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

Our sham democracy needs replacing - and soon

If you are looking around for arguments that boost the case for creating a real political and economic democracy in place of the sham one we live under, then this week has seen them piled one on top of the other.

How about the inability of MPs on the Commons public accounts committee (PAC) to get to grips with the failure of global corporations operating in Britain to pay tax on their profits? Senior executives from Amazon, Starbucks and Google were accused of secretly hiding their profits in tax havens when they appeared before MPs.

MPs admitted that a director from Amazon was “deliberately evasive” about the company’s operations. And when a Starbucks executive told MPs that the coffee chain made no profits in Britain, MPs found the story too incredible for words.

Ultimately, however, PAC members were up against the law. Google operates in Ireland and Bermuda because they offer attractive tax rates. "Like any company you play by the rules [and] manage costs efficiently to offer fair value to shareholders," said executive Matt Brittin.

In response to that, all Margaret Hodge, the PAC chair, could do was to accuse the corporations of “immoral behaviour”. But there’s no morality and certainly no democracy involved here. The bottom line is all that counts. The state created the rules to benefit global corporations and these are what they play by.

Here are two more examples from today that add to the case for change. The same PAC was back in action this morning, reporting that taxpayers were unlikely to get back any of the £66 billion spent on shares in the Royal Bank of Scotland and Lloyds when they were bailed out four years ago.

That’s the equivalent of about a year’s spending on education by local authorities who have been ordered to cut their budgets by 25%. So the taxpayer is left with a load of worthless shares while the bankers continue to pay out record bonuses to themselves. Nice.

Finally, there’s the record low turn-out for the elections for police commissioners which were held yesterday. Clearly, the vast majority of voters find participation in such elections a waste of time. And they are right. There are already local police authorities that are made up of assorted councillors and others. Why add another tier of bureaucracy?

When you add to this the imposition of the burden of the economic crisis – a crisis they did not create – on the backs of ordinary working people, you have to conclude that the current system is “undemocratic and unjust”.

This truth, contained in the initial statement adopted by the Occupy London general assembly at St Paul’s a year ago, embraces all the institutions of rule that make up the British state/political system.

The evidence is that that this system of rule favours the 1% in a variety of ways and actions and, therefore, cannot be considered democratic in the true sense and meaning of the term. Virtually every element of the establishment is now seen as exposed and corrupt. People are searching for alternatives and answers.

We should not accept that this state/political system is the end of history in so far as the story of democracy is concerned. The time is right historically to consider what a real democracy would and could look like.

To this end, we appeal to all those who support democratic change to work together to develop an Agreement of the People for the 21st century in the spirit of the Levellers who fought for democracy during the English Revolution of the 1640s.

A new Agreement should form the basis of a new constitutional settlement that favours the presently powerless majority. It should propose new forms of democratic decision-making that go beyond representation.

Seven organisations are supporting the project to create and fight for a new Agreement of the People which gets under way in London tomorrow. Be there if you can.

Paul Feldman

Communications editor

PFI albatross opens NHS up to private sector

The resource-draining Private Finance Initiative (PFI) foisted on public sector projects by New Labour is helping to create the conditions for the break-up and privatisation of the National Health Service.

The evidence is to be found in two reports over the last 48 hours – from a special administrator appointed following the financial failure of South London Healthcare Trust and today’s report from the Commons’ public accounts committee.

Yesterday, a special administrator recommended that South London Healthcare Trust should be broken up in the wake of its financial failure. The Department of Health should write off £207 million worth of debts built up by the trust driven to the brink of bankruptcy by PFI deals, the administrator said.

It should also provide up to £25 million extra per year to help continue pay for PFI deals. Two of the trust’s three hospitals were built under Labour using PFI funding. The trust plans to slash its workforce over the next five years, from 5,838 whole time equivalents in March 2012 to 4,755 in March 2016.

Administrator Matthew Kershaw said the money spent on PFIs accounted for around a third  of the trust's £65 million overspend in the last financial year. Nine bids had been made to take over the trust’s work. The private sector is ready to pounce, with bids from Virgin Care, Circle, Care UK, Capita and Serco already made.

The PFI albatross is dragging trust after trust into deep financial crisis, at a time when they are supposed to find £20 billion in “efficiency savings” (demanded by the previous government) and when the NHS is being reorganised by the ConDems to create market opportunities for the private sector.

Margaret Hodge, a member of the previous government and now chair of the PAC, presumably saw no irony in agreeing the committee’s report, which says:

“A number of trusts in financial difficulty have PFI contracts with fixed annual charges that are so high the trusts cannot break even. Paying these charges is one of the first calls on the NHS budget and the Department [of Health] is liable for supporting all PFI payments because it underwrites the Deed of Safeguard given to contractors. It already expects to have to find £1.5 billion to bail out seven trusts facing problems with PFI repayments over the remaining life of their contracts - equivalent to £60 million a year… The priority given to meeting PFI annual charges inevitably distorts priorities which is especially worrying at a time when resources are constrained.”

