Jonathan Fisher QC has an article in The Times this morning that suggests that he would welcome HSBC prosecutions. The Times paywall is one most people will not wish to penetrate, and to some degree doing so in this case is not what matters. Who is saying this is what matters.
Jonathan Fisher is a barrister who, according to Wikipedia is :
a London barrister specialising in corporate and financial crime, proceeds of crime and tax cases. He is also a Visiting Professor at the London School of Economics.
You might think he has something to gain from a prosecution.
More important still, he’s close to the Conservative Party.
So my question is to ask if he’s dropping a subtle hint? I think he might be.
According to elite state agents Knight Frank the rich are getting richer, and are in London:
London has been home to more of the ultra-rich than any other city for the past three years (4,364 in 2014), with New York in second place.
London should still be in the top spot 10 years from now, Knight Frank said, but Singapore will be snapping at its heels, with 54% growth in its wealth brigade over that period, against a 21% rise in the UK capital.
Let’s not mention the domicile rule for a moment, and let’s instead look at what the rich are, apparently worried about, which is:
Number two on their list, after maintaining the dynasty, is wealth taxation.
And rightly so.
Jolyn Maugham has provided an excellent analysis of the Court of Appeal decision in the Ingenious case.
His analysis is more interesting though. As he says:
There is a world of difference between HMRC recognising that there is no legal impediment to it acting in the public interest by enhancing transparency – and HMRC actually acting in the public interest. The former can be (and hopefully now has been) accomplished in consequence of the Court of Appeal’s decision and several brutal and public Hodgeings. But we get to the latter only through internal cultural change. Let’s hope we now see some.
I agree with my learned friend.
Some good work by Transparency International in the UK is reported by the FT today. As the FT notes:
The secrecy surrounding foreign owners of high-value London properties has long given rise to suspicions of hidden corruption and money-laundering.
Now an analysis of official data has shown that more than 40,000 London properties are held by foreign companies, of which almost 90 per cent are incorporated in tax havens, such as the British Virgin Islands, that do not require them to disclose ownership information.
Although many wealthy investors use offshore shell companies for legitimate reasons, the extensive use of so-called secrecy jurisdictions has raised questions about what some purchasers are trying to hide.
Three things are of note.
First is the use of the term secrecy jurisdiction. I introduced this to use in 2008. It’s now widely used. We are changing the terms of the debate.
Second, secrecy is the key here and it is secrecy that has to be shattered.
Third, there is an answer to this problem of secrecy, and it is really quite simple. For reasons that I consider quite absurd it is not considered necessary for a foreign company that owns property in the UK to be registered at Companies House as if it is undertaking an activity in this country. That makes no sense at all: quite clearly it does have a presence in the UK, through the property it owns, and it may be undertaking what I consider to be a trade here (although pedants will say that receiving a rental income or managing property does not constitute trade, but that is merely an excuse).
So, the answer to the problem of finding out the beneficial owners of these companies is simply solved by requiring that any company not incorporated in the UK that owns land or buildings in this country must be registered with Companies House. That would then require three further things.
First, in the near future its beneficial ownership would have to be disclosed.
Second, it would have to file accounts in the UK, and so become responsible for its actions in this country.
And, third, if it did not comply with these requirements we could require by law that the company could be struck off the Register of Companies and its property in the UK would become forfeit, and so pass to the Crown, meaning it could be sold for public benefit.
If that does not release the necessary information on who the beneficial owner of a property is, then at least we will have the property to sell instead for public benefit. That may not answer all questions, but it will certainly be some compensation.
What beats me is why such straightforward answers to relatively simply solved problems cannot be proposed for use in the UK by those with the power to enact them.
The FT has noted today that India is introducing tough new laws on tax haven abusers as a reaction to the HSBC scandal.
In a sense this is odd. For a long time the story in India was its refusal to engage with the fact that this data existed and to even formally request a copy.
Now, years after that was the story people are angry. It’s not dissimilar to the pattern here, where a few of us have been writing about HSBC and its problems for seven years or so.
But it makes a point. It’s not change that matters, per se. Change of perception on HSBC, tax havens and tax abuse has been happening amongst a few for a long time. What appears to be different now is the pace of change. This is increasing, rapidly.
That’s the good news.
The task now is to focus this anger. So far the attention remains on a relatively small number of people who abuse tax havens when the big issue is the domestic tax gap. It’s certainly true that there has been serious offshore abuse, but domestic abuse is in my estimate at least ten times greater. It’s also widespread. Take this graph from the IRS reproduced by the Tax Justice Network in the last few days based ion 2011 work on under-reported types of income:
When there is no information exchange on a domestic data source the rate of non-compliance in the US is as high as 56%.
That’s where our tax gap is.
We’re gaining momentum on the issue of tackling tax abuse, but until the cancer in our own economy is tackled we’re just dealing with peripheral symptoms. We need the same rate of change on this issue as we do on tax haven abuse.
