Corporate Tax Avoidance and Global Economic Development

A Seminar organised by

The International Trade & Law Institute

at the UK House of Commons

17 January 2005
 
 
 

 

Speaker: Professor Prem Sikka

University of Essex, UK.

Address for correspondence:

Prem Sikka

Department of Accounting Finance and Management

University of Essex

Colchester

Essex CO4 3SQ, UK.

E-mail: prems@essex.ac.uk

AABA website: https://aabaglobal.org.uk/aaba.htm

Tax Avoidance and Global Economic Development

• The issues arise from

• Well connected High Net Worth Individuals (HNWI)
• Domicile and Residence issues
• Secret ‘forward contracts’ with Inland Revenue

• World's 500 richest people have more money than the total annual earnings of the poorest 3 billion

• Power of corporations and their networks
• Absence of International co-operation
• World Bank, WTO, IMF not concerned about tax avoidance
• Impotence of National Governments.

•  The authority of nation states confined to defined jurisdictions.

• Companies roam the world
• Developments in information technologies

• Corporate influence on government policies
• Political donations, Sponsorships,
  
• Control on regulatory and policymaking bodies,
  
• Control of media,
  
• Corporations discipline governments

• Culture of deregulation and competition on tax matters
• A Race to the Bottom; A thriving ‘rules avoidance’ industry made up of accountants, lawyers and bankers.
• Tax havens sponsored by major hegemons, such as UK, USA, etc.

Power of Corporations

• Emergence of global cartels rather than freely competing companies.

• Of the 100 largest economies in the world, 51 are corporations; only 49 are countries.

• Combined sales of the top five corporations (General Motors, Wal-Mart, Exxon Mobil, Ford Motor, and DaimlerChrysler) are bigger than the GDP’s of 182 countries. The Top 200 corporations' combined sales are bigger than the combined economies of all countries minus the biggest 10.

• Sales of 200 companies represent 28.3 per cent of the world's GDP. These companies employ less than one-per cent (just 0.75%) of the workforce.

• 60% of world trade is internal transactions of 200 corporations.

• The Top 200s’ combined sales are 18 times the size of the combined annual income of the 1.2 billion people (24 percent of the total world population) living in “severe” poverty (defined by the World Bank as those surviving on less than $1 per day).

• US based corporations dominate the Top 200 with 82 slots (41 percent of the total). Japanese firms are second, with 41 slots.

• Economic power has been translated into social and political power through political contributions, sponsorship, ownership of media, control of policymaking and regulatory apparatuses
• Hold governments to ransom
• Demand favourable laws
• Little transparency in company accounts.
• Companies provide little detail of their taxes.
• No disclosure of transfer pricing policies.
• No accounting standard on meaningful tax disclosures.
• Topic missing from the UK Companies Act 2004 and the Operating and Financial Review (OFR).

• “Tax” payments are seen as ‘cost’ and not social investment.

TAX AVOIDANCE INDUSTRY

• Networks of bankers, lawyers and accountants design and market tax avoidance schemes. Global reach:

• KPMG has over 715 offices in over 148 countries;
  
• Ernst & Young has over 676 offices in 140 countries; 
• PwC in 139 countries; 
• Deloitte in 670 cities in 148 countries.
• Big Four:Global income is $56 billion (Only 52 nations have a bigger GDP). Over 70% of the income is from non-auditing work. Tax avoidance is the most profitable.
• Little Transparency of their activities.

• US Senate inquiry: KPMG admitted to having over 500 “active tax products”. Just four of these schemes, three of which may have been illegal, may have netted the firm $180 million in fees, but lost the US Treasury $85 billion in taxes.

• Cold calling and aggressive marketing of schemes.
• Banks lend money to concoct tax avoidance transactions.
• Lawyers give soothing opinions - $50,000 each .

 Partner of a major UK firm said that

•  Offshore tax havens increased from around 30 in the 1960s to over 70 and increasing.

• Companies use brass plate operations, special purpose vehicles, off balance sheet financing techniques, shell subsidiaries, partnerships and joint ventures, foreign subsidiaries, novel assets (as in WorldCom) and transfer pricing techniques.

• Boeing, Caterpillar, Coca-Cola, Daimler-Chrysler, Eastman, ExxonMobil, General Motors, Kodak, Intel, IKEA, Microsoft, NewsCorp, Virgin and others have skeletal companies in offshore havens.

• Of the U.S. corporations on the Top 200 list, 44 did not pay the full standard 35 percent federal corporate tax rate during the period 1996-1998. Seven of the firms actually paid less than zero in federal income taxes in 1998 (because of rebates). These include: Texaco, Chevron, PepsiCo, Enron, WorldCom, McKesson and the world's biggest corporation General Motors.

