Tax Research UK

Nick Cohen has responded to all those (and there were quite a lot of them mysteriously mainly from tax havens) who defended Liechtenstein in the pages of the FT last week. As he put it:

All missed the point that tax havens are inherently criminal and would go under without the proceeds of crime.

And, as he added:

As John Christensen, director of the Tax Justice Network, puts it, they are enemy states, pirate islands that have declared economic war on the rest of the world. It’s not just that they happen to be used by individual criminals - drug dealers, kleptomaniac African dictators - they are criminal entities themselves that survive by sucking potential revenues out of wealthy and destitute countries alike. If rich citizens obeyed the law, or tax havens ended their secrecy, offshore banking wouldn’t exist.

John’s words closely echo those I used on the BBC1 news on Friday night - and since John and I were in different countries with very little opportunity to speak to each other last week that might be coincidence.

Except it isn’t. No doubt John made other points to Nick, as I did to the BBC, but the message both the BBC and the Observer chose to deliver was the same, which is that tax havens are engaged in economic warfare, on us the ordinary, law-abiding citizens of the world

This is the reality at the core of this issue. An elite in our society are using the legislation of tiny states, which they have through their agents in the banks, accountants and lawyers of the world the means to influence, to secure secrecy for their transactions which are designed to ensure that they shift their tax burden onto the ordinary people of the world through the imposition of ever bigger taxes on labour. Those people who suffer this increased burden represent the vast majority of the electors in the democratic states in the world: states that represent them but from which the rich wish to float free, as we have seen the UK’s non-doms seek to do.

This is what Germany is signalling it’s fed up with. This is what the OECD says has to stop. This is what decent people the world over think is unethical.

The increase in the wealth gap, which this practice has fuelled, has reached the point where people are saying ‘enough’. If the rich have any sense they’ll start paying tax pretty quickly. It’s the only way they’ve got to preserve their position. Continuing to dodge has ceased to be acceptable.

Richard Murphy CSR, Ethics, Tax Havens

The Guardian has reported that:

One of Northern Rock’s largest shareholders has challenged the bank’s board to a public fight over its future at a meeting of investors scheduled for next week.

RAB Capital, the hedge fund which owns almost 7.6% of the bank, said it would attend the extraordinary shareholder’s meeting on January 15 to persuade rank and file shareholders they should prevent the board selling its assets “on the cheap” or succumbing to “political pressure”.

Apparently RAB chief executive Philip Richards has said

People seem to have ignored the fact that the company remains owned by its shareholders.

I find this pretty offensive. RAB is working with Monaco based SRM Global. And their aim is simple: to exploit the current crisis at Northern Rock to make money at cost to the government, without whom Northern Rock would be bust.

There’s only one consolation in this: they are showing how flawed is the model of share ownership being at the core of corporate governance. When, and in this case I think it will be when and not if, people realise that it is the ordinary tax payer of the UK who is being held to ransom by a bunch or exploitative gamblers questions will increasingly be asked about why board representation and ownership status is reserved for control by only one source of finance and one provider of risk equity in business.

Lenders have rights to.

So too do employees.

And so to do long term business suppliers.

All three of these groups normally have much longer term, more constructive, risker and economically important relationships with our largest companies than do the shareholders (or more accurately, the investment managers who represent shareholders). In which case they too need to be represented on boards. They too need to be recognised as users of financial statements. They too need to have power over key decisions.

So thanks RAB and SRM: you’re proving the case for corporate reform.

Richard Murphy CSR, Economics, Ethics

War on Want issued the follwoing press release today:

Tax haven poverty alert

The City of London today came under fire for paying out million of pounds in Christmas bonuses while denying many of the world’s poorest countries the tax owed by British companies.

The anti-poverty charity War on Want attacked the City amid reports that dozens of London bankers at Goldman Sachs have been awarded bonuses of at least £5 million each in a record global bonus pool of £9 billion.

Leading earners included chairman Lloyd Blankfein, in line for £35 million, and Simon Dingemans, senior European mergers and acquisitions banker, who will get over £10 million in shares and cash. According to the reports, hundreds of top moneymakers at Goldman’s Fleet Street offices will receive £500,000-plus after the company had an outstanding year advising on massive takeover deals.

Other banks are expected to hand out large bonuses, including Barclays Capital, DresdnerKleinwort, Lehman Brothers, UBS and Morgan Stanley.