This email arrived this afternoon:
Public Accounts Committee
Informal note to the media
Subject: Tax avoidance and evasion: HSBC
The Committee has decided to call the following witnesses to give further evidence to this inquiry:
Monday 9th March (Committee Room to be confirmed)
Stuart Gulliver Chief Executive, HSBC Holdings plc (confirmed)
Chris Meares former Group General Manager and CEO, HSBC Global Private Banking (confirmed)
Rona Fairhead Independent non-executive Director, HSBC
At approximately 4.15pm:
Edward Troup Second Permanent Secretary and Tax Assurance Commissioner, HM Revenue and Customs (confirmed)
Dave Hartnett former Permanent Secretary for tax, HM Revenue and Customs
The Committee previously took evidence from HMRC on this subject on 11 February 2015.
The words ‘cats’ and ‘pigeons’ came to mind.
And it will be great to see Dave again……
As the FT reports this morning:
Northern Ireland’s devolved government faces its biggest overhaul in 15 years as politicians and officials brace for the arrival of long-delayed public spending cuts.
Those cuts are the price Northern Ireland has to pay to introduce the tax competition that its politicians wish for with the Republic of Ireland. I have long warned that this policy is little short of economic madness, and I think I’m about to be proved right.
Edmund Phelps was the 2006 Nobel laureate in Economics and is director of the Center on Capitalism and Society at Columbia University. He argues in the FT this morning that the:
slowdown [in European growth] resulted from narrowing innovation. Even in the postwar years, innovation in Europe was feeble by past standards. In the 1960s, it slackened again, leaving the continent largely dependent on America for new ideas that would generate further productivity growth. But in the 1970s American innovation, confined to Silicon Valley, waned in the aggregate. The pool of past American advances on which Europe could draw would narrow to a trickle and lead to the productivity slowdown on the continent in the late 1990s and which came later to Germany.
This is an idea I have put forward on this blog, often.
The simple fact is that the need for the goods and services that the market supplies has been, to a very large degree, satisfied by the current state of technology given the current state of wealth and income distribution in Europe and there is little or no chance of some new technology coming along and changing that any time soon, not least because no one is investing to make that happen.
In that case two things follow. The first is the rise of the rentier economy.
The second is the decline in real wages. As rentiers extract more from the economy there is less left for wages and no disruptive technology to redistribute the balance.
Unless, of course, we have a Courageous State to do the job that would, firstly, realise that when the private sector has ceased to innovate it falls to the state to do so, and secondly would realise that this is the only way in which the real, and growing, needs of people can now be met in the future, and that this is the key to the real prosperity based upon wage growth that is fundamental to the well-being of any society and economy.
As Economia magazine, and many others, have noted:
The majority of the British public thinks it is unacceptable to avoid paying tax, according to a new poll by YouGov
In total, 59% of the UK public thinks that tax avoidance is morally wrong, making no distinction between avoidance practices and illegal tax evasion. Only 32% think that it is acceptable to avoid paying tax.
The social profiling of the opinion is interesting:
Split between different political parties, Labour, Green and UKIP voters are more likely to disagree with tax avoidance, while Conservative and Lib Dem voters support it by a small margin.
Respondents were also split by social class. Those in “upper-middle class” were much more likely to support tax avoidance than people from “working class backgrounds”.
But more interesting still are two things. The first is that this means that most people in the UK are inclined to agree with tax barrister David Quentin when he argues:
Th[e] vision of tax avoidance as a dignified and cerebral difference of opinion over legal interpretation is a radical romanticisation. In an avoidance situation the propositions of fact are just as likely to be false as the propositions of law. Take for example the reliance placed by Chris Moyles, famous DJ, on the false factual proposition that he was a used car dealer for the purposes of a tax avoidance scheme. Or take the example of Amazon, whose tax avoidance relies on the factual proposition that its Luxembourg and UK entities have operations neatly split into trading on the one hand and auxiliary functions on the other, when in reality the operations of the two companies are so mixed up together that one of them has been found liable for the other one’s tort.
To which he adds:
So perhaps rather than bemoaning the failure on the part of activists and journalists to distinguish between avoidance and evasion, as if it was all very clear and rational to those in the know, those who promulgate these scholastic taxonomies could try to come up with a compelling reason why there is one category of tax lie that is treated by the criminal law as fraud, and another category of tax lie which does not even attract a civil penalty.
I am sure most people would think that a very good use of the Oxford Centre for Business Taxation’s time, but I don’t see it happening any time soon.
Secondly, that the government has noticed that tax avoidance and tax evasion are now linked in the public mind – and rightly so for both have the sole aim of cheating it of tax – is now apparent. As they said in an announcement is made in the last few days:
Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. Tax evasion is when people or businesses deliberately do not pay the taxes that they owe and it is illegal.
The implication is obvious in that announcement where they say:
The vast majority of UK individuals and businesses pay the tax that is due. However, there is a small minority who don’t.
