The G8 at Enniskillen – No Hospitality to Tax Dodgers

Spendthrifts and tax dodgers

Six years on from the bank-induced recession, governments in the G8 are in Enniskillen, Northern Ireland to consider problems that they have failed to solve since the invention of taxation. While not as old as Enniskillen’s oldest building, built by Hugh “the hospitable” Maguire (who died in 1428), it is high time serious politicians acted.

Large sovereign deficits (spendthrifts pre-2007 and financial system saviours post-2007) and the inability of Finance Ministers to take more tax from their citizens has caused some nations to focus their attention after hundreds of years on the anomalies of the corporate tax system. This system enables companies (tax dodgers) to shift their tax burden offshore – away from where they make their money – through transfer prices, royalties and the like to places where the tax burden shrinks to almost nothing.

Margaret Hodge (the chair of the UK Parliament’s Public Accounts Committee – PAC) has pursued a fierce campaign against large companies that have, in her view, not paid their due corporate taxes in the UK.

The HMRC (the UK’s tax collectors) have, for many years, decided to be “pragmatic” and reach deals with those same companies on the basis that tax law is insufficient to compel the larger companies to pay reasonable rates of taxation – and the companies have more and better (and better paid) tax lawyers and accountants than the HMRC could dream of.

The PAC has not accused companies of illegality but has stated often that they should pay tax where they earn profits and has cast doubt on the companies’ honesty and morality. Google claims its sales take place in low tax / tax haven Ireland despite the reality of closing the deals in England – as the PAC has claimed and has brought forth witnesses who have testified to this.

What the debate between public and private sectors have shown is clear (to most of us). It is that corporate taxation is very hard to collect currently and that companies believe they are duty bound to reduce their tax to the minimum possible. For there is no social heart in a company – it is not really a person (even if it is granted that status in law), it has to meet the demands of the legal system and its shareholders (while ensuring its customers are satisfied on the way).

Tax-dodging Companies Have No Afterlife

There is a misinterpretation that great companies can find a soul but we should understand that, while they are all made up of real people, companies (especially large ones) take on a life of their own and are propelled by the dynamics of corporatism. A company knows that it has but one existence – there are no stories of “good” companies going to heaven.

Companies that pursue good CSR (corporate social responsibility) do often have good people working for them but the CSR is there because civil society (which includes a lot of customers – real people) demands it. Sustainability is best developed with a good understanding of the society around the company. This means understanding social responsibility where it is seen to be legally needed or where it will benefit the company in the medium term.

This rarely stretches to paying more tax than is needed. For every Starbucks (frightened by bad publicity to throw money in the direction of HMRC) there are 1,000 Googles and Amazons and Apples. Tax is not for sale and paying tax not required by law does not gain a company angel’s wings.

The Spendthrifts’ dilemma

However, since 2007, there have arisen massive deficits in many sovereign nations’ coffers. Suddenly, there is a need to fill those cavernous holes and the substantial drift in the share of income from individual wage earners to high net worth individuals and companies (companies don’t have a vote – outside of the city of London and there are not that many rich people – even if they control most of the wealth) means that the attention of government has shifted in times of recession.

Angel Gurria, Secretary General of the OECD, said recently that taxing the “man on the street” wasn’t economically desirable or even politically possible, so for many finance ministers the only option was “to cut, cut, cut more, rather than have a proper balance between revenue and the expense”.

He said this while overseeing the signing by more countries of automatic exchange of tax information – Austria, Switzerland and Singapore coming to the table.

However, other than austerity, which is now causing huge unemployment in countries such as Greece and Spain, the only target is corporate. This may be a turning point after hundreds of years – a Clause 4 moment – or it may be just rhetoric.

Spendthrifts chasing tax-dodgers – Tax Havens and Beneficial Ownership

Linking this to the G8 and David Cameron is obvious. Companies are able to avoid tax if they can somehow show that their profits are made outside of the higher tax areas. This can only be done if there are places with very low taxation that will accommodate them – these are the tax havens. Nicholas Shaxson’s excellent book “Treasure Islands” tells the story of these tax havens extremely well and also the appalling impact that they have on the poorest countries of the world.

