Cracking down on tax avoidance

Without China on board, Africa will suffer
May 22, 2013

"For companies to claim that they are morally in the right by having devised loopholes is ridiculous, even if their behaviour has been legal" (© Superstock)

It is amazing how much traction has been won by the drive to clamp down on corporate tax avoidance. I now expect more from the G8 gathering of world leaders, which opens in Lough Erne, Northern Ireland, on 17th June, than I did a year ago—or even a few months ago.

When I started working on corporate tax avoidance, on which I have been advising the UK government, it was just before last year’s disclosure that Starbucks paid very little tax in the UK, provoking public uproar. The company later made a contribution of £20m to the tax authorities. This single case made targeting corporate tax avoidance politically easier than it might have been.

Many governments among the G8—the United States, UK, Canada, France, Germany, Italy, Japan and Russia—now recognise that they are suffering from the lost revenue. France and Germany, perhaps prompted by cases of high-profile public figures revealed to be paying little tax, are keen to be seen to be doing something about it. African governments, who have suffered big time from corporate “transfer pricing,” a well-established method of avoiding paying tax, are also delighted that something is finally being done about it.

What has surprised me is that we have made progress on a front that initially seemed much harder—getting public disclosure from tax havens about the “beneficial ownership,” or ultimate ownership, of the shadowy shell companies used in money laundering manoeuvres. The British government has had a team working on this for several months. This is a long way from the prospect a year or so ago, when it seemed that the most we could hope for was “ascertainability of ownership”—jargon for the right of authorities, but not the public, sometimes to establish who really owned the companies.

A lot of tax-cum-secrecy havens have concluded that it is better to be seen to move first, than be told to do so. The Cayman Islands, followed by the rest of the Caribbean, and then Luxembourg, have offered some disclosure.

Since the UK government began to champion the cause of cracking down on avoidance, there have been two kinds of retorts from companies. One is that what the state requires them to pay should be clearly encoded in legislation—that it is unreasonable to make them guess how much tax is deemed fair by politicians or the public. My answer in turn is that they have half a point. They are right that this needs to be written into the rules. It is a continuous battle to change those rules to block loopholes, to change the locks, if you like. There is an irreducible amount of complexity in the tax code and companies have spent a lot of money hiring very clever people who can always find their way around it. The wave of tax avoidance that has hit us in the past 10 years has exploited the existence of 700 tax jurisdictions.

But for companies to claim that they are morally in the right by having devised loopholes is ridiculous, even if their behaviour has been legal. Any society rests not just on laws but on conventions that make life decent and tolerable. If every citizen pushed right up against the limit of the laws, it would be unworkable. Society relies on people having a degree of mutual respect. Companies rely on a certain level of public spending, for example on the education of the people they employ. All this relies on people and companies paying taxes.

There clearly has been a deterioration in corporate culture and rebuilding it is tough. Once norms are eroded they are hard to recreate. Perhaps the complaint made by companies about competition from emerging economies with poor regulation helps to explain some of the “race to the bottom” in standards, but my sense is that the leaders in that race have been American and British firms.

It is clear that the heavy lifting will now have to be done by changing the law, to block these loopholes. It would be foolish to hope that the problem would be solved simply by calling for companies to rectify their culture and repair their sense of social obligation. My hope is that if we tighten the laws, corporate culture will change to support that.

What of a second challenge from business—that there is a contradiction in UK policy? On the one hand, some companies argue, the government boasts of having some of the lowest tax rates in Europe, but on the other, they suggest, ministers appear to be encouraging public condemnation of those who pay low tax. In my view, David Cameron handled this well when challenged at Davos in January. The only way you can have an environment of low corporate taxes is if everyone pays their share. And most do—we should remember that.

I think the G8 will bring us some real progress. But it’s only the preliminary skirmish; the real battle is the G20, the much wider group that includes the leading emerging economies. The G20 won’t take its agenda from the G8—but it won’t do anything at all unless the G8 moves. We need the G20 to get China on board; without that, Africa will continue to suffer from misgovernance elsewhere. But the politics are shifting in ways that strengthen the chance of potential agreement. An alliance of South Africa and Australia, for instance, might help to persuade China to join in. We do have a fighting chance.