This imposes an unfair burden on the honest majority and prevents money from reaching the crucial public services that need it. We want to stop people cheating the tax system and collect more of what’s owed.
Note the use of the word ‘cheating’. The language of the tax justice movement, which has deliberately, and correctly, linked these two actions by using common language for both is now being used by government.
But that then, to go back to another David Quentin blog, what this also means is that a new definition of tax avoidance as deliberately taking risk as to the outcome of a transaction is right and proper, and lets us dismiss, instantly, those who argue that putting money in an ISA is tax avoidance. And this has real policy implications, as David notes:
If we are going to penalise tax avoidance when it fails (& I strongly believe that we should) we should penalise all tax avoidance that fails, and not just a very narrow and wholly arbitrary subset of tax avoidance that fails for the specific reason that it meets the General Anti-Abuse Rule criteria. Indeed to my mind the stuff that requires GAAR to defeat it is less abusive than the kind that is based on a plain lie.
This is radical, but it seems to me important: we have to realise what we are up against before we can tackle it.
But in the meantime, as David notes, some tax academics would rather deny this. I wonder why?
The East Coast main line was privatised, again, yesterday.
After five years in public ownership, in which it was one of only two train franchises to make a positive contribution to the UK Exchequer, paying a total of £1 billion to the Treasury during that period, it was let to Virgin and Stagecoach.
I am aware that these two companies are meant to pay a significant sum for the privilege of operating this route.
I’m also aware that they will, supposedly, invest considerable sum in new trains during this period but let’s be candid: this is a charade because the trains will be leased and the net beneficiaries will be the financial services industry.
The reality is, as the vast majority of the UK public who want rail renationalisation realise, that these goals could be better, more cheaply, and effectively achieved under state ownership where the cost of capital is almost negligible and where, therefore, improvements could be had at much lower cost than anything the private sector can deliver, which saving could then be passed straight on in lower fares.
That though was not what the government wants. The government wants dogma. This privatisation is failed dogma in action. Lets hope that this is the last time we see this: the time for rail renationalisation has arrived.
Mark Blyth is the Eastman professor of political economy at Brown University and the author of Austerity: The History of a Dangerous Idea.
A recent article by him relates the speech he made to German Social Democrats on being awarded a prize in Germany for that book (which I admit I have not read). This, as he noted, presented him with a dilemma, because German Social Democrats have been as guilty as others of demanding austerity in Europe, and this, he thinks is the opposite of what they should have been doing.
As he noted in the acceptance speech for his prize:
What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.
That’s a remarkably accurate summary of the neoliberal experiment, its enforcement and, by default, the consequent sidelining of politics.
And as he added:
Today it is a profound irony that European social democrats worry deeply, as they should, about the investor protection clauses embedded in the proposed Transatlantic Investment Treaty with the US, and yet they demand enforcement of exactly the same creditor protections on their fellow Europeans without pausing for breath for the money they “lent” to them to bail out their own banking systems’ errant lending decisions.
Something has gone badly wrong when social democracy thinks this is OK. It is not. Because it begs the fundamental question, “what are you for — if you are for this?” The German Social Democrats, for we are all the heirs of Rosa Luxemburg, today stand as the joint enforcers of a creditor’s paradise. Is that who you really want to be? Modern European history has turned many times on the choices of the SPD. This is one of those moments.
And he was, thankfully, unambiguous in his message:
It’s great that my book has helped remind you of the poverty of these ideas. But the point is to recover your voice, not just your historical memory. Your vote share isn’t going down because you are not shadowing the CDU enough. Its going down because if all you do is that, why should anyone vote for you at all?
I hope that reading my book reminds the SPD of one thing: that the reason they exist is to do more than simply to enforce a creditor’s paradise in Europe.
Substitute Labour for SPD and that speech could have been made here in the UK instead, and wholly appropriately.
It is not the left’s job to enforce a creditor’s paradise in Europe.
But when will the old social democratic parties take note?
Hat tip: Andrew Dickie
The coalition’s ambitions to promote the UK’s £60bn pharmaceutical sector as a high-growth industry have suffered a blow after drug output dropped by a quarter during the lifetime of the government despite an expanding market at home.
The is significant: the pharmaceuticals industry is supposedly one of the UK’s success stories and was a plank on which the rebalancing of the economy was to be built. And it is not happening.
But this is the consequence of the UK’s ‘finance curse’. Just as an over developed extractive industries sector tends to, first of all, squeeze out all other significant activity in an economy and then reduce its growth potential the same is true of the finance sector, and we are very clearly seeing that happen in the UK economy now. Finance is squeezing out all other economic activity from the UK, and we are all paying the price for that.
There is much more on the finance curse here.
In an editorial this morning the FT says:
More than two centuries after the introduction of income tax by Mr Pitt, his successors should end the egregious situation where the wealthiest enjoy the privileges of UK residency without paying their fair dues to the exchequer. The anomaly of non-dom status cannot be defended. It should be scrapped.
