Brexit Opportunities for Combating Tax Avoidance

The left just doesn’t know what it wants from Brexit. Some have accepted Brexit as a fait accompli – and their approach now appears to be limiting the damage. Others appear to be dead-set on overturning the result of last year’s referendum at the earliest opportunity. Both approaches are politically risky. The former is wishy-washy, satisfying neither the hard-core Remainers nor the devout Brexiteers; while the latter smacks of elitism and disrespect for democracy.

While “third way” approaches may have fallen out of favour with the left, there is an alternative – and that is to embrace the opportunities that Brexit brings to tackle many of the grave injustices imposed by EU law.

One of the most notable of these injustices is tax avoidance. While the European Commission may be the latest passenger on the tax-justice bandwagon, the reality is that it’s EU treaties that make tax avoidance so particularly easy in Europe. Consequently, the ECJ has a long history of striking down national laws designed to combat tax avoidance.

The Chancellor’s Autumn Statement revealed that his predecessor’s much touted Diverted Profits Tax (the so-called “Google Tax”) – designed to stop companies from limiting their tax liabilities by shifting profits to low-tax jurisdictions (like Ireland) – hasn’t yet raised a penny in revenue. I recently revealed in an article in the leading tax journal “InterTax” that this is because EU law means the tax will almost never work.

Article 49 of the Treaty on the Functioning of the European Union (TFEU) prohibits restrictions upon freedom of establishment of nationals of Member States in the territory of another Member State including establishment of companies. Article 58 TFEU further prohibits any restrictions on the free movement of capital. National laws, including tax laws, which infringe upon those rights are, in almost all circumstances, not permitted. This has resulted in many laws designed to clampdown on tax avoidance being struck down by the ECJ.

The case of Sandoz concerned a provision designed to prevent the arrangement of loans outside of Austria to avoid paying tax. In his opinion on the case, the Advocate General took the view that “[t]he principle of the free movement of capital was introduced inter alia in order to enable Community nationals to enjoy the most favourable conditions for investing their capital available to them in any of the States which make up the Community.”

The Court agreed with the Advocate General’s position, ruling that the measure “deprives residents of a Member State of the possibility of benefiting from the absence of taxation which may be associated with loans obtained outside the national territory. Accordingly, such a measure is likely to deter such residents from obtaining loans from persons established in other Member States.”

If the very purpose of free movement is to ensure the allocation of resources to their most efficient location, it logically follows that “shopping around” for the most favourable environment for those resources is perfectly lawful.

Of even greater relevance is the decision of the ECJ in Cadbury Schweppes. At issue in the case was the UK’s rules designed to prevent companies from shifting profits to related companies outside of the UK to avoid tax. The Court in Cadbury Schweppes reiterated its earlier judgement in Barbier that “a Community national cannot be deprived of the right to rely on the provisions of the Treaty on the ground that he is profiting from tax advantages which are legally provided by the rules in force in a Member State other than his State of residence.”

In other words, under EU Law the fact that a company shifts its operations to another EU state (such as Ireland or the Netherlands) to take advantage of more favourable tax treatment cannot be prohibited. Anti-avoidance rules may not be applied, even where there is an explicit intention to avoid tax, where the taxpayer nonetheless carries on genuine economic activities. Anti-avoidance rules, such as George Osborne’s Google Tax, can only work where arrangements are wholly artificial and have tax avoidance as their sole purpose.

And herein lies the problem. The reality is that these arrangements are almost never wholly artificial, with a reduction in their tax bill seemingly being a happy coincidence. At time of writing Google has over 5,000 employees in Ireland, and Apple approximately 4,000. Under EU law any attempts at taxing profits shifted to these jurisdictions is illegal – notwithstanding the fact that they likely would never have located so many employees there but for their 12.5% corporate tax rate.