The International Monetary Fund has branded the City an onshore tax haven for its role in helping companies dodge tax.

War on Want claims tax dodging and capital flight costs Africa an estimated £75 billion each year - five times what the continent receives in aid.

It says taxes paid by companies and individuals play a crucial part in enabling governments to fund essential public services, including healthcare, education, clean water and electricity.

But developing countries lose an estimated £250 billion every year as a direct result of corporate tax dodging - money which could be used to reach the UN’s anti-poverty goals several times over. Among the goals is environmental sustainability, which engages UK environment secretary Hilary Benn this week at the Bali climate change talks.

Britain also loses an estimated £100 billion a year through tax dodges. This is enough to double funding for its health service, to cover the full state pension, end student fees and enable the UK to reach the UN aid target of 0.7 % of national income overnight.

War on Want says one popular way of dodging tax is to register companies in tax havens. Many of the world’s tax havens are British - the City of London, Crown dependencies such as Jersey, Guernsey and the Isle of Man, or overseas territories, including the Cayman Islands, Bermuda and the British Virgin Islands. Tax havens allow firms to get away with paying minimal tax - and in some cases none at all. They also place little or no reporting requirements on companies, allowing them to keep secret the true sums they should be paying in tax. This then denies vital revenue to the countries in which those companies have made their profits.

Trade mispricing represents another favourite method of dodging tax. This involves selling items between different parts of a multinational corporation and deliberately mispricing the sales so as to shift the company’s tax obligations to countries where the firm will pay less tax. In this way companies have “charged” themselves over £4,000 for a ballpoint pen and under £1 for a whole prefabricated building in order to dodge the tax they owe.

John Hilary, campaigns and policy director at War on Want, said:

It is a scandal that the City of London is handing out these bonuses while denying developing countries billions of pounds in tax owed. Executives on these bonuses can get to eye up luxury cars or second homes while millions of poor people struggle to survive. The government should make City firms pay their full taxes before dishing out these obscene Christmas bonuses.

I agree.

Richard Murphy Africa, CSR, Economics, Ethics, Tax Havens

I’ve been giving the recent KPMG paper on tax and CSR a more thorough read. It’s made me think a lot, but as usual with KPMG publications my thoughts have flowed along two themes.

The first is what it does not say, on which there’s enough to write a small book. I might just get around to writing it sometime.

The second is just how crass much of what they say is. Nowhere is this more obvious than in section 6 on ‘Special features of tax in relation to CSR’. Here they make the claim that a special feature of tax and corporate social responsibility is that:

[F]or tax transactions there is normally only one counterparty in any jurisdiction. Many of the commercial decisions influenced by CSR relate to choice of supplier or of target markets. Tax, by contrast, is paid only to the state or to subdivisions of it; there is no choice as to whom the company deals with on tax matters, except insofar as decisions on location of activities and transfer pricing determine the state in which the liability arises.

In other words, as far as KPMG is concerned the only relationship of consequence in tax is between the tax payer and the state to whom they have liability. Nothing else apparently need be of concern when considering tax and CSR. As a quick response I noted the other relationships that I could immediately think of that might be of concern and came up with the follwoing list of relationships, all of which have a tax dimension that can be negotiated, that meet need to be thought about:

1. Between companies under different ownership;
2. Between companies under common ownership;
3. Between companies in the same country;
4. Between companies in different countries;
5. Between companies and tax administrations in more than one country;
6. Between companies under common ownership in different countries and tax administrations in multiple countries;
7. Between companies and their tax advisors;
8. The relationship between tax advisors in different countries advising companies under common ownership;
9. The relationship of tax advisers to companies under different ownership in one of more countries;
10. The relationship between governments (as opposed to tax administrations) and companies;
11. The relationship between governments and tax advisers, and vice versa;
12. The relationship between a company and:
a. Its customers;
b. Suppliers;
c. Staff;
d. Investors;
e. Civil Society
f. The media and others with enquiry to make of it.
13. The role of the company and advisers on legislation;
14. The duty of the adviser to other advisers;
15. The duty of a government to another government.

Now remember that this paper is produced for the “KPMG’s Tax Business School ®” (I think that registration so crass) so I have to presume it’s what they’re teaching their people. But that begs the question are they teaching these people or indoctrinating them? Either way, heaven help their clients who might end up paying for advice from those who have been subject to this process.

