Thursday, 3 October 2013
Corporate tax avoidance threatens your children's future
Death and taxes are life's two certitudes but global corporations have done remarkably well at minimising taxes, especially corporation tax. The scale of avoidance is incalculable, insidious and threatening to society's composure and therefore your children's future.
The recent furore over such tax avoidance, however, overlooks other, more sinister aspects which if not addressed comprehensively soon risks social breakdown and anarchy on the streets. Is that a gross exaggeration? Well, let's look at some of the facts. In 2010/2011 the UK government's total tax revenues of £551 billion included £163 billion in business taxes, of which £42.1 billion was corporation tax, or only 7-8% of the total tax take. One might think should such a low percentage be a cause for concern, especially as corporation tax rates are steadily declining and may one day be replaced by other business taxes. The answer is YES because the current uproar over corporate tax avoidance is not just about one tax; it involves others, it involves employment levels, an even playing field for all businesses and the insidious threat from emerging monopoly power. Worst of all, perhaps, is a possible future dominated by plutocracies.
The UK government is under pressure to slash the social security budget, along with its EU counterparts, and what do we see are the consequences? We are treated to an almost daily diet of TV news showing huge protests, violence and incendiarism, the last typified by London's 2011 summer riots in which looting suggests an economic connection. This is not to argue that there is no abuse and colossal waste in Britain's social security budget. Far from it and so the Government must act accordingly to expunge it but there can be no doubt that if all global corporations doing business in Britain had paid their fair share of UK corporation and other taxes the Government's coffers would have swollen by billions of pounds every year and so relieve the pressure to slash the social security budget.
CBI condemns abusive tax avoidance
What is it, however, that allows global corporations to avoid taxes on a staggering scale and what should be done to excise this canker from society? The facilitator is a complex, global web of disparate tax regimes first set down by the League of Nations nearly 100 years ago and now badly in need of root and branch reform. First, however, some definitions. There are three aspects to tax minimisation schemes: 1) Tax evasion through ploys like under declaring taxable income, which is clearly illegal, 2) Abusive tax avoidance which is legal but considered unacceptable even by the Confederation of British Industry (CBI), 3) Responsible tax management which is both sensible and necessary. There is no suggestion that largely American-owned businesses generating significant sales in Britain, like Starbucks, Amazon, Google and Microsoft, are operating illegally but it is clear that their tax planning, based on highly artificial devices with no commercial purpose, falls within unacceptable abuse. Here are a few examples of how the irresponsible schemes work.
1) Starbucks sources UK coffee from a wholesale subsidiary in Switzerland, which is commercially sensible because it is cheaper to have one team responsible for sourcing all of its coffee and Switzerland seems to be the centre of the world coffee trading business. But there can be little doubt that Switzerland would not be such a world centre if it did not charge a low 12% tax rate on the trading profits. The issue becomes even murkier still when global corporations use "transfer payments", an issue first tabled for cleansing before World War 2. Transfer pricing and payments have great scope for tax reduction because they mean global companies like Starbucks can decide how much its UK business pays to non UK companies within the Starbucks' empire for access to the US firm's brand, coffee making technology, engineering support and so on. Unsurprisingly, the overseas companies are based in low tax regimes so there is a strong temptation for a multi-national to overprice the goods and services provided. to reduce or eliminate profits, and therefore tax, in a relatively high tax country. This odious transfer charging has been used to devastating effect over many years in developing countries least able to afford multi-billion pound losses through tax avoidance by wealthy, global businesses. The benefits from these financial artifices mean that Starbucks, for example, paid only £8.6 million in UK corporation tax over the last 14 years and nothing at all in the last three years, despite clocking up nearly £400 million in sales during 2011.
2) E-commerce also eases the path for creative tax avoidance schemes and Amazon is a good example. When buying a book from Amazon, UK purchasers enter into a legal contract with and pay their money to Amazon Luxembourg where the VAT rate is only 3% -- an example of how more than just corporation tax avoidance is involved. Despite booking multi-billion pound sales in Britain last year Amazon reportedly paid no tax on the profits from these sales because they were funnelled through Luxembourg. Experts claim that if Amazon did not route sales' profits through Luxembourg it would be paying as much as £100 million a year in UK corporation tax.
