, agreed to the new initiative.


The EU always agree with something of a caveat:


"the measures to implement the OECD Model Rules have to be enacted in accordance with primary law and follow a common line across the Union, to provide taxpayers with legal certainty that the new legal framework is compatible with the EU fundamental freedoms, including the freedom of establishment."


Remember that?


It will certainly be interesting to watch how this is implemented in the EU and the UK with the UK no longer needing to concern itself with any such compatibility.


A piece by the EU tax observatory gives a succinct introduction to the issues the EU faces:


"For example, the income inclusion rule would allow a country hosting the headquarter of a multinational to levy a top-up tax on the undertaxed profits of a foreign affiliate in a low-tax country. Legal scholars warn that the European Court of Justice might consider this an unequal treatment of domestic and foreign affiliates and thus a disincentive for the headquarter company to invest in another member state as for domestic affiliates no such top-up tax would apply."


Keen observers will have already noticed the echoes of Cadbury Schweppes in this paragraph. The EU's solution is to modify the OECD model such that the rules "apply to entities resident in a Member State as well as non-resident entities of a parent entity located in that Member State." It seems to me the EU Commission has taken on board the Cadbury Schweppes judgement.


In Cadbury Schweppes, the government argued that a CFC charge on non-resident subsidiaries of UK resident parents was not discriminatory as a similar amount of tax would have been imposed on resident subsidiaries in any event.


However, the CJEU found a fault line within this argument:


“That difference in treatment creates a tax disadvantage for the resident company to which the legislation on CFCs is applicable. Even taking into account, as suggested by the United Kingdom, Danish, German, French, Portuguese, Finnish, and Swedish Governments, the fact referred to by the national court that such a resident company does not pay, on the profits of a CFC within the scope of application of that legislation, more tax than that which would have been payable on those profits if they had been made by a subsidiary established in the United Kingdom, the fact remains that under such legislation the resident company is taxed on profits of another legal person. That is not the case for a resident company with a subsidiary taxed in the United Kingdom or a subsidiary established outside that Member State which is not subject to a lower level of taxation.”


So the EU Commission has ensured that both Domestic and Foreign subsidiaries can be taxed at their parent level. Nonetheless, the CJEU will disregard the fact that this is an EU Directive and test whether the rule would have as an outcome a deterrence to establishing an operation in another member state.


In terms of the future direction, I suspect there are lawyers already looking to challenge the operation of this Directive within the EU. Watch this space. As I say, the UK no longer has any such issue.


Direction of Travel - ATAD III


It doesn't take much searching on social media to find ATAD III being used as the next instalment of the "Brexit was about tax avoidance". Given it was published five and a half years after the referendum and almost 2 years after we left the EU, that's something of a reach in any case. But let's consider what it's about.


On 22 December 2021, the European Commission the ATAD III directive. This proposal aims to tackle the misuse of entities with limited substance, especially in group structures, to benefit from EU-reliefs on interests, royalties, and dividends streams and also access to EU Member states' double taxation treaties.


What it's trying to do is prevent shell companies taking advantage of EU rules and treaties without actually having any substance. A classic example would be a company in Monaco setting up a subsidiary with no substance in France to take advantage of their tax treaty network.


The UK already has treaty abuse provisions in legislation which were bolstered in the Multilateral instrument (MLI) discussed earlier. As with much of this new legislation, it's largely driven by the OECD and we're really looking at OECD BEPS Actions 5 and 6 regarding substance requirements and treaty abuse.


ATAD III goes further than the UK's rules because it also prevents abuse of the Parent/Subsidiary Directives and the Interest and Royalties Directive - but, of course, UK companies cannot take advantage of these benefits in any case.


So what we would be required to have in ATAD III we materially already have - what we don't have is simply not applicable to UK companies.


Direction of Travel - Items of note


Back in 2006 there was a legal case, Marks and Spencer vs Halsey which concerned Group Relief. The U.K.’s group relief provisions only allowed for losses of a U.K. resident subsidiary to be surrendered to its U.K. parent and not losses incurred by a foreign subsidiary without a U.K. permanent establishment.


Marks & Spencer had subsidiary companies resident in Belgium, Germany and France that were loss making. It sought to surrender these losses by way of group relief to shelter U.K.-taxable profits of the U.K. parent. The retailer argued that the U.K.’s restrictions on group relief to U.K. resident companies were in contravention of paragraph two of Article 43 of the EC Treaty, i.e. the freedom of establishment (again).


Marks & Spencer won the case and the UK was forced to amend our legislation. Following Brexit, and only possible because of Brexit, this cross border group loss relief has now been abolished.


This isn't a major change in legislation, but it does demonstrate the point that UK tax avoidance legislation can be strengthened once the freedom of establishment principle is removed.


