by Andrew Rawnsley
This week, the prime minister gets to be a president: The president of the G8 summit that opened at Lough Erne in Northern Ireland yesterday. In the eight years that have passed since Britain last hosted the club, much has changed. When David Cameron gathers his fellow leaders together for the summit’s “family photo”, all the faces will be different. The state of the world economy is dramatically transformed.
In the run-up to the summit, Cameron has identified global tax avoidance as one of his key priorities and talked a good game about tackling tax havens. Yesterday, he told Patrick Wintour and Nick Watt of the Guardian that he would end the era of “secretive companies in secretive locations”. His motives might provoke us to some cynicism. But whatever his motives, he was not wrong to identify corporate tax avoidance as one of the most baleful diseases of modern capitalism. As the economist Joseph Stiglitz has observed, globalisation has given multinationals “the Plastic Man capacity to be everywhere and nowhere at the same time”. They are everywhere when it comes to selling their goods and services; they are nowhere when it comes to paying taxes on their profits.
By its very nature, tax avoidance can only be estimated, but reasonable guesses put the cost in the trillions. What we lose to it makes welfare fraud look trivial. If there is a group most deserving of the label “benefit scrounger”, it is these parasitical companies. They rely on all the advantages that come from operating in civilised societies: The opportunity to make returns for their investors; the rule of law to protect their businesses; the courts to resolve their commercial disputes; the roads and trains that bring their customers to them; the police and fire services that will come to their rescue in an emergency; the schools and universities that have educated their employees; and the health service that treats their staff when they are sick.
Yet they decline to pay their fair subscription to be part of the society from which they derive all these benefits. The whole edifice depends on tax havens and the webs of shell companies, artificial entities, fake transactions and sham trusts. Although many of the schemes are incredibly complex, the basic concept is very simple. You make your profit in one place; you bank it in another place where taxes are ultra-low to nonexistent.
It is costing the countries represented by the G8 a fortune. It is the left that tends to voice most anger about this. One of the consequences of tax havens is that they rig markets to the benefit of monopolistic multinationals at the expense of striving domestic entrepreneurs. Your independent, local coffee shop may well serve a superior beverage to Starbucks but your local business is in a very unfair fight.
George Osborne once talked about aspiring to make Britain a place for “the makers”. Tax havens bias markets in favour of the manipulators at the expense of the makers. They incentivise large companies to spend more time and imagination devising devious schemes to avoid tax than to make better or more competitive products for their consumers.
There are plenty of ideas around for doing something about it. An international agreement on the unitary taxation of multinationals would allow countries to tax them where they are really making their profits rather than where they pretend to be making them. If they were of a mind to be truly radical, the G8 could agree a reasonable definition of a tax haven and declare that any financial institution or company that wants to operate in their jurisdictions is banned from having subsidiaries in tax havens or making transactions through them.
Ninety eight of the companies in the FTSE-100 use tax havens. One of them is Sainsbury’s. You cannot imagine a more domestic company and yet the Fair Tax campaign has identified nine tax haven subsidiaries used by the supermarket chain.
While spouting indignation about tax avoidance, politicians fawn on Eric Schmidt and his ilk. One remedy available to the British government, which could be implemented tomorrow, would be to declare that there will be no jobs as government advisers, knighthoods or any other conferment of approval for the bosses of these companies that don’t pay their fair dues. Nor any public sector contracts for corporations that practise aggressive tax avoidance.
Another barrier to meaningful action is that just about every country represented at the G8 is hypocritical on the subject. Contrary to popular imagination, the most important tax havens are not on palm-fringed islands. Luxembourg is a member of the European Union. Monaco shelters under the skirts of France. America has what are effectively onshore tax havens in Nevada, Wyoming and the fine old US state of Delaware, home to Barack Obama’s vice-president. Under New Labour, London became a tax haven for many of the world’s billionaires and remains so under the coalition. What we will probably get out of the summit is some commitments to more transparency so that tax authorities have a better chance of tracking the true ownership of the trusts, shell companies and other opaque vehicles which are hiding the wealth of corporations and rich individuals. One large question for the summit, and one big test of Cameron’s negotiating skills, is whether information would be available just to tax authorities in the rich states or shared with the developing countries that suffer worst of all.
Some of the pre-summit mood music has not encouraged optimism that it will be worthy of the name success. The prime minister and his staff have been trying to depress expectations of what it will achieve. There is a suspicion that he has a lowly ambition limited to squeezing just enough concessions from the tax havens and other G8 leaders to allow him to write a self-congratulatory communique. That will not be adequate. The international tax system doesn’t require a bit of tinkering here and a token measure there, accompanied by some platitudinous rhetoric to try to soften public anger. Only fundamental and radical reform will start to put an end to this global scandal. The Guardian
