Suppose you were a director of a multinational company. As John Lennon would have it, it's easy if you try.
Now imagine you were under pressure to achieve three things. The first is to deliver director's bonuses, most of which are triggered by post tax earnings.
The second is to keep shareholder's happy with ever rising earnings, post tax.
The third is to manage pressure from auditors and others who want to sell tax planning.
All three reasons are likely to suggest you should use tax havens. What do you do as a director? It's a real issue. The fact is there will have been, and may still be, very real pressure to succumb and set up in places like Jersey, Cayman and elsewhere.
Do you give in? What are the risks? Surely there is no one who can now not see it as such? But what are they?
The moment you put a tax haven company in your group you create opacity. Make it the parent company and the whole question of the integrity of their accounts comes into question. And why not? The issue of whose law applies arises. Whilst accounting standards remain applicable wherever a company is incorporated (with rare exceptions) some critical data required, for example, by UK law might go missing in these offshore reports.
This is important: there is credibility at stake here. And when one of the issues where less data might be available is on tax this is, in the current environment a matter of real significance. The question that occurs is an obvious one, which is why you would take that risk of the negative market and public reaction to opacity if you did not get a benefit as a result? Rationally you wouldn't do that unless the trade off was either tax saved or the benefit of not talking about something you'd rather remain hidden. Assuming business is rational, it's entirely fair to think a company headquartered in a tax haven is doing that to exploit the secrecy and tax advantages they offer.
In that case, what does that say about the directors? Surely there questions to ask of them in these caseS? It's simply not possible to divorce the people who make the decision to locate In a tax haven from the decision that is made by the company they direct. And the decision must, inevitably, I think, reflect back on them and their ethics.
Is that any different if the company is instead based in the UK and has tax haven subsidiaries? There are three reasons for doing that. First, putting a business into a tax haven can quite literally mean it can disappear entirely from view. That's because the accounts of companies based in almost every tax haven need not be published. They are included in the group accounts, but they do not need to be separately identified there and until country-by-country reporting becomes standard on public record (which may be a while away as yet, although Labour has offered hope on this issue) what the use of tax havens by multinational companies means is that whole chunks of its activity wholly disappears from view.
That's legal, but is it ethical? And does it mean the company is accountable for what it does to its shareholders, let alone stakeholders in that case? Are the directors being honest is my question? And the answer is we just don't know. And in that case it's fair to say we can have doubts about the motives of any director whose company does this. After all, why not? If there's nothing to hide why would anyone use a tax haven? It would be irrational not to be suspicious.
Second, there is doubt about tax too, and what is going on there. And again, why not? If we do not know what is happening, and we know there is a tax gain to be had by using these places why shouldn't we assume we they are tax avoiding? It would be wholly irrational not to.
And the third reason for using a tax haven? That's because you really have a genuine business there. It happens, of course. But in that case you would have no problem publishing the data, would you? If so, all these reasons for doubt about thsoe companies that use tax havens and do not talk about them, and the directors of those companies who decide that is acceptable, is fair.
Go back to my opening question then. Would you succumb? Why would you take that reputational risk of being linked to tax havens? Would you do that without cash reward? In that case is it fair to think the directors of companies that use tax havens must be open to question as to their ethics, and precisely what they gain from the process.
Who's going to ask then?
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It’s an interesting thought but not one that is likely to cause much pause to most people who have risen to director. The responsibility to (deliver results for) shareholders seems to be the foremost consideration and everything else considered a barrier to this. Personal wealth/bonus is often not a huge driver except for the status it confers.
The consensus seems to be: if it is legal then it is likely our competitors will also be doing it. Therefore it is irresponsible if we do not seek to control tax expense (just as all expenses should be kept in check).
For their part, the markets do not seem overly concerned about the opacity – or at least feel it is more than compensated for in the improved returns.
The one hope is that directors are canny – they won’t want to be on the wrong side of the law – hence the plethora of loopholes they lobby for. Remove the ambiguity and they will (very grudgingly) fall into line.
Company law is vey clear that shareholder return is not the sole priority
If it is the company is failing in its duties
They should be complying now
They comply to the letter of the law. Your argument is that they should be more ethical than that. But what is ethical is more open to interpretation than what is legal. Many in the higher echelons of business would argue that it is unethical for them to spend shareholder money on ‘unnecessary’ expenses. They might even go as far as to claim that to not operate as such distorts the market.
