HOW IS EMIGRATION TAX AVOIDANCE?

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HOW IS EMIGRATION TAX AVOIDANCE?

The Times is at it again.  It recently ran a two-page spread branding people who live in Monaco, have business interests in the UK and previously lived in the UK as tax avoiders.  Didn’t Rupert Murdoch, the driving force behind News International, the owner of The Times, who lives in the USA, previously live in Australia and still has business interests in Australia?  If so, he is surely avoiding Australian tax by living in the USA.  It hardly seems reasonable for The Times to criticise ex-UK businessmen who have moved overseas but forbear from criticising a high profile Australian magnate who has done precisely the same thing.  Is it OK to avoid Australian tax?

But that is by the way.  Thousands, if not millions, of UK citizens who used to live in the UK have retired to Spain.  Thousands more have retired to Italy, France and Portugal.  Why isn’t The Times criticising them?  Surely it cannot be because many of their readers plan to retire abroad and it is not good business to slag off one’s customers?

With the sole exception of the USA, which taxes on the basis of citizenship, every other country in the world taxes on the basis of residence.  If a person moves from country A to country B, he exits the tax regime of country A and joins that of country B.  It cannot be reasonable for country A to continue to tax him even though country B taxes him too.  How can living in a different country be tax avoidance?  Indeed, if that is so, aren’t you and I avoiding US, French, German, etc tax by remaining resident in the UK rather than move to such a country?

Of course each country decides for itself how best to collect the revenue that it needs.  That also happens within a country though.  Prior to 1974, the UK collected most of its tax revenue from direct taxes.  It now collects getting on for 50% from indirect taxes such as VAT and excise duties.  Most economists say that indirect taxes are far more efficient than direct ones.  The Meade Committee in the 1980s recommended that the UK should scrap income tax and move wholly to indirect tax.  A recent major study by the Institute for Fiscal Studies reached a similar conclusion.

Indirect taxes are mainly sales taxes.  As The Times pointed out, prices in Monaco are significantly higher than in the UK.  They omitted to point out that the reason is that Monaco relies largely on sales taxes to meet its needs.  France and Italy on the other hand are more reliant on direct taxes, such as income tax.  But surely it cannot be tax avoidance to move from the UK to a country that relies on indirect taxes, but not tax avoidance to move to one that relies on direct taxes?

Indeed a person who moves to a country that relies on direct taxes is exempted from UK income tax on many types of income arising in the UK, whereas no such exemption applies to those who move to a country such as Monaco that relies on indirect taxation.  This is because we have a large number of Double Tax Agreements to seek to minimise the cases in which a person has to pay income tax in two countries at the same time.  The UK’s double tax agreements all exempt UK pensions from UK tax and also exempt salary for work done in the UK and self-employment income earned in the UK if specified conditions apply.  We do not have double tax agreements with countries that do not impose an income tax, so retain taxing rights on all UK source income where a person has emigrated to such a country.  Accordingly a person who emigrates to France does indeed avoid UK tax, whereas a person who emigrates to Monaco does so only to the extent that either the income arises outside the UK or the UK parliament has specifically chosen, as it has done with capital gains tax, not to seek to impose the tax on residents of other countries.

So what is the distinction?  I can’t help thinking that it might just be that, as Monaco is a tiny country, land is scarce so property prices are astronomically high.  This means that a person has to be far wealthier to be able to afford to emigrate to Monaco than to emigrate to Spain or France.  That may well mean the journalists at The Times cannot aspire to retire to Monaco whereas they can dream of retiring to France.  Accordingly anyone who can afford a behaviour that they cannot, deserves to be excoriated.  If so, jealousy is surely a poor basis on which to build a tax system!

ROBERT MAAS