Perhaps they’d like to take a look at our Code of Conduct. It might broaden their imaginations.

Richard Murphy CSR, Ethics, KPMG, Tax management

Each year the Berne Declaration presents the “Public Eye” awards during the Davos economic summit.

One award made each year is for Corporate Irresponsibility. The usual criteria for selection is choosing to do the wrong thing when knowing what the right thing was.

The Tax Justice Network and the Association for Accountancy & Business Affairs have nominated the International Accounting Standards Board for this award this year for pursuing the adoption of IFRS 8 when it knew that our alternative proposal would tackle transfer pricing abuse and world poverty whilst enhancing shareholder value, reducing shareholder risk and massively increasing stakeholder accountability.

The nomination can be found here.

Ten reasons for country by country reporting of the type we requested from the IASB, and as rejected by them, can be found here.

If accepted for shortlisting the nomination has to be backed up by a detailed submission. The award will be presented in January 2008.

Richard Murphy Accounting, CSR, Ethics, IFRS 8

Just launched is the SEE Companies ethical accreditation scheme for companies that identifies companies taking social, environmental and ethical (SEE) issues seriously.

I welcome this: most CSR investment screening is simple greenwash. Take the tax questions as an example (into which I’ll disclose I had an input) which require a company to answer the question:

Has your company paid appropriate levels of tax over the last two financial years?

Guidance notes add:

ANSWERING YES
Companies must, for the last two financial years:
- state the date of publication;
- state the tax bracket that applies to their business; and
- state the percentage of tax they have paid.
Companies may provide any other relevant information.

ANSWERING NO
Companies must, for the last two financial years:
- state the exact amount of profits generated;
- state the tax rate that applies;
- state the amount of tax paid and the percentage this represents; and
- explain why they paid taxes at a different rate.
Companies may provide any other relevant information.

ANSWERING NOT APPLICABLE
Companies must:
- confirm that they have not made profits in both of the last two financial years; OR
- explain why they are not subject to taxation.

DON’T KNOW is not a permissible answer to this question.

NO ANSWER YET is only permissible under extraordinary circumstances and then for only a limited period.

It’s about time ethical screening included such issues.

As it should also cover this one:

Is your company’s average employee salary at least 5% of the total remuneration of its highest paid executive?

I can see this type of screening becoming very popular, quite soon when it becomes clear by just how much high paid fools have abused UK companies during the last few years.

Richard Murphy Accounting, CSR, Ethics

The UK’s Chartered Institute of Tax ran a conference on the above theme on Tuesday. I was one of the speakers. My slides are here for those interested. They give a reasonable overview of what I said.

What was interesting was the convergence of ideas. Dave Hartnett, Director General of HMRC stole some of my themes in the first presentation of the day, and was kind enough to give this blog the first plug of the day. John Whiting of PWC, despite his claims to the contrary, is slowly revising the Total Tax Contribution framework to reflect many of my concerns. He went as far as to endorse country-by-country reporting and the need for the reconciliation of the tax charge in accounts with the tax actually paid by companies, both of them themes that have come out of my work. It’s a just a shame he can’t yet agree that this reporting should be mandatory and audited and be backed by the key indicators from country-by-country profit and loss accounts that prove the credibility of the tax data he recognises is needed.

Ian Brimicombe of AstraZeneca (who I have to say is, i always think, one of the good guys in the FTSE 100) agreed on aligning the economic substance with tax reporting, but this has been AstraZeneca policy for some time so that it not surprising, And Michael Conlon QC was happy to suggest that the EU has put paid to accounting through “diddlysquit” special purpose vehicles as a result of the Halifax tax case.

I’m not saying that there was harmony on all issues, but the degree of unity was striking. Even holding this conference would have been unthinkable three years ago. The possibility of even some convergence of view would have been unimaginable. That it happened and that this was the result is good news and a sign of how things have changed.

So where are we going next? There was considerable agreement that we were heading towards Codes of Conducts. The Tax Justice Network has its version out this autumn. It’s going to be a fascinating debate.

Richard Murphy CSR, Code of Conduct

The second quarter 2007 edition of Tax Justice Focus (TJF) is a special edition on accountability, co-edited by Nicholas Shaxson and John Christensen. A central theme of this issue is that taxation helps foster political accountability - and that this outcome has been all but forgotten, especially in poor countries.

