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The real corporate tax scandal

Western governments have finally begun to pay close attention to tax avoidance by multinational corporations in rich countries. But where, Cambridge Judge Business School’s Professor Paul Tracey asks, does that leave poor countries, where the effect is arguably much more devastating?

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Professor Paul Tracey

Professor Paul Tracey

In the midst of last month’s investigation by the UK Commons’ Public Accounts Committee into PriceWaterhouseCoopers, the committee chair Margaret Hodge concluded there was “promotion of tax avoidance on an industrial scale”. While the company was not accused of breaking any laws, and while PwC maintain that they operated within the laws of individual jurisdictions, there was a general acceptance that the complexities of the tax system leave it open to confusion to say the least.

What is certain is that Western governments have come out fighting on the subject. In the recently declared war on corporate tax evasion in Europe and North America, US technology companies have taken a particular beating. First President Obama called them “deserters” for changing the country in which they are officially domiciled in order to cut their tax bill. Then the European Commission decided to investigate Apple for its tax arrangements in Ireland, suggesting that these may constitute “illegal state aid”.

In the UK, as in other rich countries, politicians have come to realise that being seen to be tough on corporate tax avoidance is a vote winner. At last year’s Conservative Party conference in Birmingham, Chancellor George Osborne sharply criticised multinational technology companies for going to “extraordinary lengths” to avoid paying tax. Adopting an almost Churchillian tone, he went as far as to say: “If you [corporations] abuse our tax system, you abuse the trust of the British people”.

New legislation – dubbed the “Google Tax” – was promised to ensure that revenue earned in Britain would be subject to UK corporation tax rather than transferred abroad to be taxed at lower rates.

Double standards?

These developments are not before time and surely to be welcomed. And yet there is another corporate tax scandal that is significantly more pernicious than tax evasion by US technology companies in Britain – tax evasion through the use of tax havens by multinational companies, including British ones, in the poorest countries in the world.

The scale of the problem is massive. According to a report made available by the OECD, developing countries “are losing to tax havens almost three times what they get from developed countries in aid”. A recent study by ActionAid suggested that almost half of corporate investment by large companies is routed to or through a tax haven (disconcertingly, the UK was found to be “responsible for one in five tax havens” identified in the report). Moreover, 98 of the FTSE100 were shown to use tax havens, 78 of which operate in developing countries.

The net result is that the places with the lowest per capita income in the world continue to be deprived of resources they so badly need – with tens of billions of dollars worth of tax revenue siphoned elsewhere every year.

And yet the voices of social movement activists and non-governmental organisations (NGOs) in poor countries do not appear to resonate with UK politicians, while the UK media appears less outraged by tax evasion in poor countries than in rich ones. A cynic might suggest that this is because the citizens of poor countries do not have a stake in British elections or influence the fate of media empires.

Addressing an injustice

It is important to acknowledge that tax evasion in poor countries is not straightforward to address, complicated in many instances by local corruption and poorly functioning institutions. But there is so much more that policy makers in the UK and other Western countries could and should be doing.

UK politicians are justifiably proud of becoming the first – and to date only – G8 country to meet the UN target of spending 0.7 per cent of Gross National Income on aid for international development. This was a decision that, interestingly, was not especially popular in political terms. These same politicians who had the courage to make this bold commitment on international aid now need to go further and bring UK multinationals to account by ensuring that they act as global citizens and pay their way in the world.

Such a move would set a powerful example for other governments to follow. It would also be an important first step towards rectifying one of the most outrageous injustices of global capitalism.