There’s not a lot to add to that.
The UK’s fund management industry is “ripe for investigation” because of “an alarming lack of transparency that surrounds [its] pay and practices”, the influential Institute of Directors said on Sunday.
Simon Walker, director general of the IoD, said “uninterested” financial regulators should wake up “to avoid another scandal of epic proportions.”
I agree, entirely. This is a blog I wrote on pension fund accounting (a wholly related issue) in January 2014, but as I noted, the thinking had developed over number of years before that time:
I wrote most of what follows on the need for massive accounting reform in the pensions industry to make this sector accountable to those who provide it with its funding and who are dependent upon it in 2009. I updated it a bit in 2012, and nothing then came of the idea; I can’t now recall why. It was some thinking for a research project that has not happened, and is not now on my agenda and which I have no time to pursue.
However, it remains highly relevant, not least in the light of the comment by Polly Toynbee in the Guardian today on the government’s failure to cap pension costs which will leave the vast majority of people in this country open to continuing abuse from the pensions industry.
So I now offer the idea – for what I called ‘pensionholder’ reform for others to pick up if they will.
I got a statement from my pension fund recently. It was a depressing read. I will be impecunious in my old age: the fund have not managed to make investment returns since time immemorial; the amount I have paid in over the years seems hardly to have grown despite the tax relief the fund supposedly enjoys, and worst of all I am offered no explanation of any sort at all for this state of affairs.
It is the last fact that troubles me most. I entrust a pension fund with my money and, to be candid, I get nothing in return. If I invested my money in a company I would expect to get a full set of audited accounts from them each year. Implicit in that relationship with a company in which I invest is the understanding that the directors are acting as steward for my funds and must account to me, in some detail, about what they have done with it.
So a company tells me about who runs the show – and what they are paid, in considerable detail. They tell me what they are seeking to achieve, and even if I know a lot of that is spin I also know that there is some credibility underpinning it in most cases.
They tell me how they have traded, what they trade, in some cases where they have trade (although I usually want to know more about both what and where they trade). I know what costs they incur, how many people they employ and what they pay them, at least on average. The profit or loss is declared and I know if tax is paid. I also get a balance sheet to show me how the funds are invested on my behalf – and even if they have no idea who I am and probably care less the point is I get all this data. And I appreciate it.
But if I give my money to the tax preferred pension fund that are meant to manage it for me, with state endowed tax preference built into the relationship I get none of this. I am told the value of my fund and if it has gone up or down, and how much of that is due to me paying cash in. I am told what they will pay me back on the fund, which ludicrously is always less than it is supposedly worth – by a margin of well over 20% on the current statement, making a mockery of any value given. And then I am told that if the fund were to grow using wildly optimistic forecasts which seem to bear no relationship with past performance I might bet a tiny pension in many years time that has the sole effect of alienating me from the entire process.
The pension reporting conundrum
Why is this? Why is it that when a company is required to account to each and every shareholder – even if they have a minute holding – the data I get from a pension fund on which my future well being might depend is so pitifully small? And why do I know nothing at all about what this fund does to make the return I enjoy?
The scale of the issue
We all know that stock markets have failed badly of late. We all know that there is demand that management be held to account for what they do. But the reality is that I, like most in this country, engage with the stockmarket (when I have to) through the offices of a third party – a pension fund – run in turn by a company that is itself quoted on the stock market – and they don’t even send me their own accounts which I’d get as a shareholder. I’m far from being alone in this situation. Up to £70 billion a year has been paid into UK pension funds. Almost half of that came from voluntary contributions. Total value of current UK defined contribution pension funds to which these contributions are made may be £450 billion (August 2009 data) . These are the funds I am worried about: the sort where the investor takes the risk if things go wrong and so needs the maximum information on what is happening in their fund. Despite this even people like PIRC (Pensions Investment Research Consultancy) place little or no emphasis on reporting to shareholders when they discuss the crisis of governance in the City that the current financial climate has exposed.
I am not happy about that. I know that unless there is accountability there is moral hazard: that is the phenomena where a party (in this case the pension fund) is insulated from risk and so behaves differently from the way it would behave if it were fully exposed to that risk. The risk would be the challenge to pension fund management that would arise if we knew just what they were doing for us.
The information we need
So what information do we need as pension fund holders to ensure that the funds in which we invest are truly accountable to us for what they do, always remembering that if we held them to account for that this could in turn create the pressure to hold the City to account for what it does, so creating pensionholder capitalism?
