The huge leak of confidential financial data details from Mossack Fonseca, the Panamanian law firm, has brought into the open some dodgy dealings by people breaking the laws of their home nations but the sad fact is that a large proportion aren’t breaking laws they are just using what is euphemistically termed ‘Aggressive Tax Avoidance’. When pushed the big multinationals or rich individuals who use the ‘aggressive’ tax avoidance schemes always fall back on the defence that they pay all the tax that they ‘legally have to pay’. When speaking to Bloomberg Google’s Eric Schmidt proudly defended the company’s tax arrangements saying “We pay lots of taxes; we pay them in the legally prescribed ways,”. Apple CEO, Tim Cook, said ‘Apple pays every tax dollar we owe” David Cameron has said the he paid ‘all UK taxes due on the profits’ from the company in the Panama papers and that he will publish his tax return.
The weasel words are ‘legally prescribed ways’ and ‘we owe’ or ‘due’. But whose ‘ways’ or who do ‘they owe’? If you are a UK small business it is clear, it is the UK tax authorities. If you are a multinational or a rich individual who has enough money to pay the basic fees (which translates to an income of about £100k) you can move money overseas and chose to use the laws of different countries who have more favourable, rules. It isn’t illegal from a global perspective but if you tried to pay this level of tax in the UK on the same money it would not be legal it would be ‘evading’ tax. So in David Cameron’s case the key question is would he have paid the same level of tax on his money if it had been in a UK fund? To put this into a rather extreme perspective this is the same defence that Gary Glitter and certain other high profile paedophiles used for a while. If they only indulged in ‘sex tourism’ and went to countries where the age of consent was 12 or 13 years old then having sex with a 13 year old isn’t illegal under their laws. The UK changed its laws to cope with Gary Glitter and his line of defence but international tax avoiders haven’t been held to account in the same way.
In 2014 Facebook paid £4327 on a UK revenue of £105 million.
Caffé Nero has not paid corporation tax in the UK since 2008, despite racking up sales worth £1.2 billion.
In 2014 Amazon paid just £11.9m in tax on £5.3bn worth of UK sales
Apple, the most profitable company in history, who made $18.4 billion in profit in 2014 and had a bank balance of $179 billion registered so little income in the US or UK jurisdictions that it had to borrow $5 billion in 2015 to pay its share holder dividends (as that massive bank balance is held in tax havens as a result of its tax avoidance schemes).
The methods used are various. There have been two good television programmes about it recently. BBC2’s ‘The Town that took on the Tax Man’ and the Channel 4 Dispatches ‘How the Rich avoid tax’ with actor Greg Wise (January 2016). The key conclusion being that most of the problem is the horrendous complexity of the UK tax system and the total lack of backbone in the government and the HMRC when it comes to dealing with the multinationals and tax avoiding rich. There are plenty of foreign tax regimes that can be exploited by the unscrupulous, the Irish and Dutch get special mention (search for the ‘Dutch Sandwich’ or ‘Irish double’ on the internet). Ultimately it is the UK government that needs to step in and sort the situation out (although whether our membership of the EU would allow us to address the Dutch and Irish loophole is a whole different question). But at the moment, technically, what these companies and individuals are doing is not illegal.
The immediate effect of all this is that the UK has a greatly reduced tax take (along with all the other nations in the world) and small UK based businesses are disadvantaged and cannot compete. A glance along a typical high street proves the point. The chain stores dominate and the independents are disappearing. This is a fundamental ‘free market’ issue. These small and medium sized businesses are at a serious disadvantage when compared to large multinationals as they are subject to taxes that the large multinationals are able to choose not to pay.
The simple fact of the matter is that a market is kept ‘free’ the same way that people and societies are kept ‘free’ – with firm rules that bound what can be done. Taxation is a key element to this – a free market needs fair taxes.
Taxation levels are a fundamental part of the economics of any business. Taxes need to be explicit and universally applicable so that a company can plan for the future and to know that its competitors are subject to exactly the same rules as itself. The size of the company must not matter. Large companies should not be able to pay less tax just because they are large and have the resources to avoid them and governments should not treat them differently. You could view companies as being subject to a biological style life cycle of birth, growth and death so that the small start-up company of today should be looked on as something with the potential to grow into the multinational of tomorrow. So if anything (following the biological analogy) you could make a case that these small companies should be nurtured and have lower taxes than big multi nationals – not the other way round which is what is happening at the moment.
So just as you wouldn’t describe a society that had weak law enforcement, that allowed its stronger/richer individuals to avoid any laws they didn’t like, as a ‘free society’ then why would anyone consider that such an economic set up would constitute a ‘free market’?
The Gary Glitter situation also involved some ‘grey areas’ that have unfortunate echoes closer to home. Even where countries had child protection laws that should have stopped Glitter’s activities they just weren’t enforced and Glitter and his mates knew they could just ignore them. Part of this was probably poor third world countries not wanting to pick a fight with rich westerners but then they weren’t rigorously applying the laws to their own people either. The unfortunate ‘grey’ parallel in this case is London property which is used as the ‘deposit account’ of choice by foreign tax avoiders and criminals alike. Unlike most countries in the world the UK doesn’t require you to be a UK resident to own UK property. There are some weak laws that are supposed to stop misuse by enforcing transparency on the shell companies used, for example, but these are wildly flouted. The foreign tax dodger or criminal just has to evade some questions about money laundering from an estate agent, desperate for a sale, knowing that there will be no serious follow up. Again there has been some good exposes of this (for example see http://www.independent.co.uk/news/uk/home-news/london-property-boom-built-on-dirty-money-10083527.html ). Here the UK is very much at fault and it is fair to ask questions like ‘How many schools and hospitals in Africa haven’t been built because the money has been siphoned into London property’?
What can we do about all this? Individually we can attempt to shop in the tax paying establishments. The Ethical Consumer and Tax Justice sites do provide the information that can help you decide – but that is difficult to do when you are in a rush and just want a coffee on an unfamiliar high street. You can get your DVDs, books and e-books from www.hive.co.uk which is a network of independent UK book sellers. But it isn’t even possible for us consumers to influence some things. Where can you buy a streaming or downloaded film at the moment, apart from a large multinational? Realistically this is something only the government can sort out so that there is a level playing field and normal market forces will be in play. The US government used to be good at breaking up cosy monopolies like these but it, along with ours, has taken its eye of the ball on this. The thing we must all do is help bring their attention full square onto it via the ballot box and the MP mail bag to ensure this mess is sorted out, otherwise we all lose in the long run.