28 February 2012

FT: Wrong reaction to tax avoidance

This FT Editorial says that the UK government is so shocked by a bank breaking a promise not to exploit a legal tax loophole that it is introducing retroactive legislation to block it. Those with fewer illusions about the behaviour of banks will be more shocked by the government's conduct.

It is foolish to expect banks to content themselves with tax planning as foreseen by the government and not seek legal ways of eluding the intentions of those who wrote the law. It is a lucrative service to offer clients. Why would banks not use it for themselves?

The answer could be that they recognise it is wrong for banks to engage in such anti-social practices – or at least to be seen to do so at a time of deep public distrust. But this – as Barclays chief executive, Bob Diamond, said just months ago – requires a shift in corporate culture. That shift is not complete.

The law will have retroactive effect to just before the buyback profit was booked in December. Not only is this unjust; it should be anathema to a state that wants to create a predictable environment for business.

Instead of trying to undo its past mistakes, the government needs to prevent future ones by fixing a tax system that invites avoidance. A general anti-avoidance rule, considered by the government and now supported by the UK’s biggest employers, would be a step forward. So would an overhaul of the tax system to remove opportunities for tax arbitrage.

Full article (FT subscription required)

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