So and so’s. How Some Banks Con

What does HSBC stand for? What do we do about it?

“so and so” – an undefined person considered beneath contempt

  • So, HSBC is shown by the BBC to have systematically organized illegal tax benefits for hundreds or thousands of its customers through its Swiss subsidiary. No surprise.
  • So, HMRC (the UK’s tax collection agency) has recovered only £135 million since that time in tax and penalties out of billions that are illegally saved each year. No surprise.
  • So, HMRC and this government agreed with the Swiss authorities (after the leaks about HSBC were found) not to prosecute except where the cases would be virtually guaranteed to succeed. No surprise.
  • So, the then Sir Stephen Green (now Baron Green), then HSBC’s CEO at the time is not talking and the Conservatives (via the chief Secretary to the Treasury – David Gauke) say that there is no evidence that he directly knew of what was going on. No surprise.
  • So, the Conservatives demand to know why Ed Balls, now Shadow Chancellor and then City (of London) Minister did nothing at the time. No surprise.
  • Anyone see the actions that the issues and finger-pointing provoke? Just politicians ranting at each other while the poor taxpayer – those “so and so’s” who have been squeezed mercilessly since the banking industry exploded in 2007/8 – is left with the bill – lower wages and austerity.

Meanwhile, the real “so and so’s” who should have been prosecuted and some doing time in prison are seen as outside the justice system – no longer within the law despite proof of a multi-billion pounds swindle on the UK.

So what?

Well, there has been extreme tax fraud – no-one denies it. Even HSBC accepts that they have had to make major changes in their banking practices – although, according to staff who have left HSBC this did not really make any progress until well into 2011.

Sir Stephen Green may well not have known the specifics. CEO’s of big banks (and most large organisations) are sheltered from the bad things going on but it is no defence to state that they did not know “specifically”. CEO’s are appointed as heads of such organisations and set the tone – the culture – of any organisation. As such, they are culpable for any major misdeeds that occur. In his excellent book on RBS, Shredded, Ian Fraser takes apart any claims that CEO’s can be said to have stood outside the fray. Maybe RBS was even worse than HSBC but senior management set the culture and reap the rewards of profits – Sir Stephen would have benefitted personally from the gains made through tax fraud in the Swiss subsidiary and, if he did not know what was happening (just as Henry II is alleged to have made the claims about Thomas Becket’s murder in 1170), then his lack of pro-activity in finding out would have been a joke. We don’t seem to have learned much in 845 years!

Anyway, if Sir Stephen Green knew nothing and is as innocent as a puppy, then how can Ed Balls (City Minister at the time) be accused of knowing everything by the people who then appointed Sir Stephen Green (now Baron Green of Hurstpierpoint) to Government in 2010?

Is there really a case against Ed Balls when the good Baron knew nothing, apparently? David Gauke sounded ridiculous on BBC Radio 4’s Today programme today because he was being so. Stupid political points were being made when the “so and so’s” who rule the world (the bankers) are freed from the rigours of the law (and any ethical codes) and continuously benefit.

Public Accounting for the “So ands so’s”

So, Margaret Hodge (the Chair of the British Parliament’s Public Accounts Committee – PAC) states that she will bring those responsible before her Committee. She states, quite properly, that the UK is not “aggressive enough” is tackling these issues. Even though the issues occurred during the previous Labour Government’s period in office, Mrs Hodge states very clearly that Stephen Green has a responsibility – he either “knew” of the tax dodges or was “asleep at the wheel” – quite right!

The PAC should now (seven years too late) point to what should be done: not just who is culpable but how the UK will recover the lost tax and how the UK will not stand for repeated situations. The USA fines banks billions of dollars. The UK (with the political establishment too much in hock to the banks and the civil servants and HMRC too timid and weak) does almost nothing but whimpers about no-one being responsible and it being too difficult to prove.

Which “so and so’s” are running the madhouse?

Isn’t it time that those who have suffered so much from the banks’ failures begin to see some recompense? This is not a desire for revenge but failures of this size have not led to a discernible change in this country’s culture or efforts to ensure such failures do not recur.

HSBC seems not to have been penalized for tax avoidance schemes and a culture that would not be tolerated even at Tesco. The UK has a need to change the way it deals with abhorrent schemes and aberrant behaviours. Politicians and those who work in the public sector need to feel the pressure that the public wants them to be under – pressure that needs to result in the defence of public needs. If it does not, then Syriza in Greece was an outcome of such lack of public interest and UKIP in the UK is another (although not quite the anti-aberrant banking behavior that is needed). If this Government does not ensure that the “so-and-so’s” aren’t allowed to run the country, then May’s general election in the UK will see an even more angry electorate ditching them.

