Back to the drawing board?

Friday, 01 October 2010
What we want from a tax system in a changing world.

It shows what a sad person I have become that I have been waking up early worrying about the consultation exercise going on about ‘Tax Policy Making: a new approach’. In doing so, however, I have stopped and asked myself whether the real question is more fundamental.

Is the UK tax system fit for purpose? I suggest the parallel is that, as with so many other countries, we are looking at a property that was built in the 19th century, on a piece of ground that has proved inadequate in scope and size, so that one option might be to knock the whole thing down and rebuild it. The last Royal Commission on the tax system was at least 30 years ago and in the interval, the world has shrunk dramatically, financial systems and international communications have changed out of all recognition and a tax system built on domicile, while others are built on residence or citizenship, is proving inadequate and archaic.

Is it not time for a proper review and a Royal Commission? I agree there is a practical problem here. Who on earth would be prepared to give up their lives for the period necessary to produce a worthwhile report, in the knowledge that the changes necessary would not commend themselves to a government that would find the expenditure involved unattractive to the point of impossible? No doubt they would also argue that for the vast majority of taxpayers, changes would make no difference – it is at the high-net-worth and corporate end (the difficult end) that changes are needed, but equally these are the areas that generate a disproportionate amount of tax receipts. One would also argue that the problem is not going to go away – it is just going to get worse!

Taxes have always been national, but realistically, the real issues are international. I have argued before that tax systems based on domicile, residence, or citizenship are incompatible. They were pragmatic responses to the 19th century societies, but they do not work together. The international society of the 21st century needs something better.

Interestingly, the European Union has issued consultation documents about how double taxation agreements work in practice, and more particularly about how inheritance taxes within the EU give rise to double charges and, they argue, are a restriction on freedom of movement of citizens. But the same is true internationally, and in a world where each nation is trying to extract more and more from anyone with connections to it, these issues will increase. Take the example of Paul Hogan (Crocodile Dundee) and the efforts of the US and Australian tax authorities both to assert taxing rights over his resources.

Double tax treaties were introduced to stop double taxation, but as Europe is beginning to appreciate, they are now creaking at the seams and increasingly outdated. Countries outside the EU will continue to adopt an autocratic self-righteousness, and the EU will do the same, but the taxpaying community will soon get fed up with the arrogance of it all – and with the increase, to unacceptable levels, of compliance costs.

Put your hands over your eyes and ears, as you might, policy makers and government officials, but the problem is only going to get worse. One day, you will have to face up to it!

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Martyn Gowar

Martyn Gowar TEP is a Partner at McDermott Will & Emery UK LLP and an Editor of the STEP Journal.

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