In the rush to replenish tax coffers states will chase online business

IF a government levies a tax that is patently unfair or excessive then people may go to extraordinary lengths to try not to pay it, even running the risk of major fines or, worse, jail if caught and found guilty of wrong-doing.

The story of 46-year-old fruit and vegetable importer Paul Begley which commanded the headlines last weekend seems to illustrate the point perfectly. He has admitted that what he did was wrong when he labelled garlic imported from China as apples, to avoid paying excise duties of 232%. He has been jailed for six years, because of the belief of the Revenue Commissioners that this ongoing practice over 6 years effectively cost the State about €1.5m in lost revenues.

Many people have been shocked by the severity of the sentence, not least Begley and his family. They have argued that he cooperated with the investigation — although he may have little option once a customs officer opened a cargo to find 21 tonnes of garlic in a container that was supposed to have just two tonnes of garlic but 18 tonnes of apples. In a statement his company said: “It’s important to stress that what Paul did was wrong. It was a breach of EU regulations and he knows that. His family also knows that.” It also emphasised that his company, Begley Brothers, had agreed to repay the entire amount outstanding, including all the penalties, and had started to do so.

Yet Begley has gone to jail. “It’s going to end up costing the taxpayer thousands instead of Paul paying the taxpayer thousands,” the family argued. “It doesn’t make any sense...What we can’t understand is how he received such an extraordinary sentence when every day you see people guilty of violence, drug smuggling and other shocking crimes getting much less.”

Many people will sympathise. On Monday a woman who had killed a neighbour by deliberately crushing him against a wall with her car — and who cited being under the influence of cocaine and alcohol as a mitigating plea — received a jail sentence of just eight years, two of which were suspended as a “reward” for pleading guilty to manslaughter. It turned out that Claire Nolan had 16 previous convictions, including a three-year suspended sentence for cocaine possession and dealing that she had received just one day before she killed her victim Michael Duffy, who had gone to the aid of his intellectually disabled son who had done something trivial to raise Nolan’s anger.

It is very hard to see the justice of Nolan and Begley spending the same time in jail.

Yet what Begley did was not a “victimless” crime and it seems that the authorities are going to take a tougher line when it comes to financial fraud against the State. For example, there was a ruling last month at the Court of Criminal Appeal in a case of a man who had been jailed for 12 years for social welfare fraud involving hundreds of thousands of euro. The judges said “significant and systematic frauds directed upon the public revenue . . . should generally meet with an immediate and appreciable custodial sentence”. This is being interpreted as a guideline for future sentencing.

The judge in Begley’s case said the import tax “may or may not” be excessive, but stressed it was for the Oireachtas to decide and not individuals. As it happens the tax is an EU directive, designed to protect garlic producers in Spain and France who cannot compete with the high volume and low production costs in China. If such taxes are not imposed and observed then how can farmers in Europe compete?

The agricultural protectionism issue is one in itself, but the use of tax as an economic policy weapon by states is another, as is the revenue that a state can gather for itself when it imposes taxes on trade.

I spent three days in Budapest this week, working at a conference on “indirect taxes” hosted by accountants KPMG for some of its biggest global clients. As a participant from the outside it was fascinating to learn about the growing dependence of governments on this source of taxation revenue, the strains put on businesses in getting the sums right when they act as tax collectors for states, and the growing third-tier of the global economy that raises big questions as to what can be taxed and where.

The belief expressed at the conference was that governments are going to try to meet rising bills by focusing more on raising revenue from consumption taxes, because they don’t want to tax labour or capital much more than they do at present. In the US, for example, there are no federal sales taxes as yet; as visitors to the country will know those are levied at local and state level. KPMG’s US managing director reckoned the imposition of a federal government sales tax on top of existing ones is inevitable because of the country’s spending demands.

The major issue now for authorities and companies is how to tax online transactions, especially as smartphones and tablets make internet usage more ubiquitous and the volume and value of trade in that domain is soaring. The authorities are simply not going to let transactions go untaxed just because they are online. It all means more regulation and more complexity for businesses, including Irish exporters.

Few people have sympathy for big business, but often they are major employers and the suppliers of the goods and services we want to consume. One woman I met in Budapest is responsible for the payment by her company of $80bn in payments each year to governments throughout the world. Maybe this number is not too surprising given the diversity of Shell’s many business enterprises that take in close to 100 countries. But what a size of responsibility that is. Get it wrong in either direction and it could cause major headaches. Underpay and there is the risk of major problems for the company, both legal and financial, with some tax authorities. Overpay and the bottom line to Shell is impacted unnecessarily.

The risk of getting things wrong is a constant pressure for companies. However, getting things correct is highly complex.

WHILE companies have an obvious interest in trying to avoid paying tax unnecessarily, they have an obligation also not to evade tax, even those taxes that they feel have instituted unfairly or are unduly high.

While we all think of income tax, because it takes the greatest chunk of most people’s earnings, there are often substantial taxes levied on the things that we purchase. VAT generated €9.7bn in tax revenue for the Irish State in 2011, €500 million shy of the €10.2bn target set in Budget 2011. This is a major part of the Government’s overall tax take of €34bn. For 2012 the top rate of VAT has been increased to 23% from 21%, in the hope of raising an additional €600m to €800m for the State. It may fail in this ambition because of the slowdown in retail activity in this country. This may be due partly to the counterproductive nature of making VAT too expensive: people either reduce their spending, or go to places (online or illegal) where they think they can reduce or remove the VAT expense on buying something. Some businesses may be tempted to get into the area of evasion rather than avoidance.

Sympathy for Begley should be tempered by realisation that he broke the law and that his actions had consequences. The only issue for debate is the appropriateness of the length of sentence.

* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.

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