Developing nations are rife with corruption and the corrupt are big users of tax havens – really, they are laundering their money.  Today’s Sunday Times article on the use of Latvians as front Directors for companies operating scams tells this story.

This is possible because of the secrecy that exists in most jurisdictions. If there was transparency and the only issue was lower taxation, then we would have a real competitive environment. Unfortunately, that is not the situation – although it is changing quietly with projects like the one above. If transparency becomes the norm, then the corrupt and criminal (whether they are terrorists or drug barons) will have far fewer places to go. There is no better place to learn about beneficial ownership than at Global Witness – which has driven this issue from the start – see their “Idiot’s Guide to Money Laundering.” It’s so easy anyone can do it – trouble is, most are!

This is why transparency is so critical and why politicians are attempting to use transparency to open up tax havens – at last – and the end to ownership secrecy.

Once there is transparency, then the next step is to determine where profits are legitimately made. This means that the policing of royalties and transfer pricing cannot be at the whim of large corporates but there has to be international agreements that specify what is allowable. International tax laws should not predetermine rates of tax, but double taxation should not equate to zero taxation – it has to mean that tax is payable in the countries where the business is done.

The final requirement is to ensure that beneficial owners of companies are known by the taxation authorities. Why companies and trusts are allowed to be secret is beyond the comprehension of almost all of us. As Richard Murphy (Tax Research UK) has written, over 500,000 companies in the UK are struck off each year. Around a third never file accounts.  He estimates that the tax lost as a result could be upwards of £16bn per year from companies that trade but do not file accounts or tax returns.

That is in the UK alone.

Can’t Spend, can’t stop spending

Can’t tax, can’t stop taxing

 

The dilemma of western Governments that find austerity too much, too soon and who (outside of those in serious trouble like Greece, Cyprus and Spain) are unwilling to torment their citizens with mass unemployment and soup kitchens is great. This means that the deficiencies that have been all too apparent in corporate taxation for so long are seen as the final option. The 2007 banking-induced calamity has made such huge financial contortions in countries such as the UK and the USA that even the precious not-to-be-disturbed tax havens and secrecy laws are under pressure.

The G8, chaired by the UK and in Northern Ireland (rather than one of the many UK protectorates that operate as tax havens), does provide an opportunity to generate support for the ending of the nonsense that the current corporate tax system provides. Gleneagles (eight years ago) was all about international development and led to significant and positive change (even if not all the promises have been fulfilled). The same pressure and openness about tax havens and secrecy in international finance could lead to more sensible and pragmatic tax systems and, eventually (if pursued vigorously) to far less exporting of illicit funds from developing nations (such funds leave developing countries at a faster rate than aid money is put in). At least $50bn a year is lost to developing nations in Africa alone every year.

This is a great time for Enniskillen – ancient home of Hugh the Hospitable – to be remembered for its lack of hospitality to tax dodgers.

 

Do Companies Exist???

David Cameron is an astute politician and he understands that, at last, there is a popular movement for equity in taxation. This equity includes companies paying a reasonable share of profits. Ian Birrell in The Independent sees this as the start of a movement but this is a campaign that people like Richard Murphy have waged for many years.

True, much of the publicity around his work and that of organisations like the Tax Justice Network and Action Aid have revolved around tax and the developing world. This is where multinationals – especially in the energy and mining sectors – have often connived with governments with a corrupt result that siphoned off hundreds of billions of dollars from the state into the pockets of individuals, elite groups and corporates.

The Dodd-Frank Act – and its focus on country-by-country reporting of tax in such areas – was aimed at opening up governments and companies payments.

However, the taxation effects of tax havens, low tax jurisdictions and multinationals with expertise in moving their tax affairs wherever they want has also created the opportunity for such multinationals to pay if they want, where they want. Organisations like the Institute of Directors, whose members are mainly smaller companies with less multinational options, have recently come out in favour of zero corporate tax rates – on the basis that it is people that should pay tax, not companies.

What’s a Company for?

