Havens and have nots

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Following on from the Guardian's article on bananas on Tuesday (the longest single theme article ever published in the main body of the Guardian, so I gather) I was asked to write a comment piece for the Guardian. This was published on Wednesday under the above title.

I have been told by one reader that this seems a pretty clear summary of the core of what I argue, so I'll repeat it here:

As the Guardian showed in its front page story yesterday, companies in the international banana trade are paying less than half the tax that might be expected of them. And this is hardly an isolated case: UK-quoted companies reduced their effective tax rates from 26.6% in 2000 to 22.1% in 2004, compared with an expected 30% in both years. Tax avoidance is rampant, though companies insist they are cutting their costs to benefit their shareholders.

This defence is disingenuous. Tax is not a cost to a company. It is a distribution out of profits. That puts tax in the same category as a dividend - it is a return to the stakeholders in the enterprise. This reflects the fact that companies do not make profit merely by using investors' capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit.

Moreover, tax is properly due to the state in which a company generates its profit, not to that state to which it can relocate its profit for taxation purposes. Generating corporate profit requires four things. The first is a company. Companies are created by law, and this legal process creates an implicit licence for the company to operate. That licence carries in exchange an obligation to pay the tax that is due on its profits where they arise. Doing this requires that proper tax accounting take place for the other three requirements for successful corporate activity. These needs are for staff, customers and the physical infrastructure with which to operate the business. It is from these resources that profit is made, and this means that tax should be paid where they are located.

The banana example shows that modern corporations have very different intent. They record profit where the legal right to their "brand", "purchasing network" or "distribution network" might be located, none of which are likely to have been created in or be managed from the tax havens cited. They create a make-believe world in which up to 60% of world trade is notionally undertaken to redirect profit from where it is earned to where the management of corporations want to locate it.

In doing so they are enormously assisted by the accounting and legal professions, who share the spoils with the companies' senior managers. Managers get their share from bonus schemes based on share performance boosted by low tax rates. The accountants' contribution is to insist upon "consolidated" accounts for companies in which there is no disclosure of any of the intra-group trading that facilitates these reallocations. And the lawyers create the legal fiction of the contracts that require the payments to take place. Together the lawyers and accountants have created, and to some extent control, the world's tax havens where the misdirected profits are booked, as evidenced by PricewaterhouseCoopers' reported involvement in the promotion of a new Jamaican tax haven.

The outcome is simple: tax is not paid where it is due. Almost invariably that means it is not paid in the populous states of the world, which are precisely the places most in need of tax revenues. The implication is obvious: these companies do not accept their corporate social and economic responsibility to those societies that provide them with the opportunity to make profit. They strive instead to retain that profit for their own benefit and for the benefit of the social elites that own them.

As a result tax burdens are shifting from companies to ordinary people, whose effective taxation rates in the UK have risen as corporate contributions have fallen. This means corporations not only fail to pay their way, they make others pay for them and undermine the democratic accountability of taxation in the process. This is not just a threat to state services in the developed and developing worlds alike, it's a threat to the whole democratic way of life we enjoy, because a powerful and influential elite is giving clear signals that the way forward is to opt out of society.

We cannot survive such a situation. That's why society has to hold corporations accountable for the tax that they owe, where it's really due. And it's why it has to challenge the lawyers, accountants, bankers and corporations who are destroying our systems of accountability in pursuit of their own greed.