Tax avoidance: a case of their morals and ours

Do some global corporations behave “immorally” when they set out to reduce their tax bill to a minimum through a variety of dodgy but apparently legal devices? Or are they simply acting out their own morality play?

We ask the question in the light of the accusation made by the Commons public accounts committee against transnationals like Starbucks and Amazon. A PAC report launched today accuses corporations that minimise tax of “outrageous” and “immoral” behaviour.

Chair Margaret Hodge said its report showed that corporations had been allowed to get away with "ripping off" taxpayers because of a weak tax authority, poor legislation and a lack of international co-operation.

"The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK."  

Is this former Labour minister Hodge genuinely surprised? This has been going on for years. She bemoans the fact that the revenue from corporation tax has fallen. Two things account for this: the recession and the fact that during the 13 years of New Labour, corporation tax rates fell sharply from 33% to 28%.

New Labour cheered the fact that they had reduced the tax on corporations to among the lowest of the developed economies. It made Britain an attractive place to invest in, so the argument went.

Naturally, the ConDems have pushed on and the rate is heading for 23% next year. At the same time, the burden on taxpayers and consumers has of necessity risen to finance public spending at central and local level.

In 2010-11, corporation tax accounted for just 8% of the UK government’s tax revenue. By contrast, national insurance and income tax accounted for a massive 49% while VAT – a tax on consumption – brought in another 17%.

Those who do the work, who labour to create commodities and services (and profits), also carry the greatest tax burden. So where, you may ask, is the “morality” in this arrangement? Search as hard as you want and “morality” doesn’t figure anywhere. Nor will you hear Hodge or any other MP complaining about this totally immoral situation.

Which brings us to our main point: absolute morality is conditional, evolving with successive periods of history. And within this absolute is the relative morality of different social classes. For capitalism and the global corporations, the moral imperative can only be the bottom line.

Corporate-driven globalisation of the world economy freed the transnationals from territorial jurisdictions and facilitated the creation of subsidiaries, joint ventures, special purpose entities and trusts to benefit from low taxes and subsidies.
  

Professor Prem Sika, of the Centre for Global Accountability, Essex University, points out that “taxation is targeted by financial engineers who regard it as an avoidable cost, rather than a return to society on the investment of social capital (education, security, healthcare, legal system, etc.).”

In other words, for the corporations the whole issue of taxation (or how to avoid it) is an essential aspect of capitalist accumulation itself and not some form of aberrant, “immoral” behaviour.  

Take the case of food and drinks giant Cadbury-Schweppes. It set up a shell company in Ireland with no office and no employees but with £500 million in cash, which was allocated to different parts of the group. The incentive was a simple one. Corporation tax in Ireland is 12.5% - less than half the rate in Britain.

Under what are known as the Controlled Foreign Company rules (CFC), HMRC tried to collect the missing taxes. But after a series of cases, the European Court of Justice found in favour of the company on the grounds that member states could not block corporations from operating in different parts of the European Union.

Appealing to corporations to behave more “responsibly”, to pay more tax will produce a few, marginal concessions. But it will leave the main issues unchallenged and unquestioned. This because the argument about their morals and ours is in reality about class and power.  

Paul Feldman
Communications editor

Corporate tax scams you may have missed

Protests outside Vodafone shops at the weekend amid claims that the mobile phone company had been let off most of a £6 billion tax bill, highlight the fact that the major corporations ultimately call the shots at the expense of the ordinary taxpayer.

Vodafone’s case is just one example where transnational corporations (TNCs) deploy vast resources to minimise, avoid, reduce or eliminate tax liability. HMRC, who cannot compete at the same level of expertise, usually come off worst when they launch a challenge.

Take the case of food and drinks giant Cadbury-Schweppes. It set up a shell company in Ireland with no office and no employees but with £500 million in cash, which was allocated to different parts of the group. The incentive was a simple one. Corporation tax in Ireland is 12.5% - less than half the rate in Britain.

Under what are known as the Controlled Foreign Company rules (CFC), HMRC tried to collect the missing taxes. But after a series of cases, the European Court of Justice found in favour of the company on the grounds that member states could not block corporations from operating in different parts of the European Union. In 2008, HMRC lost against Vodafone in a similar case. Vodafone was thought to owe about £6 billion; it eventually settled for £1.2 billion.

An extraordinary case highlighted by BBC Radio’s File on Four is that of the Alliance Boots pharmacy and health products group. It is one of more than 27,000 companies registered for taxation purposes in the Swiss region of Zug, equivalent to one for every man, woman and child.

The reason that Burger King, Boots and other corporations are in Zug is simple – the rate of tax on corporate profits is 8.8% compared with 28% in Britain. After a series of mergers, Alliance Boots was eventually taken over by a private equity firm. The company used to pay around £120 million a year in taxes in Britain. One expert reckons the company paid about £14 million last year – an effective tax rate of just 3% on its £450 million plus profits.

Companies can also reduce corporation tax rates by using transfer pricing, which sets the price at which one unit of a group sells goods or services to another unit of the same group in a different tax jurisdiction. Google used this device to avoid virtually any corporation tax on its £1.6bn advertising revenues in Britain.

The capitalist state and governments of various hues are entirely complicit. In Britain, the corporation tax rate was 53% in 1983. It’s now heading for 24%, while some suggest that because of transfer pricing scams, the effective rate is 21%. During the credit-fuelled boom, corporate tax revenues rose to help pay for public spending. They collapsed in 2008 and helped accelerate the budget deficit. Now ordinary people face horrific cuts in services, jobs, wages and conditions as a result.

Professor Prem Sika, of the Centre for Global Accountability, Essex University, points out that “taxation is targeted by financial engineers who regard it as an avoidable cost, rather than a return to society on the investment of social capital (education, security, healthcare, legal system, etc.).”

Globalisation, of course, freed corporations from territorial jurisdictions and facilitated the creation of subsidiaries, joint ventures, special purpose entities and trust to benefit from low taxes and subsidies.

In the Dark Side of Transfer Pricing, Sika adds: “Reducing or eliminating taxes is attractive to corporations as it boosts shareholder value, post-tax earnings and returns to shareholders. It also increases company dividends and executive rewards as these are linked to reported earnings.”

In other words, for the corporations the whole issue of taxation (or how to avoid it) is an essential aspect of capitalist accumulation itself and not some form of aberrant behaviour. There can be no semblance of tax justice so long as the profit system rules the roost.

Paul Feldman
Communications editor