The Cost v Care Dilemma

Contention: there are two opposing forces within our care professions (which include the hospitals and broader care industry) – cost v compassionate care. It is often put forward that they are incompatible. They cannot be.

The Dilemma

My previous post looked at whether the NHS and care industry can provide  “care” and how the charity sector has a single-minded pursuit towards compassionate care that could assist the public sector caring professions and should be sought out to advise on care in the medical and social care services.

Someone for whom I have a great deal of respect, Richard Murphy (through his Tax Research UK ), reminded us of a post he made back in 2011:

He reminded in a more recent blog that, in the UK, we have a National Health Service (NHS) which is highly rated in international comparisons.

This high rating (2nd out of seven major nations), was at the expense of one measure where we came 7thpatient centred care. Richard Murphy, who wrote the article shown, declares that “we trade something important here: price for patient focus.”

This shows the dilemma that we appear to face. On the one hand, we (the tax-paying public) may want public sector spending kept down (and thereby keep the taxes we pay as low as possible). On the other hand, we (the hospital-attending public) want our public services to be provided to the highest quality. What does not take place in any rational way is a discussion about the quality of service that we demand and the price we are willing to pay for it. There are reasons for this.

Government, which runs the National Health Service and regulates the rest of the medical and social care industry, has one of two political defaults. It either wants to run everything centrally – which led in the past to doctrinal key performance indicators with its huge range of unintended consequences; or, it wants competition where each hospital trust can do its own thing because they are somehow in competition.

What is not understood (because no-one at a macro-level is putting enough time to do it) is how to establish the qualitative measures that we need so that a real Care Quality Commission (CQC) or other monitors would properly be able to judge performance and adequacy with the same prestige as those who guard costs.

Who Really Cares?

I mentioned in my July post that I was Chief Executive at Willow – where we provide Special Days for seriously ill young adults. I am leaving this month and will genuinely miss Willow. It personifies charitable and compassionate care throughout.

An excellent charity, it was founded in 1999 by Bob Wilson (ex-Arsenal double winner, BBC/ITV broadcaster and now Arsenal Foundation Ambassador) and his wife, Megs, following the death of their daughter Anna from cancer. Willow provides around 1,000 Special Days a year for young seriously ill adults (www.willowfoundation.org.uk) . These Special Days provide benefits on three levels: the day itself – a respite from treatment and an opportunity to do something extraordinary with your family and / or friends; positive emotions that result from the Special Days for at least two months – described by the Centre for Applied Positive Psychology (CAPP) as “Astounding!”; the impact of the Special Day both for those in a palliative condition (where they are able to focus on the Day from the time of application) and for those in a curative condition – where the day often results in a change of lifestyle – providing a momentum to start work again, a drive to get back to family life or something new.

Willow’s stories (and Willow is about to provide its 10,000th Special Day) are many and varied.

What each story shares in common is the ability to provide something way beyond repair – even beyond care. The degree of wellbeing (as evidenced by 1000’s of stories) results in Special Day beneficiaries and their families wanting to give something back to Willow – to fundraise and volunteer – and we have now formed an Alumni Association (maybe the first in a charity) for our beneficiaries and those close to them.

This is charity-provided wellbeing which adds to the excellent repair services from the medical community and the care services of hospices. It provides a respite for families who are the traditional “carers” and an opportunity for all to spend time in a positive mind-set that we know enables beneficiaries to take advantage of whatever life has to offer.

This microcosm of our society (there are 100,000 young adults in the UK at any one time who are suffering from an illness that could require palliative care) exhibits many of the issues that we confront in our trade-off between price and care (between cost and quality).

Willow does not question the treatment that any of our beneficiaries obtain in hospitals and hospices, for example. We don’t comment on them and have no desire to do so. What we witness is the complete desire on the part of our beneficiaries and their families and friends to take advantage of something so different and so positive. That Willow provides, through charitable contributions, something so remarkable is to the good. The question is why there is such a difference between what Willow provides and what appears to be provided within the NHS and elsewhere? Is the desire to remake the NHS from a repair organisation to a wellbeing one as proposed by Norman Lamb (Social Care Minister) real? Or is the trade-off between cost and care too great?

A caring organisation – the control:care plateau

What does it take beyond government rhetoric to make compassionate  care within the public sector real? It cannot be just a phrase that is uttered by a Minister with an expectation that it will immediately be understood and implemented. Compassionate care requires the whole organisation to absorb the need as a key value – supported by processes, training and monitoring. This requires management who can embody the spirit of care and staff willing to take it on. It requires sufficient staff who have the time to provide the care that it needed – sometimes it is the time itself that provides the ability to show the care.

At Willow, we have four underlying values that shape everything we do. We aim to be:

Effective    /    Positive    /    Innovative    /    Compassionate

We aim that each person that works at Willow (whether as a Special Days co-ordinator – who works with beneficiaries and medical professionals to put on the day – to a fundraiser or someone in Finance) embodies each of these values.

  • Effective (rather than efficient) means that we add value and are seen to do so;
  • Positive means that we seek to be pro-active (glass half full);
  • Innovative means that we are continuously seeking to do things better;
  • Compassionate means that we care – and show it to our beneficiaries and to staff and to funders and to whoever else Willow comes into contact with.

