Tuesday, July 03, 2007

How corporations avoid tax

The news that Saga and the AA, the private equity businesses that are merging, paid no corporation tax last year highlights the fact that global business has turned avoidance into an international art. A shadowy world of tax havens and creative accounting means that the burden of funding the state falls increasingly on the shoulders of working people. In the case of Saga and the AA, they have paid almost zero corporation tax since their take-over by private equity funds Permira, CVC and Charterhouse two and a half years ago. Yet these three companies generated capital gains for themselves of £2.5 billion while 3,000 AA workers lost their jobs. Tax was avoided by the fact that that huge debts in the form of loans were imposed on the companies – and the interest paid on these borrowings wiped out all taxable profit.
Today the Treasury select committee of MPs will question CVC and other private equity firms about their operations. Some MPs and GMB trade union leaders are in a flap about private-equity businesses, which they describe as the "unacceptable face of capitalism". Apart from paying little tax, they asset strip and rationalise companies they take over before selling them at a profit. Saga's chief executive Andrew Goodsell’s shares will be valued at about £150m, of which he will pocket about £110m in cash. As for the AA's chief executive, Tim Parker, he is understood to be cashing in his entire stake, which is worth around £50m. Nice work if you can get it.

But private equity is only a small part of the story when it comes to corporations and tax, both in Britain and internationally. In Britain, New Labour under Gordon Brown has cut corporation tax so that at 28% the rate will be the lowest rate of the major economies. Yet while corporate profits as a share of GDP have increased on average from 21.5% to 22.5% since 1999, the proportion paid in corporation tax has fallen from 15% to 14.1%, according to the Tax Justice Network (TJN). At the same time, of course, the majority of ordinary earners have seen the share of their income taken by tax and national insurance rise to around 30%. The TJN estimates that in 2005 US$11.5 trillion of personal wealth was held offshore in 70 tax havens by rich individuals. If this wealth was taxed where they were resident or derived their wealth, the additional tax revenue available to fund public services and investment around the world would be in the region of US$255 billion annually. And the number one haven, according to the International Monetary Fund? Why, it’s New Labour’s Britain. Brown has made the UK the billionaire’s first choice of residence.

The TJN acknowledges the source of the problem, with a major report saying: "Tax havens are part of a much deeper problem facing the globalised economy. As a result of technological change and capital market liberalisation, rich individuals and transnational corporations (TNCs) can move their money freely around the world. Many have chosen to locate their wealth and their profits in offshore jurisdictions that offer minimal or zero tax rates." That problem is not going away, and no amount of pressure for tax regulation or reform will change this position. The corporations not only hold economic power but they are also well in command of national state policies as well, as the decade of Blair and Brown has demonstrated.

Paul Feldman, communications editor

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