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…