Cutting through the Fog – Corporate Secrets and Beneficial Ownership

David Cameron promised last week at the Open Government Partnership Summit that companies registered in the UK would be obliged to reveal their ultimate ownership and that the public would have access to those records.

This was a major statement of intent: evidence that the UK was not going to condone the opacity of companies or owners that could possibly be engaged in criminal dealings or those who are perfectly innocent but choose to inhabit the same smog-bound territory of corporate secrecy.

Why the secrets?

More accountability is a hard-won struggle in an era where our secrets are open to secret services like the NSA and where government secrecy is hard to lessen, Through all this opening up, companies (and Trusts) operating on an international level have reatained an unwelcome ability to shield themselves from public view. At a time of real debate about privacy (Snowden, The Guardian, the NSA, Angela Merkel’s mobile), companies that seek privacy have remained relatively immune.

Companies are treated as individuals under the laws of most countries yet have the ability to hide their ownership and deal with their taxation (if operating multi-nationally) wherever they choose. This means, of course, that they usually choose what is right for them not for the wider society in which they operate. That is their remit. The recent shake-down of Starbucks, Google and others over taxation – which, to date, has yielded not much more than the voluntary promise of payment of a few tens of millions by Starbucks – was a tip of the iceberg moment. With corporate taxation in the UK heading downwards, the current government coalition seems determined to accept the Institute of Directors’ call for companies not to be taxed on their profits at all!

However, one thing about tax is that we can all see how much a large corporate pays in the UK (about a year after the event when it publishes its accounts). What we don’t see easily is where a company has overseas affiliates with which it “trades” – such as paying royalties for the use of its name – in secret jurisdictions where tax is often negligible.

This nonsense of transfer payments and royalties (which HMRC showed last week to the Public Account Committee it has no real understanding over) shifts massive amount offshore and out of the country where real business was done to tax havens.

The fear often cited that proper taxation would force companies out of the UK is nonsense. They do real and profitable business here – the UK is the world’s seventh biggest economy (or thereabouts). Why on earth does anyone believe that they would move away from doing business here? Can anyone imagine that Apple would close its Covent Garden store if they had to pay real tax in the UK rather than shift profits to where the name “Apple” is deemed by a tax expert to reside? Being afforded the space to sell its (excellent) products in the UK, to use our roads, lights, take on people educated here and all the other benefits of selling in the UK (which includes the iconic area of Covent Garden in London) are well worth the entrance fee of corporate taxation.

Offshoring the owners

However, David Cameron’s speech was not specifically about offshoring taxation – it concerned beneficial ownership issues and these are, of course, linked to taxation in a major way but it is much more than that.

The fog of hidden beneficial ownership means that companies are set up which can channel profits or simply flows of revenue to places where tax does not apply and where no-one knows the beneficiary. This is a typical and easy-to-organise ruse of the criminal world. For many years, criminal networks have laundered their revenues offshore – it used to be through the transportation of suitcases full of notes; these days, it is a little easier. This not just saves tax – it transforms illegal earnings into clean money that can then be brought back again into the real economies via the normal banking system.

With the improved ease of transmission of money across the world, it just takes complicit banks to enable the movement (along with some accountants and lawyers to get things under way) and, hey presto, money surfaces wherever it is wanted without anyone knowing.

Just watch the antics of Breaking Bad attorney Saul Goodman – now getting his own series. The essence of monetary manipulation is built around secrecy and contacts. Governments cannot easily stop the development of the latter, but they can do much to stop the former – making beneficial ownership transparent.

Lining Up for Secrecy – the Fog of War

To the vast majority of us, this is obvious, but to many it is a declaration of war. Many secrecy-led jurisdictions are concerned about their future. It is not just Cyprus where the dominance of “financial services” is far too big for the country – Cyprus became completely over-dependent on banking, Russia and lack of due diligence. According to the Tax Justice Network there are 73 secrecy jurisdictions around the world that they analyse.

Of these, a staggering 35 have some substantive connection with the UK. One of those is Jersey and Jersey Finance’s CEO, Geoff Cook, voiced his concern on Friday when he heard David Cameron’s pitch. In his blog he refers to the public register:

It is not yet clear what will be on such a register but unless this is adopted by the G20, I would confidently predict that  Mr Cameron is likely to have lots of friends in the AID world and insufficient food on the table at home.
Protecting business interests, trade secrets, safeguarding personnel from fringe, sometimes violent campaigning groups, from corrupt political elites and from criminals are all real and weighty concerns.  It is telling that the NGO community are happy to  subject those who have worked hard and done the right thing to a much greater degree of scrutiny than almost any other constituency in society.
There is little difference from opening up the private company arrangements of business owners to the public glare of NGOs, journalists, cyber criminals and the assorted flotsam and jetsam of the worldwide web, than for ordinary bank accounts. If the logic holds good do we not need to know the balance publicly of all personal bank accounts so that all can be sure we came by our cash by legitimate means?
We have nothing to hide in Jersey and we have been active supporters of government to government information exchange. However, the voyeuristic tendencies of politically correct elites should not be indulged and indeed will not be by the vast majority of countries, leaving the UK out on an uncompetitive, uncomfortable and potentially impoverished limb.