There are many who believe that a company should not pay taxes – that the market economy needs to ensure that companies are free (within the law) to grow and prosper and that their assumption of human qualities (they are seen as entities under the law) is a fiction. It is people that need to be taxed – not companies and the IoD, for example, in its paper “How to get rid of Corporation Tax” (written following a similar paper from the 2020 Tax Commission) strongly advocates the elimination of all corporation tax as the company is a mere conduit for shareholders, staff etc who should pay all the tax on disbursements from the company.

This begs the question about the essential qualities of a company in a market economy – what is it that makes a company different from an individual – why shouldn’t it pay tax?

Limited liability provides individuals with the scope to take risks. It is a formula from which individuals seeking to build a business can bring in investment knowing that the only requirement to repay (if managing a legally proper business) is limited to the value of the shares as well as any loans taken out. It is limited liability that was fully developed in the Netherlands in1602 when stock was tradable on the Amsterdam Stock Exchange that gave the push to enterprise in Europe. Taken up by the British, it heralded the industrial revolution.

Joint stock companies (having limited liability) were the original, defining force that differentiated companies from individuals pursuing business opportunities. Now, most business is done with limited liability.  Governments have lost track of the ability of such joint stock companies to register in whatever jurisdiction they want and to appoint Directors that have nothing to do with the business – often purely there to hide ownership.

Clearly, companies have a huge presence. Their marketing ability is as the company – not the individuals that are behind it. Advertising and brand management is aimed at providing the public with an identifiable face. A company relies on its customers seeing it as a tangible and identifiable organization with which customers can do business. It has a legal basis (and can take action as such and be actioned against as a result) as well as a moral requirement – the advent of CSR is merely a tangible outcome of the way that companies are seen to be real and impact the environment and society in many ways.

If it quacks…..

We all know that companies are the centre of entrepreneurship and product and service creativity. In a market economy, the rise of joint stock corporations have worked to de-risk investments so that competition has been developed and economic growth maintained since the early 1800’s. This growth has developed some enormous corporations in businesses as wide as energy, food, utilities, construction, defence and aerospace, pharmaceuticals and beyond. Every area of opportunity is mined by the evolution of companies across the globe. Governments have progressively sought to assist business but, under pressure from society (people) laws have been passed which inhibit them to what society believes are proper norms.

These laws include health and safety and employment laws but also include tax laws. As a result, companies make decisions on where to locate – although this often includes where it needs to sell as much as where it can find skilled staff or suppliers.

Apart from rogue traders, set up with the need to hide its affairs within foreign jurisdictions and behind false Directors, many MNC’s (multinational corporations) are able to move their profits around by manipulation of licensing and other features. Rather than pay tax on profits in the areas in which they make the money, accountants can provide companies with boltholes in which the rates of tax are very low.

The IoD and others believe that companies are not real – that Governments should give up on them and rely on the payments they make to people on which tax should be paid.

The question arises: if a company is a distinct entity in law; if it can be held responsible for its impact on the environment, its impact on people, its duty of care to customers – why, oh why, should it not pay taxes? Why should society not look to some repayment from the company itself – which benefits hugely from joint stock activities as well and huge benefits that are introduced for companies such in terms of infrastructure, government regulations, and a myriad of other incentives – rather than (in this instance only) having to seek tax purely from receivers of income from companies. Taxing companies is, in principle, correct as it is the company that derives the income from a location.

If tax is to be separated, then the long-term outcome for companies would be potentially the loss of other benefits (such as joint-stock arrangements) as the legal distinction becomes blurred. Not just the thin end of the wedge – but a potentially disastrous change.

Companies have to play their part

If companies exist in law as distinct entities, which they do worldwide, then it is reasonable that they face up to the reasonable demands of the society in which they operate. Company law, however, may set up companies as distinct but the reality is that the company has no moral code except that which society imposes. People have moral codes, companies (which are organisations of people) do not. CSR is reactive to society, not pro-active and while companies have a need to become sustainable (in terms not just of resources but sustainable in terms of the relationship with its customers and the societies in which they operate) it is extremely rare for them to lead – to take such societal risks.

This is true in most areas. Health and safety leaders in companies were years ahead of the legal changes in places such as California but were reacting, quite properly, to likely long-term changes. Those that did so were ahead of the game when laws changed in areas such as environmental restrictions.