Some of the oldest tax avoidance legislation the UK has is the Transfer of Assets Abroad regime which is over 85 years old. This regime aims to counteract tax avoidance whereby income becomes payable to a “person abroad” by virtue of a “transfer of assets”. It's a similar sort of principle to the Exit tax provisions for companies.


There's no need to delve into the topic in any depth, but as part of these rules there was an "EU defence" which requires the relevant transactions to be “genuine transactions” carried out on arm’s length terms application to which of the Transfer of Assets Abroad regime would be in contravention of EU freedoms. So as long as the transactions are genuine, the EU's freedoms will, once again, come to your defence - or at least they would have done prior to Brexit. The EU Defence held within the Income Tax Act 2007 s742A is part of the Retained EU Law Bill currently going through Parliament, so watch this space.


In conclusion, there is nothing that has happened so far since Brexit to suggest any of the conspiracy theories were accurate - if anything the opposite is true.


Tax Justice Network - Brexit and Tax Havens


Most of the people who repeated one of the many "Brexit was about tax avoidance" conspiracies were, with all due respect, non-tax professionals. As such they have probably read something by, or inspired by, Nolan Jazimreg or Lloyd Hardy or A.N. Other conspiracy theorist who have no real tax knowledge, and have just repeated it or the more imaginative of them will create a meme.


However, whilst the Tax Justice Network are undoubtedly an advocacy group rather than independent tax professionals, they are made up of tax practitioners and tax academics or former versions thereof. They know stuff, so I thought I'd give this piece by Nicholas Shaxson a little focus because it gives the conspiracy theorists an element of credibility.


Does it contradict anything above? Well, no. It doesn't really discuss it. I'm looking for some movements towards a loosening of our tax avoidance legislation and I find very little. There are some discussions of deregulation, but they're very broad and theoretical. That the UK is trying to be competitive, and this competition leads to a race to the bottom. Most of the regulations it's talking about are nothing to do with tax.


It does make my earlier point about the tax haven blacklist being a motivation to support remain, not leave (my emphasis):


"Was the City of London financial centre and the “offshore interest” in Britain behind Brexit?


Not exactly. Many if not most people and institutions in the City of London actively opposed Brexit. Most of Britain’s large banks, law firms and insurance businesses had long grown used to the rules of the EU Single Market, which granted them “passporting rights” allowing them to establish branches in and do business across the zone with minimal cross-border kerfuffle, while being regulated and supervised in their home country. British tax havens like Jersey and Guernsey were mostly not cheerleading the Brexiteers: although they were previously locked out of the Single Market for financial services, suggesting that Brexit may not be such a rupture for them – it will be hard, because without Britain to lobby for them in Brussels, they are now more vulnerable to things like EU blacklists."


However, he says, "But finance, and especially offshore finance, certainly played a big role". There then follows a history lesson in the emergence of offshore finance, which is not surprising from the author of Treasure Islands, and the "competitiveness agenda".


This isn't an article about tax, this is an article about economic theory. Looser regulations vs tighter regulations, and intervention vs non-intervention. It is, possibly, an argument about EU regulations being stronger than UK regulations - but it doesn't explain why, even in the EU, and even with a Conservative Government for most of the time, UK regulations were invariably stronger than their EU equivalent, whether that's workers' rights or tax avoidance.


It seems Shaxson's issue is with competitiveness generally, "These ‘competitive’ policies are always harmful in the long run." The opposite of competitive isn't 'good', it's non-competitive. So we can have non-competitive regulations, which put our industry at an international disadvantage without a proportionate increase in standards. Remember, it's not standards we're looking for, it's just to be non-competitive. Any series of pointless regulations will help Shaxson achieve his goal.


It may seem I'm being facetious. Shaxson seems to think no-one has thought that the point of regulation isn't to be competitive or non-competitive as an end in itself, but to produce, good, proportionate regulation. What do you want your regulation to do? 'To be competitive' or not isn't an answer to that question. Regulations are to protect. Is the protection achieved proportionate to its cost? Are ALL regulations required? Is it really necessary to have "may contain nuts" written on a packet of nuts?

Anyway, the piece has nothing to do with the timing of Brexit at all, and very little to do with tax, but more that pro-Brexit supporters may have a different version of what makes "good" regulation than that usually derived from the EU. Well, I would think that's a given.


There's nothing in that article that suggests Brexit was about tax avoidance.


The Tax Justice Network, and many others, in their commentary seem to me to have an old fashioned view of tax havens, that they're purely for illicit uses, hiding secretive accounts for oligarchs and general money laundering. It's undoubtedly the case that they still can be, notwithstanding the international efforts such as the Common Reporting Standard etc, but the World has moved on. Much of the "tax avoidance" we see now happens largely in the public domain, especially when we're talking about profit shifting by multinationals.