• 60 percent of major US corporations did not pay any federal taxes for 1996 to 2000 (US General Accounting Office, 2004).

• An estimated 94 percent of U.S. corporations reported tax liabilities amounting to less than 5 percent of their income in 2000.

• 71 percent of foreign-controlled corporations paid no taxes on their U.S. income, while 89 percent had liabilities of less than 5 percent of their income.

• Enron used offshore subsidiaries to create opaque corporate structure and reduce its tax liabilities. So did BCCI, Parmalat and many others.

• In OECD countries, corporate taxes provide about 8% of the total taxes collected and the share is declining.

• Governments appeasing corporations.
• Low taxes,
  
• special incentives (e.g. films),
  
• lax enforcement,
  
• the avoidance industry has ‘insider’ status.

• Taxes shifted to individuals.
• Regressive
• Aggravates social inequalities,
  
• exclusions,
  
• poverty,
  
• income inequalities,
  
• impact on savings, pensions, etc.

• CORPORATE TAX TAKE IS LESS THAN 2.5% OF THE UK GDP – the Lowest ever.
• 40% per cent of the total increase in income between 1979 and 2003 went to top 10 per cent of Britain's earners (John Hills, 2004).

• TRANSFER PRICING IS A KEY METHOD FOR AVOIDING TAXES

• Difficult to find arm’s length transaction prices or data. Companies concoct artificial prices to avoid taxes, encourage flight of capital and social irresponsibility.
• International agreements outdated; domestic ones assume arm’s length transactions – but there is no free market!
• US alone losing over $55 billion in taxes each year due to transfer pricing scams.
• Chinese tax authorities investigated 9,465 foreign-funded enterprises and found that "Almost 90 per cent of the foreign enterprises are making money under the table. Some of their businesses involve smuggling. But, most commonly, they use transfer pricing to dodge tax payments" (China Daily, 25 November 2004).
• In Africa, “tax jurisdictions have latched onto the indiscriminate relocation of profits, which if taxed would assist greatly in advancing the economy of the African countries. Various methods are now being implemented to stop this outflow of funds, and transfer pricing in various shapes and forms has been earmarked as a way to make a "quick buck". The result is the unprecedented implementation of legislation with a smell of transfer pricing."
• Policies of Hewlett-Packard's Compaq Computer, GlaxoSmithKline, Nissan, Honda, Ford challenged.

EXAMPLES OF TRANSFER PRICES ACTUALLY USED

• Urgent need to overhaul rules governing international allocation of profits

• Abandon the unworkable "arm's length" method of allocating profits

• Replace with a formula approach to allocate the taxable profits of multinational corporations

CONSEQUENCES OF LOST TAX REVENUES

• US may be losing over $300 billion each year due to tax avoidance.
• UK government refuses to provide information by the figures may be around £85 billion each year though some say nearer £100 billion.
• Latin American, Russian economies weakened.
• Developing countries losing more than $50 billion each year (Oxfam, 2000).

• What could be done with tax revenues?
• Make social investment, improve quality of life

• Four billion people live on less than $2 a day; 550 million on less than $1 a day (ILO, 2004).
• 1.8 billion people lack access to electricity;
• the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent (Prahalad and Hart, 2004).
• In 2003, 640 million children did not have adequate shelter;
• 400 million do not have access to safe water;
• 270 million have no access to health services and
• 140 million had never been to school.
• More than 10 million child deaths were recorded in 2003 and almost half a million children aged under-15 died of Aids, while a further 630,000 children were infected with HIV (UNICEF, 2004).
• Average life expectancy in some parts of Africa is 33.

• UK: 15.7% of population lives below poverty line
• 21.8% of adults are functionally illiterate
• 22,000 pensioners die each year from cold related illnesses.
• 4.8 million Brits facing pension poverty

TAX AVOIDANCE AND COMPETITION

• With tax avoidance ‘fair’ competition is not possible.
• Avoiders receive hidden subsidies.
• Domestic contractors, manufacturing and less mobile capital is always disadvantaged.
• Tax haven contractors were about one and a half times more likely to have no tax liability as domestic contractors (GAO, 2004).
• Logic of competition dictates that everything moves offshore and every business avoids taxes.
• Tax base has been undermined
• Multinational businesses gain an advantage over their purely domestic competitors
• Loss of jobs and social investment.

• US calls to ban tax haven based contractors from bidding for public contactors. UK – nothing doing.

• Citizens of tax havens do not always gain.

• Era of zero-rate and negative corporate taxes has begun.
• Zero-rate in Jersey and BVI
• For the first time - Sales tax in Jersey.

• Any future for democracy?

• Any future for the State and community?

• Who Governs: People or Corporations?