I completely agree with the aspects of your campaign that seek to tighten and clarify the law. I think appeals to do the right thing and threats of embarrassment when explaining their structures are pointless. If there is one thing people at the top have it’s brass neck.
“….there is doubt about tax too, and what is going on there. And again, why not? If we do not know what is happening, and we know there is a tax gain to be had by using these places why shouldn’t we assume we they are tax avoiding? It would be wholly irrational not to.”
So if someone operates through an LLP, like you, the accounts of which disclose nothing about tax payable by its partners, we should assume there is a tax avoiding motive? It would be irrational not to?
You can’t have it both ways. If quite legally not revealling full tax details means you can assume tax avoidance motives for a company, why should we not assume it for you?
Total nonsense, I suggest
Everyone knows LLP tax is paid through a partner’s tax return
And I am not asking for corporation tax returns on record, so you entirely miss the point (as usual)
In 2013 you were calling for some corporation tax returns and some personal tax returns to be made public in the bill you wrote for Michael Meacher.
That was Michael’s idea
Not mine
Sometimes I have to do what is asked
I think tax avoidance for companies that utilise national infrastructures to bring goods or services to a consumer market is irrational. To not pay tax puts unnecessary pressure on the infrastructures in question and in the long term under government actions such as austerity will lead to crumbling infrastructures. I run a company, albeit a small one, but have worked for large multi-nats in the past. I pay taxes (almost) happily. I need good roads and telecoms infrastructure to be profitable.
Well said
Bless you Kate – you are a ‘conscious capitalist’ – unlike many others you don’t seem to ignore where all this stuff like infrastructure that helps you do business comes from.
‘Wish there were more like you!
Thank you 🙂 There are loads of folk running companies like me, we’re just invisible though because companies paying tax is not news…
like many people here I’m very concerned about tax avoidance (and by that I mean specifically the fact that it appears that legally companies can mitigate their tax paid).
I’m a bit uncomfortable appealing to ethics though to solve the problem as really I’d much prefer that politicians, and organisations like HMRC designed rule based systems and properly enforced those systems. That’s not to say that ethical behaviour can’t be built into and implicit to those systems, particularly around corporate governance – Will Hutton discussed using company ownership rules to change how organisations operate and govern themselves in the Guardian a few days ago.
Also, I think that for many multinational companies the ethical ‘decision’ for directors is obscured somewhat for the following reason: Take a typical American company that operates in Europe. The way they see it, Europe is one territory (to use corporate speak), so what they will try and do is use that territory to get the lowest tax rate overall through their European operations. That gets delegated to more junior directors and so the senior US directors don’t properly appreciate the decisions that they are making and don’t properly see their tax policy on a country by country basis. I don’t particularly want to defend such people, but I think it is an alternative perspective on things.
All rules are open to interpretation
And so ethics always come into play
Inevitably
I would disagree that CEOs don’t know what is going on in all markets/territories. It is their job to set the tone and business practices across the company. As far as ethics go, it is not something you can count on in individuals which is why there has to be regulation of the market place. The biggest problem I think is that there is a ‘get rich quick’ mentality that ignores the big picture. Tax burdens do not go away they just get reallocated, if you can’t get money from corporations, you raise tax on consumers to fill the funding gap, consumers have less disposable income, markets decline, corps ask for more latitude and the cycle goes on spiraling to the bottom. Shareholders and CEOs alike should be content that their investment makes any profit – that should be the bonus but alas like the housing bubble, they are not happy unless they can double or treble (etc) their money.
I did think of a solution though…No tax, no access to market. I know we’d all be devastated if we couldn’t buy the new iPhone X or shop at Amazon but we could chose to support local suppliers and businesses that pay tax instead…
The whole point is that a territory/market is bigger than a single country eg: Europe Middle East and Africa (EMEA) or the EU for instance. Particularly with respect to Europe it invites/allows corporations to think of their tax on a regional basis (whether deliberately or by default) rather than a country by country one, which is why country by country reporting is so necessary.
In terms of ignoring the big picture, it is precisely as you say, which invites the question why so many free market champions are so adverse to many of the things that the centre-left and left might champion when they are precisely the things that will lead to strong long term sustainable economic growth. But then that’s probably a whole other can of worms….
Tax is paid nationally
People live locally
All companies are created under state law
Accountability must be local