I suggest the following would do for starters, to be sent to evert pensionholder every year as if they held shares in a company for whom such accountability is, of course normal:
1: Who runs the fund
1.1: The name of the company
1.2: A summary of their accounts
1.3: Full details of where and how their full accounts can be obtained
1.4: The name of the fund in which the prospective pensioner has invested
1.5: Where the constitution of that fund can be obtained from, and how
1.6: The names of the individual pension fund managers responsible for the fund and for each such manager:
1.6.1: Their age
1.6.2: Summary CV
1.6.3: Qualifications to undertake the task entrusted to them
1.6.4: Remuneration, split between basic pay and bonuses
1.6.5: Any other appointments they have
1.6.6: Any conflicts of interest they might have e.g. personal shareholdings
1.7: The method of changing the fund managers available to the prospective pensioner
2: What the fund has done
2.1: What its income was in a year, split between:
2.1.4: Hedge funds
2.1.5: Private Equity
2.1.6: Profits and losses (each stated separately to come to a net disclosed figure) from trading investments split between
184.108.40.206: Equity shares
220.127.116.11: Corporate bonds
18.104.22.168: Government bonds
22.214.171.124: Cash related activity e.g. foreign exchange trading
2.1.7: Income from other sources
126.96.36.199: Stock lending
2.2: Volume of trading
2.2.1: Gross purchases and sales of each of the following netted to produce a net movement
188.8.131.52: Equity shares
184.108.40.206: Corporate bonds
220.127.116.11: Government bonds
18.104.22.168: Hedge Funds
22.214.171.124: Private Equity
126.96.36.199: Cash held in other currencies
2.3: Costs of trading
2.3.1: Split by category, as noted above
2.4: Movements in value of assets in the year, not yet realised
2.4.1: Increases and decreases in value for each of the following, each then netted to a total
188.8.131.52: Equity shares
184.108.40.206: Corporate bonds
220.127.116.11: Government bonds
18.104.22.168: Hedge Funds
22.214.171.124: Private Equity
126.96.36.199: Cash held in other currencies
2.5: Administration and other costs
2.5.3: Overhead costs
2.5.4: Management fees to parent institution
188.8.131.52: NB if the previous three categories are included in a management fee an indicative split of the management fee into these categories should be given
2.5.5: Audit fees
2.5.6: Regulatory fees
2.5.7: Other costs
2.6: Surplus for the year
2.6.1: The surplus or deficit for the year allocated by sub fund if appropriate
3: What the fund invests in
3.1: A balance sheet for the fund
184.108.40.206: See separate notes below
3.1.2: Current assets
220.127.116.11: Split in the format required by Company Accounts
3.1.3: Current liabilities
18.104.22.168: Split in the format required by Company Accounts
3.1.4: Member funds
22.214.171.124: Opening funds plus contributions less the result for the year equals closing member funds
3.2.1: Detailed notes required by asset category showing value brought forward, additions, disposals and movements in asset value – to reconcile with notes in the statement of what the funds has done – leaving closing cost
3.2.2: Equity shares
3.2.3: Corporate bonds
3.2.4: Government bonds
3.2.6: Hedge Funds
3.2.7: Private Equity
3.3: Investment analysis
3.3.1: List the top 100 investments by value at the start and end of the year and note the following for each
3.3.3: Type of asset by category already noted
3.3.4: Proportion of the fund invested in the asset and proportion of the asset held (e.g. what percentage of the company invested in is owned)
3.3.5: How the asset invested in generates its income .e.g. what use is made of a let property, what trade a company pursues
3.3.6: Whether the investment is considered ethical, referencing an accepted standard
3.3.7: Whether the investment is in a low tax jurisdiction (headline corporate tax rate of less than 20%)
3.3.8: Value at the start of the year
3.3.9: All purchases
3.3.10: All sales
3.3.11: Profit or loss
3.3.12: Value at end of year
3.3.13: Total income received
3.3.14: Income of highest paid director in company invested ion
3.3.15: Whether the fund voted against any resolutions put by the company in the year and if so what on and why
4: Other information
4.1: Future investment policy
4.2: Green policy
4.3: Ethical policy
What this information would let us do
There are numerous good reasons for providing this information. First and foremost being accountable is a key component in good governance. It is extraordinary that we have a system of pension fund management that outside people’s houses represents one of the biggest repositories of wealth in the UK and yet no one, the Turner report included, thinks it necessary to require proper accountability of the funds in which people deposit their savings and about which, in consequence, they know almost nothing.
Second, when something is observed it changes. If pension funds can be better monitored their performance will improve. This is vital for our well being.
Third, this data empowers pension fund holders to ask questions of their fund. At present this is almost impossible to do.
Fourth, pension fund holders will now know they have direct association with major companies of whom they might never have heard but whose performance is vital to their own future. Nothing will drive improved performance and governance in the City like being accountable to a mass of people will.
Fifth, people should be allowed to vote the shares their pension fund holds if they so wish and attend at the annual general meetings of the funds in which their fund is invested and speak as if members if they so wish. This will break the stranglehold that ‘investors’ are considered to be pension fund managers, most of whom come from the same background as those whom they are meant to be holding to account but which they have completely failed to do.
Sixth, transparency will improve choice and so performance in the market. Alternatively, and as importantly, it will bring pressure to bear to reduce cost and churning of investments if both have to be reported, as the above disclosure requirements implicitly require. These are at present major areas of suspected abuse of pension funds by fund managers.