It is extraordinary that arguments for secrecy over beneficial ownership are now wrapped up in screams about safety from “violent” campaigning groups and cyber criminals. These are the words of fear – fear for a future that may have been predicated on the Cyprus model and lack of such due diligence.

Secrecy over beneficial ownership allows vast amounts of money to be electronically channeled out of not just the UK developing nations. That cannot afford the losses. Huge amounts of wealth properly owned by citizens of countries such as Guinea, DRC, Angola and others are secretly moved and laundered – often with the help of banks (who are now in the firing line of authorities especially in the USA). As TJN itself states:

Secrecy jurisdictions facilitate illicit financial flows.

Illicit financial flows stem from three major sources: bribery (corruption in its narrow sense), criminal activity and cross-border tax evasion. In doing so, secrecy jurisdictions and the secrecy providers operating through them play not only a major role in preventing the poorest countries from developing out of a state of dependency and poverty, but they help creating a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of breaking the law.

The crimes that are facilitated and whose financial reward is secured by financial opacity and the resulting secrecy comprise, but are not limited to: tax evasion, aggressive tax avoidance, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, non-payment of alimonies, counterfeiting, insider dealing, embezzlement, fleeing of bankruptcy orders, illicit intelligence operations, insider dealing, all sorts of fraud, and many more.

Clearing the Fog

David Cameron has made a real commitment but there are real obstacles to further progress.

The first is implementation.

Those involved in celebrating the introduction of the Bribery Act in 2011 are rightly concerned that its implementation is suspect. As Jack Straw, then Minister of Justice, said in the original White Paper, there was unlikely to be many cases brought before judges as a result of the Act. This has been borne out in practice along with insufficient funding of investigations, low numbers of court actions and Bribery Act guidance that was aimed at stifling the Act’s powers. Proper and funded implementation of real transparency and public availability of that information is now key to ending secret beneficial ownership for UK-registered companies.

The second issue is around Trusts. These are not covered by the PM’s statement or commitment yet Trusts are a key secrecy weapon for criminal activity across the globe.

The third issue is that the commitment only applies to the UK. This will serve some purpose in helping to clear money laundering from this country but the UK should now use its leadership wherever it has influence. This is direct in the 35 secrecy jurisdictions mentioned above but also in other forums where the UK has any influence – such as the G20, EU, FATF (Financial Action Task Force).

The fog remains but the UK is beginning to spy a way through – taking a lead on an issue on which millions of lives depend outside the UK. It is not the problems of those in Jersey’s Finance Ministry we should most be concerned with but the problems of those in countries where massive corruption by those in power is facilitated by banks and secrecy jurisdictions – resulting in billions leaving the countries (far higher than Aid going in) and that means millions having to survive on a $ a day with no medical facilities let alone schools or economic opportunities.

Time to see above the fog.

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

Give us a (tax) break!

As the President and Congress argue as they approach the Fiscal Cliff in the US – an argument over spending cuts and individual taxation, in the UK, Mail online reveals:

Big business makes more money but pays less tax as small firms are hit harder – Corporation tax paid by big business falls 20% while profits rose £359 billion.

The most revealing line in this: “Another factor was overseas takeovers of firms, such as Cadburys and Boots, where the tax base is moved to more lenient regimes.”

The British Government should establish a new requirement on overseas takeovers of UK companies that prohibits the transfer of profits made in the UK to overseas, more lenient, regimes. This is not news, but it is an example of how real business no longer gets taxed where profits are made. International business can simply move profits around to where they want to pay as little tax as possible. This impacts small companies that cannot fight against HMRC and the rest of society that pays a higher tax bill to compensate.

Boots and Cadburys are unlikely to  be better UK businesses because their taxes have been lowered – it is more likely that these tax benefits will accrue to their new owners – Walgreens of the US now owns 45% of Boots and Kraft owns Cadburys. In 2010 it was announced:

“Cadbury’s new owner Kraft Foods has confirmed plans to move part of the business to Switzerland in a move which could cut its UK tax bill.

By switching a few key roles to Zurich, the US food giant is expected to pay less corporation tax, depriving the exchequer of millions of pounds.” see BBC –  http://www.bbc.co.uk/news/uk-11919248

I don’t blame companies – that is their job. We should blame our governments and tax authorities for allowing this to happen and work to ensure it stops.

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.