So, it is a balance between the two bottom lines that I discussed in my previous post – we have to balance a proper degree of control with a proper degree of care. These are not mutually exclusive. We believe and show that the control : care plateau we have reached is a good one but that we have to continuously strive to raise our sights to a new plateau. For us, a focus on care underlies what Willow is all about.

Within the NHS, this trade off has been seen to be an “either / or”. Richard Murphy’s comment strongly suggests (and Richard never meekly suggests anything)  that the national health service has to make a choice – not a plateau of control : care but a choice between them.

This assumes that the prime requirement is to repair the physical when holistic treatment should be in place. Moving from repair to wellbeing is not just a preventative message but one where the wellbeing of a patient comes from an understanding that they have as much right to a fulfilling existence as anyone else. This does mean that the way they are treated has to be via a care policy that is not just understood but embedded and funded.

From All those Reports to Compassionate Care

The Francis Report showed that the standards of compassionate care were too often far too low. Unfortunately, the remedies that the media have focused on relate to punishment and monitoring. Great quality of care cannot be monitored in; great compassionate care cannot be sought though punishment when things go wrong.

The Berwick Report into safety in the NHS properly focused on what could pro-actively be done to reduce accidents, for example, and that purely quantitative measures (“naïve or mechanistic targets”) are insufficient and, on their own, damaging. The Report stated that the problems in care happens despite the good nature of the staff:

“Most impressive of all, perhaps, has been the consistent dedication to helping their patients among the vast majority of clinicians—doctors, nurses, pharmacists, allied health professionals, mental health professionals and many more—as well as non-clinical staff”.

From all these reports, we now have to move on. I believe there are four, crucial outcomes that include:

  • ·         the need for organisational approaches from the top – values have to embody compassionate care; they include the need for qualitative measures which may best be made around stories like in Willow’s case and a process being followed up in a number of hospitals (in Mental Health as an example);
  • ·         the need for a cost and care balance – an agreed plateau that provides in each hospital satisfactory levels of both;
  • ·         the need for innovation in care and understanding of care needs – just as important in holistic treatment as new equipment or methods of surgery;
  • ·         continuous learning and best in class understanding from wherever this can be obtained – often from the charity sector where compassionate care is the underlying value.

Moving from a sense of mutual exclusivity and away from

Costs v Care

to a

Cost : Compassionate Care plateau

Should be the new normal of 21st patient care wherever practised: no either / or but an acceptable balance of care and costs.

Advertisements

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.

 

Country by Country reporting – a strong Socionomical trend

Country by country reporting is about to be put into effect i the EU as reported by Richard Murphy – see

Real progress since I wrote an article in 2010 – Mines of Information

First, through Dodd-Frank in the USA based on energy companies operating in resource-cursed nations and now through the EU, country-by-country reporting for all companies that will begin to unravel where tax should be paid is spreading.

This is a social phenomenon that is a sign of the times: recessions are not just for lower hemlines – but, focus attention by those exploited on to the exploiters – nowadays, the tax havens and those using them. A Socionomical trend is well under way.

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

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.

The Moral Tax Maze – What Does Society Want ……

…..and General Anti-Avoidance Rules (GAAR)

Following on from the Aaronson report in November, 2011, George Osborne stated in his budget speech to Parliament this week that he has decided (no doubt after Liberal Democrat pressure) to adopt General Anti-Avoidance Tax Rules (GAAR) after due consultation. This is a major departure for the UK and has potentially huge benefits on a world-wide scale.

 

Osborne stated his abhorrence to excessive tax avoidance and this repeated, in effect, the Aaronson dictum that only excessive tax avoidance should be the subject of any GAAR. Any law should focus, it said, on excesses – where schemes were devised that provided for a “moderate rule” that does not penalize proper tax planning. This would, Aaronson said in November, 2011, not need elaborate clearance systems because it would be clear that centre ground tax avoidance was not likely to be the subject of HMRC wrath. Guidance (rather like that provided with the 2010 Bribery Act, no doubt) could be provided.

 

Tax and avoiding commitment

 

Taxation is not an exact science. In the rush to comment on George Osborne’s 2012 budget, the focus has been on how the proceeds of taxation are used by the State. The Moral Maze on Radio 4 this week highlighted this issue. The discussion was not that illuminating but revealed the continuing problem that society has in determining the mix between public and private sector, taxation and philanthropy in a democratic state.  The extremes were in good evidence – at least in the ‘conversation” between Richard Murphy (of Tax Research UK) and Melanie Phillips (Daily Mail).

 

In the US, the Tea Party and similar Republican and libertarian factions have called for minimum state intrusion in the private affairs of individuals and corporations: to allow them to make their profits and earn their income and spend it however they wish.  Reagan’s opinion that the State was “the problem” is reflected in rightist policy in the US. Here, entrepreneurial spirit takes precedence over the “so-called” needs of those who can’t make it economically or fail through ill-health (or, it is assumed, lack of opportunity – opportunity is what you make yourself). State spending should be for defence (and maybe policing) and little else. The private sector should be responsible for everything and pricing through demand and supply should be responsible for sharing out the needs of the population.