Seventh, such accountability may improve the rate of pension saving.
Eighth, this accountability will require pension funds to account for the enormous tax benefits they receive.
Ninth, the risk of pension failure should be reduced.
And tenth, people might have a better sense of well being if they can better understand what their pension fund is doing for them.
What will it cost?
Such a proposal is bound to result in a clamour of protest from the City and all pension fund managers. There is one obvious response to that, which is that all markets work best when the highest quality information is available to all participants and why should the enormous pension sector be any different?
Cost is, however an issue, but one that is almost irrelevant. Firstly, all pension funds are audited already. Second, this data (with tiny exceptions – such as that on ethical standards, which is industry generic and therefore easy and cheap to procure) has to be produced already is a pension fund is to prepare proper accounts. Therefore, and third, the only significant additional cost would be printing which could be avoided by providing the report in default form on the internet with hard copy being sent only to those who specifically request it.
And cost may not, in any event, be an issue. It may well be that the pressure of exposure will result in considerably more cost being saved than this measure will cost: the outcome of transparency is almost always enhanced performance and that is what should be expected here. In other words, cost is not an issue.
Now is the time for reform. It is the government’s intention that more people should, as a result of the Turner reforms to pensions, be required to invest in stock market based pension funds. The obligation may or may not make sense but what is without doubt true is that compulsion without accountability is unacceptable. This therefore is the time to create accountability within out pension funds and in turn a whole new pensionholder capitalism where those who manage pension funds and the companies they are in turn investing in are held to account by those on whose behalf they act – the future pensioners of the UK. Then we move towards a world of real openness, transparency and accountability which is essential if we are to bring an end to the excess, waste and unaccountability of the City, our financial institutions and British business.
If you want to know why the domicile rule survives despite the very obvious abuses it permits note this in an email I have just received:
It survives because the tax profession and banks make money from it.
And they are the people who are too close to writing too much tax law.
And so this abuse of most people in the UK goes on.
I liked this comment in the Economist yesterday in an article discussing the problems with automatic information exchange from tax havens under the OECD’s proposed Common Reporting Standard (CRS):
The OECD hopes that upright financial firms will turn in rivals that abet tax evasion once the CRS kicks in, if only to stop them stealing business. Tax campaigners are another source of intelligence. A report published last year by the Tax Justice Network, whose membership includes smart tax lawyers with a conscience (supply your own punchline), identified more than 30 loopholes and exemptions in the CRS.
They’re right. It is civil society and not tax academia or the professions that is providing the alternative thinking and critiques on issues such as this. Which is a pretty damning indictment of both tax lawyers and accountants and tax research in universities.
The TJN analysis is here.
Cooperatives UK have issued the following press release that I am pleased to share:
The UK co-operative sector, worth £37 billion to the British economy, has agreed a partnership with the Fair Tax Mark, an initiative that enables businesses to demonstrate to consumers that they deal with tax transparently and fairly.
In the context of tax avoidance by large companies such as Starbucks and Amazon – which research confirms is the public’s number one concern about business behaviour1 – the commitment from this sizable sector is of significance.
A number of pioneering co-operatives signed up to the Fair Tax Mark when it was launched last year. These include Midcounties Co-operative, which runs retail, energy, travel and funeral businesses and turns over £1 billion a year and made £22 million in operating profit during its last financial year; and the Phone Co-op,-a fast growing home and broadband co-operative founded 16 years ago, now turning over £11 million.
It was agreed at the co-operative sector’s annual conference that it would forge stronger links with the Fair Tax Mark. A formal partnership between the Mark and Co-operatives UK, the network for Britain’s thousands of co-operative businesses, will be announced at an event for leaders of the largest retail co-operatives in the UK taking place this weekend, the National Retail Consumer Conference.
As part of the partnership, co-operatives across country will be provided with a set of voluntary guidelines and be supported in adopting the Fair Tax Mark if they choose to.
Ed Mayo, Secretary General of Co-operatives UK, said:
“Tax avoidance is the number one public issue today and what the Fair Tax Mark offers customers is a way to judge where they spend their money. With tax income tight and austerity the dominant response, it would be wonderful to make fair tax the norm for large businesses over the next ten years.
“Co-operatives have always been market leaders on issues of fairness, whether it’s working hours, Fairtrade or ethical investment practices. As home-grown businesses, not a single co-operative we know of has engaged in aggressive tax avoidance. That’s why we are seeing the sector coming together to lead the way on fair tax.”
Ben Reid, Chief Executive of Midcounties Co-operative, said:
“The Institute for Business Ethics recently found that tax avoidance is now the number one concern of the public when it comes to business conduct. As a values-led and ethical organisation, we believe that we should pay the taxes that are due and not engage in aggressive tax avoidance schemes, even if legal.”