The rising cost of over 650 PFI projects hit £230bn this summer and won’t be fully paid off until 2048, according to a GMB union analysis of the latest Treasury data. Including the £44bn already handed over for PFI schemes up to 2009-10, the public purse will be hit with a total PFI bill of more than £270bn which is almost five times the value of the assets built (£56bn), says the union. “It means that British PFI debt is now equivalent to £9,300 per taxpayer. Annual payments are forecast to break the £10bn mark by 2017-18.”

The way that PFI contracts are framed puts them in a weak position when it comes to renegotiating deals, which can involve interest payments in double figures and exorbitant one-off charges just getting the contractor to change a light bulb. So trusts are locked into paying unaffordable PFI payments.

  

With another 20 or so NHS trusts in dire financial straits – despite an emergency £1 billion bail-out last summer – the private sector is licking its lips. The “failure regime” imposed on South London Healthcare is expected to be used at other trusts, with bids being taken for the continuation of services.

While PFI projects – under which contractors own the assets and lease them to the public sector – began life under the Tory government 1992-97, they were greatly expanded under New Labour by chancellor Gordon Brown. They were seen as a wheeze to build hospitals and schools on the never-never, without showing up as public spending, while giving the private sector a stake. The chickens have come to roost, however, and the NHS is being lined up for auction as a result.

Paul Feldman

Communications editor

New Labour's devastating legacy

Take one struggling NHS Trust, add in an exorbitant build-and-maintain private contract – all this is New Labour’s handiwork – and the result is a financial disaster containing a threat to patient care.

Today’s government announcement that 22 trusts, which run 60 units, cannot afford their exorbitant “private finance initiative” (PFI) payments and have lost financial stability only confirms the worst. For some trusts, annual repayments take up more than 18% of their turnover.

PFI deals, under which the state enters into a cast-iron mortgage-leaseback deal with developers who own the assets and receive an annual fee, were favoured by New Labour for two reasons.

First, the cost of building hospitals, schools and other infrastructure did not appear on the government’s balance sheet (although it involves a state liability). Second, it fulfilled New Labour’s dream of private-public partnerships as an exemplar of 21st century capitalism.

The dream has, inevitably, turned into a nightmare for taxpayers and patients alike. Some hospitals were smaller than they might have been to allow for repayments, while PFI contract costs have become unmanageable. Professor John Appleby, chief economist at the King's Fund think-tank, says that there is already “a drive to keep patients out of hospital”.

The contractors are laughing all the way to the bank, however, as the state is obliged to pick up the tab if the NHS Trusts can’t. Renegotiation of the contracts is virtually impossible because lenders know the government won’t let the trusts go bankrupt.

Official figures show that yearly bills will rise by 75% in the next 18 years. By 2049, more than £70 billion will have been transferred from taxpayers to private investors.

Even taking services like maintenance into account, this sum is far above the £11.4bn value of the building projects.

According to a Commons committee, the taxpayer is paying well over £20bn in “extra” borrowing costs – the equivalent of more than 40 sizeable new hospitals – for the 700 projects that successive governments have acquired under the PFI.

Last month, the Commons public accounts committee found that tax assumptions built into the case for PFI contracts were laughable.

One of the largest PFI investment funds told the committee that 72% of the shareholders of its management company were registered offshore. HICL, a subsidiary of HSBC, which made £38m of profit from 33 PFI schemes paid just £100,000 in UK tax. Ultimate ownership of at least 90 projects has been moved offshore, potentially avoiding tax payments when they are sold on again.

The PAC report says that the “buoyant and profitable” secondary market in PFI deals. “We suspect that initial investors are able to make excessive profits from selling PFI shares, yet we lack the information to know for sure,” MPs admitted.

Figures from the National Audit Office suggest that up to £4bn has been paid in fees to financial consultants, lawyers and others to get the projects off the ground. The head of one big PFI investment fund earned £8.6m last year.

Health Secretary Andrew Lansley said: "The truth is that some hospitals have been landed with PFI deals they simply cannot afford. "Like the economy, Labour has brought some parts of the NHS to the brink of financial collapse." Yet PFI goes on and on.

Since the May 2010 election, however, the Conservative-Liberal Democrat coalition government has signed 34 contracts with a capital value of £1.8bn ($2.9bn), according to the Treasury. Hundreds more contracts are in the pipeline for schools and other projects.

The continued commercialisation of the NHS, with the direct injection of competition by the Coalition, is bound to favour healthcare corporations. Like New Labour before them, the Tories know how to favour their friends and keep capitalism happy.

Paul Feldman

Communications editor