Good Global Citizenship and Tax Havens

Barclays was cornered this week in the UK by Her Majesty’s Revenue and Customs into paying back around £500 million for entering into a tax avoidance scheme – despite signing up to a Government scheme not to do such things. Bob Diamond now looks foolish after his vow to make Barclays a good citizen.

For many years, it has been “OK” for companies and high income earners to shield their earnings behind tax avoidance schemes. Since the introduction of welfare states across the world, companies and individuals have sought to minimize the tax that society needs to work through the system. They have systematically sought to challenge the efforts of democracies to manage the tax base. In some countries like Greece, there has been a tacit buy-in by Governments (and those in Government with their fingers in the till) to allow tax to go unpaid. This leads inexorably to financial chaos and, as we now see in Greece, to progressive civil strife and poverty. This is what has happened in Africa for so long – the wealthy shield their income from the State (who are paid off to look away).

In those countries which do make a real effort to collect taxes, the best tax avoidance comes through the use of tax havens and the real killer for economic equity is the way the world accepts tax havens as a reasonable and acceptable part of our global economy.

David Cameron and many others talk a lot about fairness: the fairness that makes bankers bonuses almost a criminal offence. But, this is two-faced. While George Osborne says that the HMRC will work towards killing off general tax avoidance schemes, we have in our midst a main centre of tax avoidance – the City of London.

Nicholas Shaxson wrote brilliantly in his book “Treasure Islands” about the tax havens that bedevil the world of finance and economics. Tax havens distort, they do not equalize.  Tax havens provide the wealthy (individuals and corporates) alongside the wealthy criminals and wealthy terrorists with the ability to shield themselves from legitimate taxation. Providing a legitimacy to tax havens (and allowing them to proliferate worldwide – even shielding them as the UK does the Cayman Islands and elsewhere) creates massive market distortions and inequalities. Legitimate and democratic tax collection is continuously stymied by the tax havens – just a step from the wealth-grabbing in Angola or the tax avoidance mentality that is Greece.

Taxation is a central plank of democratic society.  While the Tea Party and similar libertarians might rage against central government tax and tax collections as a scourge of society, we know that society is centred on a democratic ideal of the wealthy properly financing the society on which it depends to provide a basic source of welfare to the poor and sick, for defence, for infrastructure. Society is more than just the wealthy and privileged creating an elite life. Angola is a good example of how fortunate elites manipulate the wealth of a nation to appropriate its total wealth and Sonangol (its so-called publicly owned oil company – really commanded by its country’s leadership who reap its financial benefits) has been built to achieve the grabbing of oil and energy wealth from the citizens.

The nations that democratically elect their leaders (and, it is to be hoped the new rich of China and Brazil and others) should take heed to the dangers posed by the examples of the wealth grabbers in the energy-rich nations. It is here, in the UK (City of London, Jersey), the USA (such as the state of Delaware) as well as the better known haunts of the Dutch Antilles or the Cayman Islands, where huge financial flows (from the legitimate wealthy alongside the illegitimate) travel in order to reduce the legitimate tax take of the countries in which the wealth is created. Tax havens are wealth destroyers.

Wealth is destroyed by tax havens because they eat away at the main body of a nation – its mass of people, its true wealth creators. Education and education systems suffer dramatically because taxation is unavailable to finance schools. Health systems suffer for the same reasons – in the UK, where we have moved vast sums to the NHS in the last Government, cut-backs are now biting as the tax take is diminished along with economic growth. In poorer countries, the wealth shift is much more dramatic.

Ambassador Nancy Soderberg (appointed by President Obama earlier this year) was in London this week to campaign for Argentina to live up to its duties in economic areas. She mentioned its lack of adherence to the Financial Action Task Force  (FATF) requirements for responsible national supervision of illegal financing – Argentina was placed on FATF’s grey list over corruption issues. But, FATF and other international bodies have failed to oversee a sustained reduction in how financial flows travel the world and to institute a level of good citizenship on a worldwide scale amongst our companies and wealthy individuals.

While steps have been taken to reduce terrorist financing and, to a much smaller extent, the benefits of illegal drug trafficking and gambling and prostitution, very minor shifts have been made in (a) defining what global good citizenship means (b) reducing tax havens and the financial flows through them.

The G20 states from time to time that tax havens are to be reduced in scope but the battle against them has hardly started. Tax avoidance on a grand scale is as bad as grand corruption (maybe bigger in scale): two sides of the same coin. Good global citizenship requires a new definition to be made – where a global consensus is sought to reduce hugely the ability of companies and individuals to create their wealth in one place and move it offshore to save tax. This simple example of good global citizenship is a cornerstone to increasing wealth creation on a wider scale. It is not socialism but realism and pragmatism. It is good citizenship.