The Financial Times has published a review of Nick Shaxson's book, Treasure Islands. it finds lots to praise, but I'll address its negatives, which are:
Shaxson touches on what some would dismiss as conspiracy theory, arguing that tax havens with links to the US, such as Panama, are “a pointer to the fact that offshore finance has quietly been at the heart of neo-conservative schemes to project US power around the globe for years. Few people have noticed.”
It is not surprising that Shaxson has his own agenda in writing this book — he is also a long-term consultant to the Tax Justice Network, an anti-tax haven group. But the drawback to the sledgehammer approach is that the reader is left with unanswered questions. Why do multinationals shift their profits into low-tax havens and costs into high-tax countries? The only motives Shaxson gives are sinister.
But while he devotes a convincing chapter to rebutting the views of those who support tax havens, such as US economist Daniel J Mitchell, he makes little mention of shareholders in multinationals who benefit from extra profits. Whether a company’s duty lies more with society than shareholders is an important debate — and arguing convincingly for the former could cement Shaxson’s argument — but it is not one that this book enters into.
If the book anxwers all questions bar one it does pretty well, let's be honest. But let's deal with that one.
First, as Ha Joon Chang argues in '23 things they don't tell you about capitalism', of all the groups whose interests should be put last when considering the management of a company - after all they are, without doubt, the people with least loyalty to it in the case of a quoted enterprise. And if, as is absolutely critical to a quoted company the emphasis should be on long term value creation with stability of earnings vital to the payment of stable income streams to owners then tax haven activity is the absolute antithesis of what is required.
Tax haven activity encourages a focus on financial engineering that is the antithesis of focussing on customer service. And it encourages the misallocation of resources to sub optimal locations to ensure tax is saved rather than ensuring that returns from productive activity are optimised. And it encourages risk taking on artifice which may be challenged by tax authorities long after those putting the structure in place have left the corporation but when some shareholders may still be left, or those who have replaced them will face rick they were not warned of since tax haven activity is almost entirely hidden from view in the corporation.
The reality is that tax haven activity does not benefit shareholders. It does benefit executives: their bonuses are often triggered by free cash flow, and reducing current tax is the easiest way to achieve that. And that free cash is, of course, of use to them in their own plans for aggrandisement. But is any of that for shareholder benefit? No, it's not.
Shareholder benefit comes from making and supplying goods and services. And tax haven activity completely distracts from that in unsustainable short term fashion. It's the antithesis of value. The FT's reviewer has completely missed the point. But she's not alone.
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Richard, I hope you have sent this response to the FT letters editor. It would be good to see it published there.
I acknowledge the point you make about tax haven participation, but I think its worth revisiting why institutions invest in quoted equities. Ultimately its about generating a risk-adjusted return, otherwise they may as well invest in cash and government bonds which will never generate sufficient returns over the longer term for pension funds. A significant level of equity exposure is essential.
The level of dividend yield is what attracts shareholders, especially tax-exempt pension funds. They are therefore motivated by the company’s net-of-tax profits which are then available to distribute as dividends. The higher the tax burden suffered by the company, the lower the dividend will be.
Its hard to see how that circle of conflicting interests can ever be squared.
@Rupert
That is straightforwardly illiberal doctrine, and it does not reflect the reality of what actually happens in corporate management
Richard
The problem is that corporate managers are motivated to maximise profits for their own bonus purposes (which of course is an above-the-line expense. The directors on the other hand have a fiduciary duty (which is invariably measured in monetary terms and not in terms of social responsibility). The pension fund trustees have a fiduciary duty to their members to generate the best risk-adjusted returns. All of that parties are heavily motivated to engage in lawful tax planning.
Its a huge conundrum and there’s no easy answer because neither the directors nor the pension fund trustees will risk being sued for breach of their fiduciary duty if they take a moral stance. Some shareholders and pension fund members will agree with such a stance and some won’t. Individual shareholders can follow their morals and choose not to invest in such a company, but members of a pension scheme do not have that option if its a non-contributory group or company scheme.
@Rupert
But you’re just wrong
Pension trustees can take tax paid into account as a risk factor and therefore ignore companies that choose high risk strategies
And nothing says that the company must minimise its tax bill. It must be managed in the interest of its shareholders and other stakeholders and that is something entirely different
So you are making up straw men to suit your argument and that is unbecoming
Richard
Exactly how is tax paid a risk factor? I assume we are talking only about companies engaged in lawful tax avoidance, in which case where’s the risk? The worst that can happen is that the company’s lawful tax planning is unsuccessful, which means they might end up paying the tax that they would have paid anyway. If the company’s tax planning is successful then its all upside, and if not then its neutral. Hardly seems like a “high risk strategy” for a pension scheme trustee to be concerned about. On the other hand if the company is acting unlawfully re its tax affairs then I would agree with yo
I think you are confusing your moral arguments with company law. A board of director has a fiduciary duty to its shareholders. It has different legal and moral obligations to its employers and to its community. That undoubtedly is a conflict. If you are a director of a company then you will take advice from the company’s lawyers. They will inevitably advise the company into the legitimacy of the company’s proposed tax planning, and of the upside risk and downside risks of such planning. The directors will have covered their arses by obtaining such advice, often backed by QC opinions. Those advisors earn a living by advising on the law as it stands. It is simply not what they being engaged for to say “well that’s the law but is tax avoidance morally acceptable”? That’s what they are being asked to advise on and if they play the moral card then their career will take a nose-dive. That’s how it works on the real world. Tax advisors anf tax QCs become successful because they deliver results. They simply won’t get instructed on tax planning matters if they have a moral problem with tax planning, but then its unlikely that they would have ever chosen that career or risen through the ranks to receive instructions from listed companies. Sorry, but that’s exactly how the system works.
I don’t buy the “straw man” trustee argument at all. Trustees of pension schemes of publicly-listed companies tend to be very successful or high profile people who have a lot to lose and who are well aware of their duties and responsibilities to the scheme members.
Absolutely nothing will change unless tax avoidance becomes illegal or until a GAAR is proved to work. Until then, the prevailing law is what matters and legal advisors and tax advisors will continue to advise based on the prevailing law. How can they possibly do otherwise?
“Whether a company’s duty lies more with society than shareholders is an important debate”
The FT reviewer here strangely assumes that the POV of the company is the only one relevant to the moral evaluation of arguments for and against tax havens. That is clearly not the case. Even if the company would has some “duty” to evade taxes, a democratic polity definitely does not have a moral duty to help it or to let such antisocial behaviour stand. Any democratic polity that takes the welfare of all its citizens seriously on the contrary has a duty to take real measures rid the world of tax havens.