Holiday is a great time for reflection. It’s also an opportunity to stand back from the day to day and to view the bigger picture. But sometimes a story from the day to day invades that bigger picture. The story of Bono’s tax planning that erupted into the news a couple of weeks ago was one such event.
Bono is seen as a guru. Of course, he’s a successful musician (although, I’ll be candid, I’m not sure I’d recognise a single one of his songs). And with Bob Geldof he’s been seen as the leader of the culture that has driven the ‘pop’ development agenda. It’s one that has not always sat comfortably with either the serious development agencies or government, but as a lobby exercise there’s no doubt it has contributed to awareness.
But, there has always been risk in his position. Bono has accumulated personal worth of hundreds of millions (chose your currency, I think the answer is the same in dollars, euros or sterling). And many (perhaps most) people still think wealth comes with responsibility, especially when the owner asks for that responsibility from others.
This makes Bono’s shift of his tax affairs from Ireland to the Netherlands all the more difficult to understand. As I’ve said before on this site, and will say again, Ireland is a tax haven. And amongst the absurd benefits it has offered is tax free status to artists. U2 have apparently exploited this to ensure that no tax has been paid on the royalties they have earned from their songs.
Now, in a slightly more enlightened moment Ireland has decided to cap the income which can be subject to this exemption at 250,000 euros per annum. This is, of course, income beyond the dreams of about 99% of artists, whatever their medium, and so hardly diminishes Ireland‘s commitment to support the arts, if that was the intent of the exemption. But the change is apparently unacceptable to U2.
Let’s put this in context. At worst the change means that if their excess royalties were shifted into an Irish company they might be subject to 12.5% corporation tax. This is, because Ireland is a tax haven, one of the lowest corporate tax rates in the world. Except that the Netherlands, which as I’ve also noted before will get increasing attention from this site, offers an even better deal on royalties and hopes to improve still further upon it from January 2007.
In essence, the Netherlands has done two things. Firstly, unlike almost any other tax haven, it has developed a considerable network of double tax treaties. These offer the advantage almost unknown in the tax haven world of allowing royalties to be paid to the Netherlands without tax being deducted at source in many of the originating counties, or if taxes are to be deducted, the rate is much reduced. This makes it an ideal place to receive royalties.
As a tax haven the Netherlands has gone a deliberate stage further than this, which might otherwise be a characteristic it otherwise shares with a fair number of developed countries. The additional feature it has added that in essence the Netherlands seeks to tax the royalties received at a very low rate. The rate is officially 10% from January 2007 but given the significant range of reliefs and deductions also available, not usually available elsewhere, the effective rate can be much lower, which is absurd even by Irish standards. The rate can be reduced still further if the royalties are then paid on to a Netherlands Antilles holding company. It’s clear Bono is looking to exploit some of these arrangements, although precisely how is not certain. But, the Stones have been there before them. It’s clear they work.
It’s important at this point to remind oneself why this is important. The reason is simple. Tax is a key component in the development equation. Development thinking started with aid. Then it moved to loans (which of course subsequently led to the whole debt issue), which in turn led to trade and the need to generate the income to repay the loans, but now tax is seen as the fourth component in the equation.
The reason is simple. Loans have not worked, as Bono is keen to point out. The resulting debt cannot be repaid. Trade remains an enormous issue, with the odds still stacked against developing countries. So aid remains on the agenda. But no one who is serious about development really sees aid as the long term solution to the development issue. Aid dependency is the outcome of it. And that does not result in the creation of viable independent states capable of supporting their own populations which has to be the objective of development. Only a country which can raise the tax to support itself can do that.
What this argument on tax and development suggests is that the two are simply inseparable. Not everyone buys this argument yet, but it is hard to see how its validity can be denied. This means that anyone who promotes development has to be serious about tax: more than that, they have to be serious about paying tax.
That attitude to payment has to be evidenced in two ways. The first is a personal commitment to paying the tax that is due by an individual or corporation on the income they have earned in the location in which it can be best determined that it has been earned. The second commitment is to the integrity of the tax system, nationally and internationally.
What Bono proves
What seems clear is that Bono has not bought into this argument. I think he should be aware of it. The Tax Justice Network has tried to contact him. We’ve never succeeded in doing so. So, perhaps, to use tax jargon, he’s simply avoiding it. Which is an action in denying responsibility, as we’ve always argued.
But the example he provides is more important than that. What he proves is that for some people (and especially those with considerable wealth) the only acceptable rate of tax is no tax. However low the rate of tax a country offers, and contrary to all the arguments put forward by those who promote flat taxes, so long as any tax is charged some will try to avoid or evade them in denial of responsibility to the societies in which they live. In essence this proves that all the arguments that cutting taxes will increase tax revenues are based on a myth. Only 0% is acceptable to tax avoiders. And the result is obvious. In this case the state fails, and one can only presume that this is what those who promote this argument really want.
And yet the reaction to Bono’s actions prove something else is happening in parallel. The outrage suggests that tax planning continues to carry with it a reputational risk. His actions are seen as unacceptable. He is not accepting his responsibility to society. The message is simple. Paying tax is a moral imperative.
Paying tax is essential to development
Where does this leave Bono? Seriously out of step I’m afraid. In fact, well outside the development agenda. The tax havens he uses undermine development. They divert income from developing countries. They ensure tax is not paid in them. They facilitate capital flight from those developing counties. As Raymond Baker has shown, tax avoidance driven capital flight costs developing countries ten times their aid receipts.
Bono is endorsing this. His credibility is in tatters.
But he has a choice. He could pay tax. This is an option he can afford. But it’s more important than that: it’s his duty.