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Cover Stories Series 2013> Taxation Reform> Archive
UPDATED: July 8, 2013 NO. 28 JULY 11, 2013
A Taxing Dilemma
Multinational corporations come under scrutiny for alleged tax dodging
By Kerry Brown

FAIR PLAY: British Prime Minister David Cameron meets attendees of the Global Investment Conference in London on May 9. The conference focused on issues such as promoting global investment opportunities and creating a more equitable tax system (XINHUA/AFP)

The issue of taxation seems to be a dry, technical subject. But it is one that people can get extremely emotional about, as some major corporations in Europe and North America have discovered recently.

Since the global financial crisis broke out in 2008, the issue of taxes that corporations pay has become a sensitive one. In Europe and North America, at least, the feeling is that tax regimes for companies became very lax during the boom years. In the times of high growth, these things were hardly noticed. Everyone was too busy making money, and that created a sense of shared benefit. But once austerity policies started to cause cutbacks on government services in order to reduce massive government budget deficits, views changed quickly and sharply. Evasive tax payment strategies and the creation of complex offshore infrastructure which had grown up to help companies avoid paying taxes became legitimate targets of protest and anger.

Tax havens

Multinational corporations are as prone to seek out highly efficient legal means by which to save them from paying taxes as wealthy people are. For many of them, there is little real clarity about where their services are delivered, and therefore what tax regime they need to observe. Amazon and other large international companies have been able to look around for the most benign domicile to be based.

In the case of Amazon, while its trade might be physically carried out in the UK for instance, it pays taxes according to generous Luxemburg laws. Some countries have even established attractive tax payment regimes for non-local companies in order to bring some of their business there. Ireland, for instance, has a low tax rate for some sectors set up several years ago, and this means there are major international companies that channel many of their profits through the country without doing much business there.

British Prime Minister David Cameron in particular at the Group of Eight Summit held in the UK in June focused on this issue of trying to close tax havens so that major companies were not able to exploit them. One of his key demands was to have greater transparency in revealing how companies use the British Virgin Islands, the Cayman Islands and others in order to get around paying higher tax levels.

At the moment, there are transparency issues in terms of how companies and commercial entities report their activities in offshore vehicles and how they are accountable. Cameron wants similar levels of transparency and divulgence of information on company activity, profits, ownership and tax payments from offshore entities as would be expected by the authorities in, for example, the United States, the UK, France or Germany.

Some would argue that Cameron is proposing more government interference and more bureaucracy in an area where the current structures encourage entrepreneurialism. They state that they will follow local laws for trade activities based on their legislative region, but for other matters they will simply seek the best deal in the global market. They are exercising their right to operate in an international market economy where there are no issues with looking for the best deal.

A governance issue

The problem, however, is that tax payment has never been more politicized. Big, profitable companies that pay only a tiny amount of taxes clash with people's moral intuitions regardless of location. This is why the case of Starbucks was so sensitive in the UK. Early in 2013, the company was accused of paying hardly any tax in the UK in the last few years, despite having over 3 billion pounds ($3.9 billion) in revenue and sales. The company's defensive remarks that it had observed the correct laws were not listened to. Public pressure caused the company to make a one-off payment to the British tax authorities of 20 million pounds ($26 million). Even so, this is hardly a sustainable solution.

Leaving the amount of taxes companies pay up to their goodwill and discretion is an incoherent policy. Why cannot this also apply to citizens? The outcome with Starbucks does nothing to resolve the fundamental issue of how to create detailed, fairer and effective laws that stop this sort of anomaly happening in the first place.

Cameron knows that without an international agreement and international cooperation, nothing will happen to close tax law loopholes and stop companies and people exploiting deals available to them. At the heart of this debate is the clash between morality and law, and creating a common international agreement on this. It might be legally permissible to go to the place that offers the best possible deal, but public perceptions of this now are unforgiving, with activists willing to boycott companies that take this route. For them, the moral issue is straightforward.

If you are undertaking business in a place, then you should pay those subsequent taxes. Trying to muddy the waters is not good enough. With taxes already regarded as such a contentious issue almost everywhere, having what are viewed as successful and profitable corporations shirk their responsibility by channeling their earnings through tax havens is no longer easy for politicians to tolerate. They have had to consider introducing legislation to control this.

There has already been some success in getting greater openness and accountability from specific havens. Luxemburg and Switzerland have reached a detailed agreement on how they report company and account activity. The British Virgin Islands and the Cayman Islands are considering issuing more information about the companies that have registered entities there. But it is likely that corporations and wealthy individuals will start to argue back about the tax levels they are then expected to pay and the uses to which this money is put. Like it or not, this issue is ultimately going to be one of governance, no matter how much governments might be trying to show that it is simply about company and business behavior.

Former British Prime Minister Tony Blair discussed polls taken in the UK about taxes in his autobiography. The results showed that people were willing to pay higher taxes if they felt they were getting better value for money from the state and saw more investment and funding in social services, education and other areas. However, as Blair powerfully pointed out, any politician who tried to win an election promising to raise taxes was doomed. While people might say such well-intentioned things, they were also very negative about the ability of the government to keep its bargain and do sensible things with the extra revenue raised.

Their answer to the poll question therefore was one they would carry into practice in an ideal world. In the world as it is, however, the overwhelming consensus from the public is that taxes are paid to governments that waste too much and therefore cannot be trusted. So why throw good money after bad? The fundamental theory of taxation is that it should be redistributive and progressive—those earning more should pay more, and the money should go into areas of need decided by the state. That is the theory at least.

The author is an op-ed contributor to Beijing Review and executive director of the China Studies Center at the University of Sydney

Email us at: yanwei@bjreview.com

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