This reactive ability (changing as the environment changes in an evolutionary way) makes the best companies resilient – sustainable. It shows they are real entities as much of society as any other organizational form or the individuals that self-organise around them and within them. Companies are a part of society and should contribute to society as a key part of it. This means that opting out of a crucial element of the system – taxation – is ludicrous on grounds of the companies’ relationship with society – whether that opting out is legal or not.

The dangers are obvious. The crack in society would be potentially dramatic – companies would be seen to have no fiscal contract with society. This may well be the case for MNC’s now but the public backlash is starting to inhibit their ability to prosper in this environment. Companies that properly pay their tax are now selling this proposition to their customers – companies such as J Sainsbury whose pride in paying proper company tax in the UK is seen in distinct contrast to those MNC’s like Amazon, Starbucks and similar. The latter is threatening to disentangle itself from future investment in the UK if David Cameron (and his “time to smell the coffee remarks”) persists in trying to get them to pay tax where they trade rather than using licensing and royalties to hid their true profits.

Companies are a key part of society. They have to act as such and not just contribute to society solely through CSR documents. They have to be seen to contribute and tax is one of the most obvious manifestations of that contribution.

Let tax be paid where the trade is made

Let’s end the notion that companies should not pay corporation tax and let’s get on to the next step of the ladder – working out how to ensure that royalties, tax havens, tax schemes, fake Directors and the like are no longer tolerated and that tax is paid where the trade is made.

 

See: Do Companies Exist – Part II

See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.

Going Soft on Power

We are all looking back on 2012 as the year when the UK has been said to lead the way in a number of areas – the Olympics, Sir Bradley Wiggins and the Tour de France, Murray and the US Open, James Bond and the Queen, with Danny Boyle wrapping it all up to show the UK on the side of good.

But, like every nation, we are not just the nice guys. The UK has also become better known internationally for bribery and bank irregularities (LIBOR fixing, money laundering for terrorists), the Leveson inquiry into the press and phone hacking, the indictment of our police over Hillsborough, alleged police wrongdoing that led to a cabinet minister resigning (Andrew Mitchell) and Jimmy Savile reminding us all of what this country was like just recently.

So, 2012 has been a very strange year for the UK – a “curate’s egg” of a year. Monocle Magazine (itself named after an eyepiece that was popular in the 19th Century) rated the UK the world’s top “Soft Power” in 2012 as a result of the Olympics, Murray’s tennis feats and James Bond (among other things). Yet, at the same time, our banks are being shown up for massive failures on LIBOR, HSBC’s lack of control and willingness to allow money laundering on an exceptional scale and the recent Rolls Royce bribery allegations.

The UK is home to amazing ideals and potential: from sports stars and a tremendous passion for sport, home of democratic freedoms, a country based on welcoming the world to its shores and an internationalism based on a long-lost Empire and a need to be important but be seen to be doing the right thing; an independent spirit that makes us not want to be subsumed in Europe or the USA but to straddle the middle and be all things to all.

The UK is also home to the World Wildlife Fund and to a host of NGO’s and charities that see the UK as the centre of the struggle for the world to be a better place. Our aid programme (directed by DfID) is well-meaning even if sometimes misguided (recent nonsense in Rwanda being a good example).

Yet, business and financial irregularity brings our self-righteousness back to earth with a bump.  While we may be able to export a high degree of soft power through our great sporting and artistic talents, a nation like the UK has to be wary that its reputation is not completely destroyed by letting our ancient mercantile and trading instincts come first. Sometimes we don’t know if we are on the side of James Bond or SMERSH.

Britain’s “export” trade

The UK was a mercantile nation well before becoming the first into the Industrial Age and its Empire was established on the back of pioneering instincts and a trading mentality – heavily mixed with politics and ownership. Our wealth was built on the back of exploration and an eye for what sold well – whether it was gold or slaves.