Freedom from the application of EU rules on free movement of capital and freedom of establishment would allow the UK to enact a genuinely effective anti-avoidance rule. Rather than being limited to a rule that applies only to arrangements the sole purpose of which is to avoid tax, the UK could adopt a rule that clamp down on arrangements which have as their main purpose the minimisation of tax liabilities.

A favourite method of profit shifting by large multinationals is to make royalty and interest payments from subsidiaries in high-tax jurisdictions to subsidiaries in tax havens. A withholding tax on such payments would seriously clamp-down on this prolific method of tax avoidance, but such a tax is prohibited by a 2003 EU Directive.

Combating tax avoidance is just one opportunity presented by Brexit. There are plenty of others.

The left is undoubtedly suffering from an ideological crisis. Many of the left’s assumptions have been challenged by the discovery that its core vote isn’t what it used to be. But if the left decides to embrace Brexit then there are plenty of opportunities. Ending EU-sanctioned tax avoidance would be a good start.

A special deal for Scotland? No chance.

Nicola Sturgeon has accused the UK Government of “ignoring Scotland’s voice” on Brexit. I’m not sure what else the First Minister can expect given that she spent the past six months making demands she knows can never be met. The Scottish Government intervened in Miller on flimsy grounds in the futile hope of securing a veto for Scotland over the UK’s exit from the European Union – knowing full well (as, I think, likely every lawyer in the country did too) that they stood absolutely no chance of success.

Similarly, the First Minister has peddled the myth that it would be possible for some kind of special deal to be struck that would allow Scotland to remain in the EU/EEA/EFTA/single market (these have been used interchangeably). But such a deal is not possible, as I have articulated before. This is for three reasons.

The first, is international law. Scotland is not a sovereign state – it has no legal personality. As Scotland is not an actor in international law, it cannot enter into treaties with other countries. There is no non-independent region in the world (save, possibly, for the Emirates) with the powers that would be necessary to participate in participate in an international organisation like the EEA.

The second hurdle is domestic, and significant. Since early cases such as Costa v ENEL, it has been clear that single market rules are supreme, and rank above all other forms of domestic law. While this wouldn’t pose any problem where Scotland’s devolved competences are concerned, it’s not clear what would happen should single market rules come into conflict with the powers reserved to Westminster. Of course, the UK could devolve those powers necessary for Scotland’s participation in the single market – the trouble is that’s basically all the powers: full fiscal autonomy; regulation of all markets (financial services, energy, telecoms, etc); immigration, naturalisation, and citizenship; competition law; employment law; product standards; consumer protection – to name but a few. Were this to happen, there would be little left of the United Kingdom, save for a currency union and a defence pact. Scotland would be, de facto, independent.

The third problem is EU/EEA law based, and is possibly even more challenging. The EU/EEA’s institutions are designed for independent sovereign states. There is no provision in the treaties for the participation of a non-sovereign territory. Two years ago the worst case scenario was that an independent Scotland would have to follow the EU’s accession procedures set out in Article 49 of the Treaty on European Union. However, when compared to what would be required for a non-independent Scotland to join the EEA the accession process looks like a breeze. Nothing short of substantial changes to the EU and EEA treaties would be necessary to accommodate a non-sovereign Scotland. Even if Scotland could persuade the EU institutions to go along with this, Scotland still comes up against the same brick wall as it would have done post-independence, which is states with their own secessionist movements such as Spain and Belgium. If Scotland gets to participate in the EEA/EU without independence, you can guarantee that Catalonia, the Basque Country, Flanders, and Wallonia (just for starters) will want the same. You can also guarantee that Spain and probably Belgium would veto it – as is their right.

The opposition needs to call out this daft idea for what it is: a complete fabrication designed to stoke the flames of grievance.

It’s clear that the SNP has no interest in securing the “best deal for Scotland” when the only proposals they have thus far made are manifestly impossible. A far more constructive approach would be to lay dibs on the powers being repatriated from Brussels that they believe would be best exercised in Scotland. Agriculture and Fisheries would obviously be top of the wish list. The devolution of labour law and company law would allow Scotland to take a different path from the race to the bottom that the Government in London seems keen to pursue. While absent concerns about compliance with EU law, VAT is one of the best candidates for further fiscal devolution.