 

Opposite to this are state run economies – the failed economies of the Soviet Union, for example – which proved that state monopoly failed. The attempt to centralize pricing when the number of SKU’s (stock keeping units) may run into billions was seen to be a huge error. China has awoken to that reality and the market economy is now much more the norm.

 

So, market economics rules and pricing is, wherever possible, market driven by supply and demand.

 

The problem is that the “market” (Adam Smith’s “invisible hand”) is not always right and the drive of many individuals and other organisations (the market) coming together is often imperfect on timing, often leading to monopolies of supply and often the result of market imperfections. Of course, there are also wider social issues on which government develops obligations to intervene. Global Warming may be one; re-armament in the UK in 1939 is another – no market would supply the needed response (at least in the latter).

 

This leads to the need for some societal intervention beyond the market. However, as soon as one section is taken outside the market economy, then the economy is further driven in directions that are imperfect. The requirement for a nation (or city-state or whatever) to defend itself from potential invasion has, throughout civilization, meant that central government has needed to collect tithes or taxes from the population it is defending. Of course, ancient monarchies were defending the monarch rather than the people, but newer, democracies have a similar aspect. Until we reach the perfect state where no-one needs to defend themselves, defence spending will be “allowed” through taxation. This is a basic need and taxation results. Governments (that take on the responsibilities that society gives them through the democratic process) then extend that remit to tax and supply “needs” such as policing, a legal system, health, social security and market intervention. It also has the power to alter the direction that markets take through taxation or incentivisation – e.g. 100% capital allowances or allowances for R&D and geographical location.

 

The question is no longer whether market economies should exist but the degree of state (on behalf of society) intervention through taxation and the ability of society to accept that taxation and / or devise ways to minimize individual and corporate tax burdens (in the same way that computer hackers attempt to break down IT security defences).

 

The Moral Taxation Maze

 

If we believe that democratically elected governments have the right to raise finance through taxation based on the mandate they have been given by society, then it cannot be too far a push to agree that the collection of tax receipts should not be stymied. Tax evasion is a criminal activity; tax avoidance has long been seen as the right of the clever (and the wealthy) to find ways to minimize the tax they (individuals and companies) pay.

 

This “right” has pitched the seemingly able and spirited against  government bureaucrats and tax inspectors in a battle that the public seemed to want the former to win. After the banking and credit-induced damage inflicted in 2007/8, the “spin” has changed direction. It is no longer just bankers that have questionable business ethics. We are now engaged (world-wide) on a deleveraging project of austerity and public sector cut-backs. This is made much more difficult by those individuals / organisations who are engaged in tax avoidance and try to minimize the tax-take made by government. This impacts directly on the need to save even more public sector spending – impacting directly on those sectors of society that can least afford it.

 

The fact that tax avoiders inhabit the same off-shore jurisdictions as drug dealers, kleptocrats sending oil and energy wealth into their own accounts and organized crime is maybe a clue  that tax avoidance is not a wholly respectable activity – whether done by individuals or corporations. The debate seems to be changing and the world is now waking up to the debilitating impact of the “legal” flouting of tax laws through manipulative mechanisms and offshore tax havens. Ethical considerations are now allied to the deleveraging process.

 

Tax: Society’s writ, Government implementation

 

The moral tax maze may becoming a lot simpler to navigate. Taxation in each country should now be  based on a wide-ranging general anti-avoidance law, which should go further than the Aaronson proposals. While tax will continue to be a competitive issue between nations (within broad guidelines set by trading agreements), tax havens located where value does not arise should be outlawed and value-adding nations (where goods and services are produced, designed and /or sold) should have the sole rights to levy taxes and, through a broad-based anti-avoidance rule, collect those taxes from those operating there (with double taxation only operating between those signing up to the general provisions in operation).

 

George Osborne’s discomfort with the worst excesses of tax avoidance (based on Aaronson’s GAAR proposals) is a start. But, in a world, which will take a decade or more to rid itself of the excesses that began to unravel in 2007/8 and where economic strength will continue to be more broadly based internationally, governments (where properly representative of society and elected by that society) will need to ensure that society’s wishes are carried out. Taxation is a key to that (as it has always been).  As transparency grows and we know more about tax take and where it is spent (as Osborne is keen to provide information on – or so he stated in his budget speech), the ability of the wealthier and most powerful to manipulate their taxation burden must diminish or the outcry from society will become too loud. In the same budget that reduced the top income tax rate from 50% to 45% (because earners had been able to manipulate the tax take from an estimated £3bn to just £100m!), we are given some hope that the fight back is taking hold.

 

A few weeks ago, retrospective action was taken against Barclays Bank. Now the consultation is under way on general anti-avoidance rules on tax. Modern economies should not shy away from the essential need of society to see that the governments it elects carries out its wishes. Tax laws (and the ethics behind them) should be implemented and be seen to be implemented. This is an international requirement – the UK may be at the forefront of something transformational – if it does not get too scared by being out in front.