Richard Murphy, tax campaigner and Fair Tax Mark director said:
“The UK public now think that paying fair tax is one of the most important things a business can do. They rightly expect business to pay its share, as they do. In that case to have a whole UK business sector declare its support for Fair Tax is really good news. The UK public will now know that co-ops are committed to paying their tax, and I hope they reward them with their business as a result.”
I admire their conviction and courage and wish them well but cannot suggest that others follow their action.
The penalties for paying taxes due later than law requires are substantial and automatically imposed and there is no possibility of waiver for acting out of conscience. For most people this gesture will, then, be very expensive indeed.
I am also not sure that refusing to pay tax is the best way for most people to show their commitment to paying it, although headline cases like this might work.
There are ways of protesting about tax but I am not sure that this will be the best for most people and so I cannot endorse a widespread tax strike.
But campaigning for a Tax Dodging Bill is something anyone could do. And should, in my opinion.
I have been noticing some commentary of late asking the question ‘what is the Fair Tax Mark for?’ I think it appropriate to answer that question given I was the creator of the idea and am a director of the Fair Tax Mark.
The objects of the Fair Tax Mark are relatively straightforward. In an era during which the public has become increasingly, and rightly, concerned about the tax paid by companies the Fair Tax Mark is a mechanism to identify those companies, however large or small they might be, that have a number of what, we think, are quite critical commitments in place within their management systems. These cover:
- Tax avoidance
- Explaining how the right amount of tax has been paid by the company
The most basic of these commitments is to transparency. In the case of a small company this involves stating some very obvious information that is not required to be disclosed by law, such as where the company actually trades.
In the case of large companies the commitment is similar, although different in nature, inevitably. For a multinational company the requirement is that they declare where they locate their businesses, and what they’re called in that place. This information should be provided by law, but research has shown that a very large number of companies are completely unaware of their obligation to disclose this data, and that it tends to be fairly inaccessible if it is published.
Our aim, whatever the size of company, is to show where it impacts upon communities. We think that this is at the heart of social responsibility. It might also indicate where tax should be paid.
Governance is an important issue whether a company is large or small, although more formal procedures are inevitably required as companies grow. In both cases, however, the commitment is to positively thinking about the course of action the company might adopt in certain situations, and taking steps to ensure that the right outcome is delivered. In the case of companies, whether large or small, we think that the commitment required is to pay the right amount of tax, but no more, in the right place and at the right time. In this context the word right has a particular meaning, which is that the way in which a transaction is reported for tax must reflect the economic reality of what has really gone on. So, for example, we have significant difficulties with companies that pay royalties within their own group for trademarks that they invented which happen to be have their legal ownership recorded in a tax haven. And we would have similar difficulty with the payment of interest to a tax haven subsidiary if there was no matching obligation to that interest on to a third party supplier of loan finance. So, what we’re looking for is a commitment to the process of ensuring that the income of the company, and the expenditure it has incurred, is recorded in ways that reflect what really happens and not in ways that can be constructed to minimise tax bills.
This governance issue is, of course, related to tax avoidance.
Tax avoidance is a way of trying to reduce a tax bill in a way that a parliament would never have intended. As a result, for example, claiming legitimate business expenses can never be tax avoidance if they have been genuinely incurred in the way in which they are presented to a tax authority. There are, however, many ways in which a combination of accounting and taxation can be combined to manipulate loopholes in the law that will always be inevitable however long that law might be.
So, for example, recording your income in one place when it very obviously arises in another, as has been commonplace for some multinational companies, looks like tax avoidance to us.
So too do the arrangements outlined in the previous paragraph, were royalties and interest are paid to tax havens without there being any real economic substance to the transactions.
And, there are also marketed tax avoidance schemes that we think no self-respecting company should go near whilst since 2013 the UK has had a General Anti-Abuse Rule in taxation law which does, in some circumstances, allow HM Revenue & Customs to challenge an accounting or tax arrangement the company puts in place where it is obvious that its main purpose is to reduce tax.
We ask, at a minimum, the companies commit to not using marketed tax avoidance schemes and to avoid any arrangement that might be subject to the General Anti-Abuse Rule, but we go further than that.
So, for example, we look quite specifically at the use made by multinational companies of tax havens. It is quite fair to have a company in such a place if it really trades in that community. But, when a tax haven subsidiary appears to only exist to save tax or to hide a transaction from view then we have what we think are quite reasonable concerns about that fact.
And, because tax avoidance is subjective, and exploits loopholes, we reserve the right to reject the application of any company if we decide that although we have not previously said we would refuse accreditation because of the use of a particular scheme or arrangement, that their doing so would be prejudicial to the interests of the Fair Tax Mark and the companies who have already been awarded it.
All of which brings us to our last point, which is about offering explanation. There is no doubt that some people, including experienced tax professionals, cannot see why anyone would need the Fair Tax Mark. No doubt these people think that they can extract all the information they need from the accounts of companies already, and that may be true. But, it seems that for the vast majority of people this is not the case and we know, from experience, that many ordinary users of accounts and many people who want to know what a company is up to, including a great many journalists who appear to be skilled in investigative techniques, find most accounting incomprehensible. So, we have laid down what we think a company must publish if it is to be awarded the Fair Tax Mark.