Whereas the Chinese and its tributary system did not seek to rule the countries with which it traded, the UK sought vertical integration through Empire. It exported its laws, its systems, its language and its instincts throughout the world – the good and the bad. Writers like Niall Ferguson have debated whether, on balance, the British Empire has done good or bad overall, but, like the apology being demanded currently for Turing, this is history. As AN Wilson so majestically says in “The Elizabethans”, it is hard for us to look back on that age with the eyes and experience of the 21st Century.

What matters today are the after-effects of the actions taken and also in the actions being taken today along with the belief systems that are current. While Monocle may be right that we export some good and reap some soft power, the UK also exports some bad that may well negate the soft power that we so want to aspire to at a time when the West’s economic power is diminishing fast. Joseph Nye calls the mix of soft and hard powers,  our overall “smart power” and we are in danger of losing the “smarts”

When Transparency International – UK was setting up its “Defence against Corruption” project and I was an adviser to them, a great deal of discussion took place about how corruption has three legs  –  the corrupted (the government and individuals who were bribed), the corruptor (usually a company that did the corrupting) and the nation where the corruptor was based.

Much of the discussion around TI’s Corruption Perception Index is about the first, but the latter two are as much party to the corruption as the corrupted.

When Jack Straw originally produced his white paper which ended with the introduction of the Bribery Act (a very late addition to the codifying of our laws and the subject of many years fighting between NGO’s and companies as well as between the UK government and OECD – where we had signed up to the OECD Anti-Bribery Convention many years before), he pointed out that the UK was a relatively bribery-free nation.

It is true that since the times of Samuel Pepys (when anything could be bought through bribery) the UK has cleaned up its act at home. As we became wealthier, we became less corrupt (although there remain many instances of bribery and corruption still).

However, in some ways we became more Confucian – we were most obsessed with doing right at home and exported our worst sins overseas. Companies from the UK in many industries such as energy, construction and aerospace and defence bribed for business. As the recent ITV programme “Exposure” aired on 10th October, 2012 showed, bribery by British firms overseas remains too common despite the Bribery Act. Rolls Royce is accused of two major acts of corruption in Indonesia and China dating back several years. It will have to show that its systems and policies are now consistent with the Bribery Act requirements or staff could be held culpable.

National reputation – national character

In the defence industry, the cry was always “If we don’t bribe, the French will”. The Chinese and Russians may be the chief bribing competitors these days but we have now enacted the Bribery Act – so, by law the exporting of bribery by companies from the UK should be at an end – including any company that does any business in the UK.

Maybe the issues that have been uncovered at Rolls Royce are old news but many concerns persist and suggest that the short-term gain mentality remains. In a posting from October I reported on a Financial Times article (from a survey by FTI Consulting) that showed a third of board members in the UK would bribe if they felt it was needed to win business. This worrying statistic shows clearly that the UK’s soft power base is in danger.

Our 2012 national reputation was portrayed in Danny Boyle’s Olympics opening ceremony as quirky but unselfconscious; a nation of tremendous artistic, scientific, engineering and business success, caring and cultured. Ai Weiwei summed it up well in an article in the Guardian (it is well worth reading the whole article:

“Brilliant. It was very, very well done. This was about Great Britain; it didn’t pretend it was trying to have global appeal. Because Great Britain has self-confidence, it doesn’t need a monumental Olympics.”

This was a characteristic portrayed throughout 2012 – a year when our sporting achievements have been at their highest in athletics, in golf (along with the rest of Europe), in tennis, in cycling and in cricket (we even beat New Zealand at rugby). Only in football (our national sport) has a less than successful and a less than wholesome image been portrayed.

But, maybe this is where the link may be. Football has become a huge business and business has no ethics of its own – we are continuously told that companies have no souls (as tax avoiders such as Google, Starbucks, Amazon and the rest show clearly). Football was a working class sport but is now a multi-billion pound successful business. Its sporting soul has disappeared as our exports grow – its “self-confidence” becoming mere hubris.

Soft power and hard exports

It could be said that football has not suffered yet along with its financial success (it still has its fan base). It took someone like Lord Coe to defeat the doomsayers that forecast the Olympics in London, with its huge corporate branding, would go the same way but it was a success with real people. Football remains hugely popular but the corruption in FIFA allied to racism at football grounds in Eastern Europe and the huge pay gap between the performers (being paid £20,000 and upward per week) and the fans means that its brand is continuously being corrupted.

