SwissLeaks: Why Corporate Tax Scandals Won’t Go Away

One year ago today, a team of international journalists published details of hundreds of secret bank accounts held by a motley crew of wealthy individuals in the Swiss banking arm of the HSBC.  Altogether the accounts were hiding more than $100 billion out of the sight of tax authorities.

$100 billion sat idle while sluggish economies around the world were – and still are - desperate for productive investment. If tax were paid on the income that this hidden wealth generated, millions of dollars more would have been available to governments for vital public services like schools and hospitals, or medical research and infrastructure investment. For example, the SwissLeaks scandal revealed that wealthy Latin-American residents amassed over $52 billion in these secret bank accounts between 2006 and 2007. This is equivalent to 26 per cent of the region’s total public spending on health.

The scandal made headlines around the globe but it was not the first – and it has not been the last by a long stretch.  With every new scandal politicians line up to express their outrage.  Yet despite their rhetoric they have still not taken the action needed to stop - or criminalize - the schemes accountants and wealth managers’ use to reduce their wealthy clients’ tax bills.

Some of these schemes are illegal – but many are perfectly legal under current global tax laws. Both result in governments being cheated out of tax revenues.  Unless governments change the rules - and their attitudes - to corporate tax abuse, these scandals will never go away.

For example, US-based digital corporate giant Google has been at the centre of a media storm for the £130m tax deal it recently agreed with the UK revenue service. The deal means Google paid just £200 million in tax on the estimated £7.2 billion it made in profits in the UK since 2005. Google used the so-called double Irish and Dutch sandwich tax avoidance scheme, whereby profits are routed first through an Irish subsidiary company, then to a Dutch subsidiary company and finally to a second Irish company headquartered in a recognized tax haven – in this case Bermuda. As Google points out, this is legal under UK law and permissible under international tax rules. Google is not alone in the manner in which it manages its tax affairs.

Why are governments so reluctant to take the tough action needed on the world’s most prolific tax dodgers?

In May 2014, Oxfam released Business among Friends: Why corporate tax dodgers are not yet losing sleep over tax reforms, which critically appraises international efforts to clamp down on corporate tax dodging. The paper argues that international corporate tax rules are rigged in favour of commercial interests who successfully pursue their agenda at the cost of the public interest. Big corporations use their vast resources to   lobby governments on issues and policies that affect their business interests.

While it would be misplaced to suggest that corporates should not have a voice on the issues concerning them, the excessive influence they now wield is undermining our democratic institutions and skewing government policy-making in their favour. This is happening at the cost of the very people who these same governments are supposed to represent.  

For example, in the second quarter of 2015, Google spent a whopping $4.62 million on lobbying efforts across the range of its policy interests, including international taxation. More generally, the most prolific lobbying activities in the US are on budget and tax issues; public resources that should be directed to benefit the whole population, rather than reflect the interests of powerful lobbyists.

In the international arena, Oxfam has long been concerned about the unjustifiable and disproportionate influence that powerful business interests have on OECD member governments’ tax policy making, particularly when compared to the lack of influence wielded by poor countries.

While all countries suffer because of corporate tax dodging, poorer economies are hit hardest because corporate tax revenues comprise a higher proportion of their national income.  Yet the majority of developing countries have not been allowed an equal say in decisions on international taxation. They have to work within the system created and agreed by rich governments, because they are not members of the G20, or OECD, which lead key international negotiations on tax rules.

A consequence of governments working to promote vested interests is large-scale tax dodgers acting with seeming impunity, and corporates using tax havens as entirely common place.  Nine out of ten of the world’s biggest companies have a presence in at least one tax haven. Meanwhile, corporate investment in tax havens almost quadrupled between 2000 and 2014.

However there are signs this could all change. 

High profile publicity surrounding tax scandals and the public outrage that has followed indicates that how a company manages its tax affairs carries a real reputational risk. Companies are beginning to realise they need to win back the trust of their customers and investors.

Companies must re-conceive their tax responsibilities and, as with many issues of corporate social responsibility, values must shape their behaviour. They need to start embracing ‘responsibility beyond legal compliance,’ and ensure that their conduct on tax reflects their broader duties to contribute to the public good that enable the development of the type of societies in which profitable, sustainable companies can thrive.

In a recent paper, Oxfam, ActionAid and Christian Aid suggested actions that companies can take. For example, companies could publish country-by-country reports before being legally required to do so; or publish a comprehensive tax strategy that is linked to corporate responsibility (or sustainability) strategy.

Companies must also “preach what they practice”. If they are truly responsible companies, they should ensure that their lobbying positions are in line their corporate responsibility positions. On taxation, this means they should support global efforts to make tax rules more progressive and fair – and not work to undermine them.

Ultimately it is the responsibility of governments to show leadership and greater fortitude in protecting the public interest against large-scale tax abuse by creating fair and consistent global tax rules. Even Google say international tax systems need reform.  

How these reforms are made is of critical importance. Tax reform is not is not just a rich country issue. Negotiations at the UN’s Financing for Development Conference in Addis last year went to the wire with an astonishing final stand-off between rich and poor countries  on the creation of a global tax body that would give all countries - not just the rich and powerful - an equal say in how the global rules on taxation are designed.

The battle became as much about the demand for systemic change and a shift in political governance to address the power imbalance as the creation of the body itself.

Developing countries lose around US$100bn in tax revenues each year as a result of corporate tax avoidance schemes that route investments through tax havens. This does not include the full set of tax avoidance schemes used by multinational companies nor the billions of dollars that corporations gain because of overly generous tax incentives.

The global tax system is now designed to pit countries against each other in a race to the bottom on corporate taxation. Consequently, the offshore economy has been allowed to grow two-and-a-half times faster than global GDP from 2000-14.  But it is not only the poorest countries that lose out to corporate tax dodging; all citizens around the world are losing out. In 2012, US multinationals alone shifted $500–700bn, or roughly 25 percent of their annual profits, mostly to countries where these profits are not taxed, or taxed at very low rates. Among the biggest losers in the G20 are the US, UK, Germany, Japan, France, Mexico, India, and Spain.

All governments must take action to end the ‘race to the bottom’ that encourages developing countries to compete with each other to offer the lowest tax environment, driven by harmful and preferential tax regimes. This must include tackling the role of tax havens, for which there are currently no reform plans. In 1998, the OECD’s Harmful Tax Competition report proposed that ‘countries consider terminating their tax conventions with tax havens’. Unfortunately, OECD member countries that operate as tax havens, together with other powerful members, succeeded in blocking further progress on the report’s findings and recommendations.

Putting a stop to the seemingly endless stream of corporate tax scandals is possible but it will require a new generation of more fundamental reforms than are on the table at the moment; and a rebalancing of power in global tax negotiations. The creation of a new global tax body that includes all governments on an equal footing would go a long way to redressing this balance and delivering deeper reforms that are so desperately needed for the benefit of all.

What you can do now

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This entry posted by Claire Godfrey, Oxfam Global Policy Lead, Even it Up Campaign, on 8 February 2016.

 

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