3) Microsoft sells its software from Ireland or, in the case of electronic downloads, through Luxembourg, so most of the money the company makes from British customers is earned in Ireland, where corporation tax is only 12.5%, about half the UK rate. This is part of an elaborate structure that the US Senate committee described as designed "to shift and keep profits offshore."
Overly concentrated wealth threatens democracy
There are no accurate figures on how much has been lost to tax havens but the figures are undeniably staggering, one estimate being $20 trillion. Another estimate indicates that the 70 plus "business friendly jurisdictions" are sheltering between $21 trillion and $32 trillion, up from only $11.5 trillion in 2005. This, of course, includes a large element of individual tax avoidance, and along with company tax avoidance should be tackled to prevent future social disharmony. Britain' HMRC (formerly the Inland Revenue) estimates that the country is losing £5 billion every year through corporate and individual tax avoidance.
As remarked earlier, tax loss does not just harm government revenues. Aggressive tax avoidance schemes also create an uneven playing field for competitors. Whitbread, a British company for example, owns Costa Coffee and pays its fair share of UK corporation tax, unlike Starbucks and Caffe Nero, the latter reportedly having paid no corporation tax on a $40 million profit in just one year. This puts Costa Coffee at a serious disadvantage and could even lead to market domination (monopoly) as fair tax payers are driven to the wall. One could argue that Amazon's unfair tax advantage over bricks and mortar book retailers is helping to drive them out of business. Reportedly, Amazon already has a 25% share of the UK book market. What then for the future prices of books? No monopoly can ever be trusted to work in the public interest. But potentially far worse than all these is the threat to democracy from plutocracy.
Ever since World War 2 the disparity between income groups has widened, first slowly but now rapidly. A key component behind this is the growth in global tax havens. As Angel Curria, head of the OECD warned, big corporation tax avoiders "will undermine democracy. This is about the survival of democracy." If civilization is to work harmoniously then those who enjoy its benefits must also be prepared to pay their fair share of the costs. The warning signs of failure to do so are plainly evident. Greece came close to anarchy over austerity measures brought on by rife tax evasion, corruption and crass economics. Spain is flirting with political dismemberment while the wealthier, economically more responsible EU members are tiring of subsidising fiscal delinquents. Most of their citizens believe that their governments will renege on the their debts.* If nothing is done to reform rich-world financial centres as well as island tax havens then anarchy on the streets is not a fanciful notion.
Fortunately, the right noises are now being made by governments. France has slapped Amazon with a $252 million contested demand for back taxes, interest and penalties. It has been rumoured that Google may also receive a French tax demand for one billion Euro. The UK Government is suggesting that the public sector should tie their contracts only to companies that pay their fair share of tax. This shows the huge importance of concerted power because such spending accounts for £1 in every £7 spent in Britain. It signpost the way consumers should go. Consumers hold the ultimate weapon but for it to be effective it must be concerted and sustained. No global corporation, no matter how big and wealthy, can withstand consumer action through boycott. It is every company's worst nightmare and it has already been proved against Starbucks, who have now agreed to pay £20 million in corporation tax over the next two years. But be not deceived. It is a short- term sop akin the the Roman emperors throwing bread to appease the Roman mob. Such boycotts also worked against multi-nationals using child slave labour in the clothing industry.
The likelihood, however, is that consumer protest will wane and the matter soon forgotten. That would be risky because although a global initiative is under way to clean out the Augean stables of tax avoidance it will take years to reach consensus, if ever. That is why pressure must be kept up. The public should pressure their MPs and MEPs about what, if anything, they are doing to make the tax regime fairer for all. They should themselves learn more about the main tax exploiters and be prepared to engage in peaceful, lawful protest. Apathy is not an affordable luxury. The next time you sip your Starbucks or Caffe Nero coffee ask yourself if you are sipping to your health or toasting to your descendants' angst. Is that the kind of future you wish to bequeath to your children?
*Google my blog headline: "Good governance must prevail"