If, in the age of smart power, if it is to be a continuing success, brand UK has to be clear and focused, not tainted by bad business ethics. It means not just abiding by the rules of international business but setting the standards – to take advantage of the good will that has been gained in 2012.

This means swapping the short-term (unreal) benefits of poor, 19th trading standards (where bribery and corruption was rife) to set real standards that are enshrined in the 2011 Bribery Act but where the UK has not put in the resources to implement the Act, where the US has shown a willingness to prosecute its own malfeasants in a way that shames successive UK governments.

Soft Power has to become (to use Nye’s term) smart power. Smart power is the ability to take advantage of the benefits that come from our leadership in key areas and to trade on them. Danny Boyle (through the Olympics opening ceremony and his refusal of a knighthood) shows the way away from the 19th Century mercantilistic British norms to a UK that has the ability to lead the world with its soft power allied to economic and political capabilities. This means waking up to what the 21st Century could mean – a global economy where improved communications can kill a business in progressively much shorter times as well as upsetting the benefits that the likes of Tolkein (The Hobbit is a classic British tale) and Fleming and the rest have provided to the country as a whole.

It means being self-confident enough to be seen to espouse good business not business at any price or any cost. There was no government reaction to the FT report cited above. There should have been. Doing good business is becoming the next stage of capitalism – we should be at its forefront as the challenge of the Chinese and others (who aspire less to this cause than the vocalized western consensus since WWII) grow: good business rather than bad business.

This is a hard ask in the depths of recession – but, if the UK is to capitalize on its soft power base, then a UK for the 21st Century has to be built on a smart power base – rather than simply going soft.

Waking from our tax stupor

Sleeping with Royalties

So Amazon, Starbucks and Google avoid tax and British politicians are surprised! So the big accounting firms (KPMG, Ernst and Young, Pricewaterhouse Coopers and Deloittes) follow the banks in Margaret Hodge’s and her committee’s sights.

It is pretty incredible that in 2012, after hundreds of years of banking and secrecy in financial dealings that politicians seem to suddenly wake up to the fact that multinational companies move money around the world to save on tax and that wealthy individuals do the same.

Have the sleeping pills run out? Is the dreamlike state that they were in for so long worn off like a modern-day Rip van Winkle?

All this time, companies have paid large royalties to themselves in low tax jurisdictions, changed prices to do the same, set up secret companies in secrecy-oriented tax havens alongside wealthy individuals and others from the criminal and terrorist fraternity who make the tax havens their home.

As wealthy nations like the UK have slept while such as royalties escape our shores (and our tax revenues with them) to the tax havens, we have allowed even more serious crimes to take place – the looting of the developing world of their natural resources through the illegal and morally repugnant ocean of money that gets sent to such secret jurisdictions. Far more money is transferred out of the third world into such jurisdictions annually than we in the so-called developed world push back in through aid programmes: all because we allow the secrecy to continue while we sleep.

Tax evasion / avoidance and secrecy – lifelong bedfellows

The talk is about how we extract more tax from corporations and the focus has been on HMRC to review the levels of royalties it allows companies like Starbucks to pay to what appear to be false set-ups in countries like Luxemburg. Starbucks solution is to keep on doing this but to pay HMRC £10m for a couple of years as a gift.

Tax avoidance on the scale that we are seeing – tens of billions a year according to experts like Richard Murphy. He shows how little companies are paying (compared to some like Costa Coffee who appear to be paying amounts that equate to their sales and real profits). The problem is that corporation tax is based on profits and, as any good accountant knows, profits are an art form not a science. If there were no secret jurisdictions, then companies would show their total sales and profits (as shifting money inside a company cannot lose it overall – so overall profits stay the same over time) and it would be possible to tax profits based on where the sales were made. Agreements could be made between the nations in which such sales were made on a national scale and by company. So, if Google makes $1bn in profits and 10% of its worldwide sales were in the UK, then it could be taxed on $100m of its profits in the UK at UK rates unless there were good reasons not to – e.g. evidence of excess investments. Of course, the simplest method would be to completely ban royalty payments within a company or connected companies. This would ensure (at least improve the chance that) that real activity and profitability were taxed where they should be. Royalties charged outside the company to another one would continue.