In the editorial, “Wake Up, Donors”, we consider why aid donors have been so reticent about engaging on tax. By and large this is a field that has been left to technical specialists, who frequently treat the issue in isolation from its political dimension and therefore seldom pay attention to the vital role that taxation plays in maintaining lines of accountability between governments and the citizens they rule. We argue that donor agencies need to wake up to this issue, not just because good taxation fosters better governance, but also because the endgame for the donor community should be to reduce reliance on external funding and increase the ability of poorer countries to finance their public services from tax revenues.

Alex Cobham discusses why an international consensus that has grown up around taxation has failed to meet the Four-R tests of good taxation policy: raising Revenue for public expenditure; Redistributing wealth and income; Re-pricing goods and services to adjust consumption behaviour; and fostering better political Representation. Alex concludes that the Tax Consensus needs to be overthrown and replaced by tax systems geared to achieve genuinely sustainable development.

Other key articles include:

* Mick Moore and Nardia Simpson of the Institute of Development Studies explore the links between taxation policy and good governance, and outline practical steps that can contribute to fostering a more consensual relationship between taxpayers and government.

* Richard Murphy, a campaigning Chartered Accountant and senior adviser to TJN, describes the current campaign to strengthen corporate accountability by introducing an international financial reporting standard for country-by-country reporting. This apparently obscure measure for increasing corporate transparency could transform the quality of information made available to revenue authorities.

* Prem Sikka, director of the Association for Accountancy & Business Affairs, reviews the case for a Code of Conduct on Taxation, and considers how TJN’s Code of Conduct, which is being finalised for launch in October 2007, will contribute to the emerging global debate about the respective roles of governments, taxpayers and their advisers or agents.

This edition also covers the launch of the Tax Justice Nederland and covers the high level conference on Illicit Financial Flows organised by Raymond Baker’s team in Washington at end-June. It also includes important feedback from the first meeting of the African Steering Committee held in Cape Town in June, plus a review of Adrian Henrique’s book - Corporate Truth- the limits to transparency.

The pdf version of this edition, which is published in a screen layout suitable also for printing on standard A4 paper can be downloaded here.

Richard Murphy CSR, Code of Conduct, Corruption, Development, Tax Justice Network

Down here in Oxford an academic took me aside to discuss my comments on Mike Devereux’s work, published hereon Monday. His argument was that a company can pay tax, but can’t bear it. In other words, he argued in support of Mike that the tax charge on a corporation can be passed on to labour, customers, or whatever. As such it is an economically neutral issue.

I responded by saying that this is not true. Companies can decide within quite wide parameters where they will pay tax. And they can decide when they will pay tax. And as a result they can decide how much tax they might pay. All of these issues have been agreed upon here at Oxford today. That means companies decide who benefits from the tax they pay. If that is the case then they are doing two things. First they are acting as principals in their own right, and not as agents for anyone, be it for the shareholders or someone else. Second, they are pursuing a political activity when making these decisions.

This is far removed from the neutral economic claim that is usually made for corporation taxes. Second it shatters the myth that corporations have no social responsibility in this matter. They have. If you undertake political activity, even by proxy, then you have responsibility in the exercise of that action. This is why tax is at the core of social responsibility - and why every multinational company should recognise it as such.

I have to say that I was surprised by the reaction to my comments. The academic said he had changed his mind.

Richard Murphy CSR, Ethics, Tax management

According to the Ethical Corporation the UK government’s commitment to corporate responsibility has been downgraded somewhat.

The DTI has a minister whose portfolio includes corporate responsibility. She is now supported by just one half time official. Impressive, isn’t it? This makes something of a mockery of their web site which claims:

Welcome to the Government’s website on CSR. We have an ambitious vision for UK businesses to consider the economic, social and environmental impacts of their activities, wherever they operate in the world. This website connects you to information about what we are doing to help make that vision a reality.

Sorry, but I don’t see it happening. Nor do I think the CSR brief can be covered by saying the Foreign Office has people responsible for the Extractive Industries Transport Initiative, Kimberley Process and the Voluntary Principles. They’re all valuable. But they’re a tiny part of CSR.

Put simply, the rhetoric is failing on this one. The government has to put its cash where its mouth and its web pages are or action will not happen.

Richard Murphy CSR, Ethics