If Nicola Sturgeon truly wants the best deal for Scotland she should stop the shadow boxing and start drawing up a wish list that’s actually deliverable.

Ticket Touts Aren’t The Problem – Greedy Artists Are

As an avid gig goer, I know all-too-well how frustrating it is not to get tickets to a band you really want to see. As someone who has been a Bruce Springsteen fan since I was a teenager it becomes particularly frustrating when an artist becomes “legendary”.

Whenever tickets to a hugely high-demand event go on sale it’s certain that within minutes of tickets being sold out huge numbers of them appear on aftermarket. This understandably leads to outrage among those fans who missed out that something they attempted to buy five minutes ago is now being sold at as much as ten times the price.

The focus of public vitriol are invariably ticket touts, companies like Ticketmaster, and aftermarket sellers like GetMeIn and SeatWave; while comparatively little ire is directed towards greedy artists who also profit from aftermarkets.

It’s astonishing how many avowed free-marketers suddenly have a problem with the free market when they don’t get U2 tickets. Fine Gael TD Noel Rock has proposed a bill to outlaw selling tickets at above face value. Many right-wingers have described the practice as “profiteering”, which so far as I can tell simply means making a profit in a way they disapprove of. Those who make these arguments usually do so largely in ignorance of how the music industry actually works.

A Glastonbury ticket with photo ID

There is, of course, no need to legislate to prevent ticket touting. It’s perfectly easy for artists and promoters to stop touting of their tickets, should they so wish. When you go to a Radiohead gig you have to present the credit card with which you bought the tickets, much like at a train station. Glastonbury passes include a photographic ID. With the advent of e-ticketing and tickets you print off yourself it’s perfectly possible to only release tickets on the day of the gig, which would eliminate all but the very last-minute touting at the venue gates. So given that it’s actually so easy for artists and promoters to stop touting – why don’t they? The answer is simple: it’s the artists and promoters who are the biggest racketeers of the lot.

It’s normal practice for artists and promoters to hold back a large proportion of tickets from the primary sale. In one reported instance Justin Bieber held back 92% of the tickets for a gig from the public – meaning a paltry 940 out of 12,000 seats were sold as normal, face-value tickets.

Almost as soon as ticket sales close there are hundreds of them on aftermarkets such as SeatWave at massively inflated prices. It’s implausible to the point of near-impossibility that so many tickets could be on sale so quickly by touts. It’s highly probable that the vast majority of those tickets (possibly even all of them) are tickets that were never on sale to the public in the first place.

The problem, of course, is that the tickets in the primary market are vastly under-priced given the demand. Consequently, whether or not you actually get tickets isn’t the product of a functioning marketplace – it’s a lottery. The demand for U2 tickets would have been significantly lower had they been priced at €200, rather than €70 – but this would have made U2 look greedy. Alternatively, a more transparent way of pricing tickets would be similar to the way that airlines price seats on planes: the first seat sold is £1; the last seat is £200 – because there are always people who will pay well over-the-odds to get that flight in an emergency. So too will there be fans who will pay ridiculous prices to see these bands – the aftermarket wouldn’t exist if there weren’t. But again, this would be quite transparent, and artists’ greed would be plain for all to see.

So the secretive aftermarket provides the perfect cover, and a patsy-to boot: the touts. Artists get to look like they’ve priced the tickets fairly, and greedy touts get the blame for profiteering. But the reality is that the real profiteers (look, I’m doing it now) are the artists and their promoters.

So if you’re looking for someone to blame because you didn’t get U2 tickets don’t blame touts – it almost certainly wasn’t them. Blame greedy U2 and their promoters LiveNation – who, by happy coincidence, also own Ticketmaster, SeatWave, and GetMeIn.