We have all seen stories about Facebook (Meta), Apple, Amazon, Google (Alphabet), Netflix, Starbucks and Microsoft amongst others. It would be somewhat surprising if these companies were systematically involved in illegal activities. No, these are law abiding companies, certainly as far as we know, who just have tax liabilities which seem completely inadequate compared to the apparent success of their enterprise.


Let's look at some of these:


Facebook


"Facebook is winding up Irish holding companies it has used to channel billions of profits to avoid paying taxes in the US, the UK and hundreds of other countries.


The company’s main Irish subsidiary paid $101m (£75m) in tax while recording profits of more than $15bn in 2018, the last year for which records are available. Facebook companies around the world paid the Irish holding company for use of its intellectual property.


Facebook International Holdings I Unlimited Company recorded revenue of $30bn in 2018, more than half of Facebook’s total global turnover of $56bn."


Apple


"Apple landed a major victory on Wednesday when the second-highest court in the European Union declared that the tech giant does not have to pay $14.8 billion in taxes to Ireland that regulators in Europe claim the company owes.


The ruling overturns a 2016 European Commission decision that Ireland, where Apple is based in Europe, essentially handed out tax breaks to the company that were illegal under European law.


Regulators said Apple routed profits from around the world through Irish shell companies to take advantage of low tax rates. Authorities said Apple's tax manoeuvring gave it an effective tax rate of about 0.05% on its European profits."


Microsoft


"An Irish subsidiary of Microsoft recorded a profit of $315bn (£222bn) last year.

The profit generated by Microsoft Round Island One is equal to nearly three-quarters of Ireland’s gross domestic product – even though the company has no employees.


The subsidiary, which is resident for tax purposes in Bermuda and collects licence fees for the use of copyrighted Microsoft software around the world, recorded an annual profit of $314.7bn in the year to the end of June 2020, according to accounts filed at the Irish Companies Registration Office."


Amazon


"Amazon paid zero corporation tax in Luxembourg last year, despite seeing a record sales income of €44 billion.

As first reported by The Guardian, accounts for Amazon EU Sarl published online showed that despite making billions of dollars in sales, the company's Luxembourg unit, which oversees retail in countries across Europe, made a €1.2 billion loss and therefore paid zero tax.

Not only did the company not have to pay corporate tax, but it was also handed €56 million in tax credits to offset future tax bills in the event that it does turn a profit. That also comes on top of €2.7 billion in losses that have been carried forward and can be used to offset future tax bills."


We could go on and on. The first thing that strikes you is the amount of money involved. In just four cases there are £10s of billions of taxes seemingly avoided. This isn't the personal wealth of some oligarchs, this amount of tax can only involve the very largest most well known brands.


The Tax Justice Network compiles a Corporate Tax Haven Index which absurdly has Ireland as 11th and Jersey as 8th in the Index. According to the Zucman analysis Jersey is responsible for shifting $7.4bn and Ireland $129.6bn! Even anecdotally it should be obvious to anyone looking at multinational profit shifting that Ireland should be fairly high on any comparative scale.


How do these companies avoid so much tax? One way is licensing. So, for example, Coffee Shop UK Ltd sells coffee in the UK under licence from Coffee Shop Offshore. So because CSU is using the brand belonging to CSO, and so can sell the coffee for more money, it will pay CSO royalties. This shifts the profit from the UK offshore.


The UK introduced legislation, Offshore Receipts in respect of Intangible Property (ORIP) rules, whereby royalties being transferred offshore where they won't be taxed will be taxed in the UK. There is a necessary carve-out though, because the UK has signed full tax treaties with certain jurisdictions which grants taxing rights over this income whether it is subsequently taxed or not:


"On introduction, the measure will generally apply to entities that are located in jurisdictions with whom the UK does not have a full tax treaty (meaning a Double Tax Agreement which contains a non-discrimination provision)."


So the fact that you have a Double Taxation Agreement (DTA) with another jurisdiction is another restriction on the tax avoidance legislation you can introduce, as the ORIP rules demonstrate.


The UK will not have full double taxation treaties with traditional tax havens, such as the BVI and the Cayman Islands - we will have treaties which cover things like exchange of information, but they are not full tax treaties. It would be rare for any jurisdiction to sign a full double taxation treaty with a tax haven. We do have full double taxation treaties with Ireland, Luxembourg and the Netherlands. Indeed, every EU member state has a full double taxation treaty with every other EU member state because the EU insists you negotiate one.


The traditional tax havens struggle to compete with EU tax havens which are gifted double taxation treaties in addition to the freedom of establishment. Not something which is a factor in the TJN's Corporate Tax Haven Index, it seems.


The Remainers who put their money offshore


There's a hint of mischief with this heading, echoing this piece from the Guardian. The implication from the Guardian article is that it can't be a coincidence that a list of rich people who donated to the leave campaign have offshore interests, which predictably leads to more memes from the more conspiratorial artists on social media.


