The (Im)morality of Tax Avoidance 2

In the last post, the Sage lamented the limited power of governments over big business – unless they were globally united in purpose and action (and when did that ever happen?) – but also suggested a justification for tax avoidance, citing a company’s obligations to its shareholders.

Alongside those shareholders, couldn’t customers also be added to the list of those culpable for providing the incentives for corporations to act (and continue to act) in the way they do?

Take Amazon, for example – it may have received a fair amount of bad press recently, but if a book or DVD, say, were found to be substantially cheaper on its website than in a rival store, where would most people choose to make their purchase?

In most cases, until managers have a very good reason for implementing a policy that would have a negative impact on their bottom line, it would be irrational for them to do so. That reason may be legislative change – but large organisations don’t employ specialist legal and tax advisors for nothing; there will always be ways of getting around even the best-laid plans of politicians.

But if a company’s foot-soldiers – its customers – were to vote with their feet, sales would fall, profits would dwindle, investors would flee... and chairmen would have nightmares. The only problem is that – just like with world leaders – that kind of universal harmony is never going to happen either.

And it isn’t for the lack of trying. Remember the days when G8 summits had their headlines hijacked by anti-globalisation protestors filling the streets with their hatred and violence (donning T-shirts and gadgets made on the other side of the world, naturally)?

Remember the Occupy London camp that parked itself outside St Paul’s for a few months last winter, to show supposed unity between workers and the unemployed, from all backgrounds, against the evil corporate machine? You know, the one whose members interrupted their solemn meditation to do another day’s work on behalf of people they didn’t know, or to return to their warm, mortgaged home for the night?

Is it any wonder that the corporate behaviour that so many claim to revile continues so relentlessly when efforts to stand up to it have so often been undermined? And well they might be, because the actions of these outspoken critics are themselves purely rational.

Just as the boss of a listed company must uphold the interests of his business and his shareholders, the ordinary man on the street is bound by similar obligations to himself and his family. And, ultimately, if he had a clear opportunity to make himself and his dependants better off without breaking the law, he would surely choose – indeed, be obliged – to take it.

So perhaps the discussion should focus less on the morality of tax avoidance, which leads people to expect others to take actions based on their own subjective values, and be directed more towards finding ways of shifting the balance of incentives.

Gestures like empty diplomatic statements and fickle, forgotten protests make no impression whatsoever on this landscape, because those on the receiving end of them know that those making them have at least as much to lose from putting their money where their mouth is.

So the next time you’re sat in a Starbucks branch that you found on Google reading a Kindle book that you found by reading Facebook on your iPhone, ask yourself who’s really winning.

The (Im)morality of Tax Avoidance 1

The recent gathering of G20 bigwigs in Moscow, where representatives of the world’s richest nations declared war on multinational corporations over tax avoidance, did more to demonstrate finance ministers’ penchant for politics than their eye for economics.

For decades, politicians have turned a blind eye to the often wholly legal – but highly controversial – practices of large companies, and the industry of accountants that exists to assist them. During the boom years, the issue not only seemed less significant (politically as well as financially), but was even seen as a factor in the global economic success story – one of the fruits of globalisation.

How times have changed. Last weekend, George Osborne and Sir Mervyn King sat down with all of their major counterparts to discuss how to bring this juggernaut shuddering to a halt. Besides another apparently meaningless communiqué, all that emerged was a realisation of the scale of the challenge.

This was, nevertheless, an important first step. By definition, the accounting practices of businesses that transcend borders cannot be governed by one or even a handful of governments acting in isolation; it requires concerted, co-ordinated action.

Indeed, the G20 summit merely reaffirmed the action plan already being devised by the OECD, another rich-country club. This plan will bring together ongoing investigations, for example into how companies are minimising their tax base, and how and where e-commerce activities should be registered.

The third focus of the OECD’s attention is transfer pricing, whereby companies divert profits to subsidiaries registered in tax havens. Such payments have become increasingly common (at a staggering rate), with Amazon, Google and Starbucks among the most high-profile cases of companies picking and choosing their tax rates in this way.