Before such a solution takes hold (or something similar – making real change to dual-tax treaties), the tax authorities have to struggle with long-term negotiation with companies on esoteric and mind-numbing issues and governments have to work to destroy tax havens and secret jurisdictions. HMRC are involved in the first but the progress on the second seems to take place on a geological timescale.

Secrecy is the friend of tax evaders and avoiders. Being able to hide the actual transactions that take place is often the cornerstone of tax minimization. This is why it is so important that the current discussions between the Isle of Man and the British government on opening up all the former’s bank account to UK investigation is so significant – even if just a start. Richard Murphy estimates that this will open up 99% of such accounts.

Good start but hardly the whole picture. As Nicholas Shaxson has written in his book Treasure Islands there are many tax havens in the world from the Channel Islands to Delaware  and from Cyprus to the Virgin Islands. Each one enables secrecy of accounts and company ownership that does not just delay the ability of tax authorities to open up the information but stymies it completely in many cases.

Transparency – letting the light in

Earlier this year, Global Witness issued a report – Grave Secrecy that highlighted the following:

Global Witness believes a further dramatic change  is required: the identities of the real, ‘beneficial’ owners of all companies should be publicly available in the country they are incorporated, and nominee directors and shareholders should be held liable for their clients’ actions. The EU has the opportunity to take the lead on this over the next 18 months as it updates its anti-money laundering laws.

This matters because ‘shell’ companies – entities that are little more than just a name on a piece of paper – are key to the outflow of corrupt money that keeps poor countries poor. Those who loot state funds through corruption or deprive their state of revenues through tax evasion need more than a bank: they need to hide their identity behind a corporate front. Countries such as the UK might have a company registry and consider themselves ‘onshore’, but as long as they only collect shareholder information, they are effectively permitting hidden company ownership – which means they are as offshore as any palm-fringed island and will continue to facilitate corruption, tax evasion and other crimes. This needs to change.

Their investigations showed how easy is was to set up false companies (in one case with a director who was no longer alive) which would often not operate but to which financial transactions would be placed – disguising the remittance of funds from one jurisdiction to another. Money laundering of this type is thus rampant internationally.

This is not much different from the tax avoidance of legitimate companies who, arm in arm with politicians and tax authorities, have been sleep walking to the current position. Now, with so many countries deep in recession and with Governments indebted and working hard to stay financially afloat, the general public is angered at what seems to be the slanting of tax benefits away from those who are working hardest to those who manage money and financial flows.

Robert Peston (BBC financial commentator) writes today (December 8th):

“Companies perceived by people, politicians and media as, in some sense, not making a proper contribution to the societies from which they extract their revenues and profits, will over time become marginalized within those societies”

Secrecy has bred tax opportunism and money laundering and it is right to conjoin those terms even if in law they differ. While the recession keeps its grip on the western world, there will be no let up on the public’s desire for some better form of equality whether against the wealthiest 1% or the top companies who control most of society. This equality of outcome – paying the right tax for the benefits that accrue from the nation that houses that company (such as roads, police, defence forces, education and the like) – is a central theme for this recession.

To become transparent is the requirement for the 21st Century and especially during the economic downturn. The internet has given us all the ability to learn what is happening within seconds and to act on it. So, Starbucks is today hit by demonstrations despite its ploy of giving a charitable donation to HMRC.

However, real transparency will require the ending of tax havens, the ending of impunity for those who are guilty of money laundering and for those who enable it (whether lawyers, firms of accountants or banks – many of whom are now facing corporate fines but few individuals are facing prison).

We should have a transparency law operating in all jurisdictions (similar to the country-by-country reporting) which would require multi-nationals to declare their sales in every country in which they do business, an end to tax havens and secrecy, real Directors allowed to operate companies, an end to the transfer of funds of PEP’s (politically exposed persons who operate with impunity and take billions out of countries desperate for the money they transfer into their own accounts) and a general set of legal requirements which ban artificial tax avoidance schemes.