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.

 

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.

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.