Tackling this is undoubtedly the political world’s biggest challenge. Not only is it the most difficult to legislate against, it is also where the stakes are highest and the headlines are biggest.

After all, if Amazon says the money from its UK customers is paid into a bank in Luxembourg, and if Starbucks says its British-based shops are using goods purchased and processed in Switzerland as well as intellectual property honed and owned elsewhere, who can argue?

Governments, even when acting together, can only do so much; investors, on the other hand, can hit a corporation where it hurts. How can a listed company tell the stock market in one of its major areas of business that it is profitable and thriving, whilst telling the tax man in the same jurisdiction that it has nothing left over to give?

The justification comes down to legislative requirements. If it is legal (however ‘immoral’) to take certain actions to reduce your company’s exposure to tax, boosting your overall profits and the dividends paid to shareholders, do you not have a ‘moral’ duty to those shareholders to take those actions – trumping any obligation towards your tax-paying customers?

Until governments large and small come together and devise a legal and financial framework that not only legislates but also operates across borders, the world will continue on its merry, globalising way, and those firms in a position to exploit the trend will continue to do so.

International authorities have a hard enough time as it is when it comes to writing a global accountancy rule book (not least because of classic American aloofness); raising the stakes and challenging vested interests is not high on the priority list.

So if you can’t beat them…

High-Speed Rail - Cart Before the Horse?

After a series of failed court appeals by a local campaign group, the proposed Aberdeen city bypass finally got the go-ahead in October last year. The new transport link will cost hundreds of millions – and almost certainly more than original estimates, because of delays caused by the long judicial process – and will not be completed for years to come.

The local authority has since announced that the new project will take priority, so that no major investment will be made in the existing network until after it is completed – ironic, given that a key purpose of the new link is to relieve the pressure on the current, outdated infrastructure.

Sound familiar?

The latest chapter in the story of High Speed 2 was written this week with the announcement of the proposed route of the project’s second phase between Birmingham and Manchester/Leeds – cue the re-opening of the national debate about just what it is for, who it will benefit, and what it will cost.

Despite being a clearly divisive issue, high-speed rail is also one of those rare subjects on which all three major political parties basically agree with each other. It was Labour who initiated the process in 2009, with the coalition government making only minor modifications to the strategic plans they inherited.

Opinion in the country seems to be much less united, with influential pressure groups such as the Taxpayers’ Alliance expressing major concerns not only about the project’s affordability per se, but whether it is a justifiable use of billions of pounds of public money, committed to at a time of recession and austerity.

Even putting that aside, the economic case for the line is far from compelling. If the purpose is to attract greater inward investment into the UK, the fact that the project’s completion may be nearly two decades away makes the scale of that investment almost impossible to quantify, let alone guarantee.

If it’s about linking north and south to better distribute the proceeds of growth, making London more accessible from the likes of Manchester and Leeds may send a mixed message. If the aim is to reduce demand for short-haul flights by providing a more viable alternative to aviation, arguably the money would be better spent improving Britain’s existing, ageing railways.

If it’s about enabling political and business leaders to wear a badge of honour already boasted by most of Britain’s economic rivals… well then it becomes clearer why these sorts are so eager to proceed, and why the public are so suspicious.

In an era when booming internet connectivity means doing business remotely is easier and more popular than ever, why is it so essential that travelling by rail between Britain’s hubs takes a little bit less time than it does currently?

To use the new line, people will still have to travel (via road or Victorian railway) to one of the big cities, squeezing the efficiency gains to be made, so why not invest in making the public transport options available to people on their doorstep more appealing – costing less money, and delivering much quicker results?

Britain has a poor recent record of major infrastructure projects, even during the boom years, and there is nothing to suggest this latest vanity project will be any different. That is not to say the Sage is against capital investment – quite the opposite; politicians with a long-term view of what is best for their country rather than a preoccupation with forthcoming elections are an all too rare species.

But the benefits of a scheme have to be in proportion to the costs, and be enjoyed by a sufficiently large section of the population whose taxes are funding it. High-speed rail, in its current incarnation and its current context, surely fails that test.