It might sound obvious, but the first thing that we want is a set of accounts. It is a fact that a great many small companies in the UK do not publish on public record full accounts that reveal their profit and tax paid. They must produce those accounts for their shareholders, but are allowed by law to file much less information at the Registrar of Companies and so hide details of their income, profits, taxation, and other matters of inspection. The law might permit this, but quite clearly this makes it impossible to assess whether a company is, or is not, paying fair tax and as a result we expect full accounts to be published or we will not award the Mark. This might seem to some minor issue, but we think that paying tax is the price a company should pay for the privilege of limited liability that it is granted by society. That is why we are happy to suggest the law is wrong in allowing companies to hide details of their affairs, and require full accounts on public record from companies that want the Fair Tax Mark. In this sense the Fair Tax Mark is pioneering what we think is appropriate change that society now expects.
In the case of multinational companies our requirement is a little different. Here we expect the company to publish country-by-country results. What this means is that for every country in which the multinational company operates we expect it to disclose its sales, the number of people it employs, the profit it makes, the taxes that it both owes and pays and its total investment in that country. This then gives us, and of course the users of the accounts, the opportunity to appraise how significant each country is in its operations, and also provides the opportunity to assess whether or not it is making extensive use of tax havens for what look like artificial purposes. We think that this is vital to the understanding of where the company is, and how it operates.
In addition, whatever the size of a company we want it to explain its tax bills in more detail than is required by current UK and international law and accounting regulation. So, we do not think that a few numbers with bland descriptions attached to them is usually sufficient to explain this, especially when many accounts appear to make little effort to discriminate between the tax bill that is due immediately as a result of the trading of the company during a year, and those tax bills that might be due at sometime in the future (called deferred taxation). We therefore expect those companies who get a Fair Tax Mark to explain in sufficient detail that a lay person can understand what tax they owe as a result of the trading in a year and what tax they might owe as a result of their activities during the year more than one year after the year end. And, as we know that two or three word descriptions are insufficient in very many cases to explain this we expect that when a number is significant that the company explain it in sufficient detail that somebody might understand why, or why not, tax is due.
The result of all this is slightly contentious, by which we mean that if a company does fully explain why it is not making a tax payment then we are still quite happy to give it a Fair Tax Mark. There are, after all, good reasons why tax may not be due. The most obvious is that the company made a loss, but that is by no means the only one.
For example, if a company decides to clear its pension deficit with new funds it has raised for that purpose then this is, very clearly, a socially responsible act, but it also happens to be the case that the company can then claim tax relief on this over a number of years, and this can have significant impact upon the amount of tax that it pays.
Likewise, some companies engaged in environmental activity receive special tax allowances which disproportionately reduce their tax bills, whilst a company with extensive research and development activity can be in the same position.
All of these are completely appropriate courses of action, provided for in law, and so long as the necessary costs been incurred, if tax relief that reduces the tax rate is provided, and an explanation of how that has happened is given in the accounts, then we do not think we should punish the company for that fact. They may not get full marks on our assessment process if their tax rate is significantly below the headline rate of tax in the UK at the time that we are looking at them, but with good explanation they may not fall far short.
And, this last point is important: what we want is explanation. What we are encouraging is that explanation. We want companies to communicate how they think about tax, how they plan their affairs with regard to tax, what steps they take when planning their tax liabilities (and it is quite reasonable that they do) and to explain what the outcome is.
There is no point, in our opinion, saying that a company is good or bad depending solely on its tax rate: the company with a very high apparent tax rate can do so because it put lots of expenditure through its accounts which have nothing to do with its business and so can’t claim tax relief on them. We doubt that is socially responsible, any more than shifting profits to tax havens is. Tax rate is not enough to assess a company on: more is needed and that is what we seek to supply.
So, transparency, accountability, governance, commitment to paying the right amount of tax in the right place and at the right time, and explanation are the core elements of the Fair Tax Mark. Those are the things that we are here to promote, largely because no one has ever done this before, and no one else seems willing to take the task on. If they did and, for example, what we are asking for became accepted practice in UK accounting our job would be over, and we would be happy with that.
But until that happens there will be companies who want to differentiate themselves on the basis that they really are trying to manage their tax affairs responsibly and who want to communicate that fact. We want them to do so, and want to encourage and help them in achieving that goal, and that’s why we think that the Fair Tax Mark is important.
Simon Caulkin is, in my opinion, one of the best business witers there is.
He’s written a powerful piece on why it is hard to be an optimist now which includes this telling, and I think true,paragraph:
Let’s face it, if the private sector, the engine room of capitalism, is now too feeble to keep people in work, in food and shelter and in decent retirement, then either capitalism ceases to be defensible, or the engine room needs a complete and urgent overhaul.
It’s worth reading the rest.
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