Clearly the Guardian didn't feel it appropriate to include any kind of balance to their article, so let’s look at the financing of the Remain campaign from “Stronger In” onwards in this article.


Lord Sainsbury – Easily Remain’s biggest backer. Sainsbury’s has about a dozen offshore subsidiaries including Guernsey, Jersey, Isle of Man, Ireland and Hong Kong – yet has no overseas stores. He gave £4million to Remain.


David Harding set up Winton Group which manages dozens of funds in low or no tax jurisdictions. Not that there’s anything wrong with that but certain Remain supporters have been known to criticise Rees-Mogg’s firm for doing the same, as above. Harding gave Remain £1million.


Mark Coombs – founder of Ashmore Group, another investment fund manager. They have funds in Guernsey, Luxembourg and the Cayman Islands. They also invest in Russian bank Sberbank. Again, no criticism here whatsoever, but of course if he was a Brexiteer you may have heard more about this I suspect. Coombs gave Remain £750K,


Nathan Kirsh, gave Remain £500K – he has interests in BVI, Liberia and Liechtenstein (Eurona Foundation).


Ian Taylor – the late CEO of Vitol, which was known as “one of Britain’s Biggest tax avoiders” gave Remain £359K. Again, if he was a leaver you would have seen this article.


Andrew Law, who gave £200K, owns Caxton Associates – also has BVI funds. “Their returns are hidden offshore in companies in Bermuda and the British Virgin Islands” said an article in Private Eye (“One Law for Them”, issue 1583)


Ian Wace from Marshall and Wace – managed many hedge funds in the Cayman Islands, Ireland and Luxembourg. Took various short positions in UK companies.


John Armitage of Egerton Capital, manages a number of investment funds in Ireland and Luxembourg.


George Soros – Difficult to know where one would start with an in-depth analysis, but his charity, Open Societies Foundation, did donate £400K to Gina Miller’s Best for Britain.

The Wall Street Journal Says (my emphasis): “Congress is still scrambling to find ways to pay for its tax cut, so perhaps it should pay closer attention to last month’s news that George Soros had transferred $18 billion of his fortune to a private charity that he controls. There it will be sheltered from the Internal Revenue Service forever. This may be the single biggest tax dodge in U.S. history, yet no one on the right or left seems to have raised an eyebrow.


True tax reform is predicated on the principle that all income should be taxed at a low rate once, and only once. But much of the wealth that Mr. Soros spent years moving into his Open Society Foundations will never be taxed.”


He is of course mentioned in the Panama Papers. Several times.


Sir Richard Branson - literally tax resident in the BVI! Donated £25,000 to Gina Miller’s campaign.


There is no accusation here, unless otherwise stated, that any of these people have avoided any tax. Nor is there any accusation that any of these people supported any campaign for personal gain, tax or otherwise. So, despite the tongue-in-cheek headline, this isn’t a “counter-conspiracy theory”


The point is, if these people supported leave you will have seen reams of stories about them, as if they were all involved in some conspiracy. The reality is they probably just thought remaining in the EU was the best decision for the UK. Likewise, the people who supported leave probably just thought leaving was the best decision for the UK.


There is a lot of offshore interests in this section – but the common denominator isn’t really that they supported remain – it’s that they’re rich or managing operations which require offshore subsidiaries and structures, and some of them, on either side, may well be paying less tax as a result of their arrangements.



Conclusion


Was Brexit about tax avoidance? No. That the EU permits competitive tax jurisdictions to exist alongside freedom of establishment principles, preventing discrimination against operations from those jurisdictions, as well as insisting on DTAs which grant taxing rights to those jurisdictions, is a perfect storm for Corporate Tax Avoidance.


If you were a large corporation basing your view on your tax position you would absolutely insist the UK must be a member of the European Union. The idea that people wanted to leave the EU to avoid the EU's corporate tax avoidance legislation is utterly absurd.


Congratulations to anyone who got this far. It’s so easy to say “look, a new tax avoidance rule, this is what Brexit is all about. Follow the money!!”


Actually getting to the bottom of whether that is true, especially if you are predisposed to “remain”, takes quite a bit of patience. Social media, especially twitter, lends itself to eye-catching one-line conspiracies and false assertions, it lends itself far less to their rebuttal.


In summary, Brexit wasn’t about avoiding tax rules, some of which we invented, all of which we already have, have had for years, and would have whether we were in the EU or not. There is no prospect of the UK being an international pariah in the future, as the UK's post-Brexit actions have shown.


If you have got this far without cheating, thank you for taking the time. If you're frustrated by people posting memes and one liners just because they believe it furthers their cause without caring about its veracity, join the club. If you are still reading this then whatever your view it should be respected, you are clearly prepared to spend the time researching. Whether you supported leave or remain, we're on the same side.






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