The wealthiest companies and people in the world are avoiding paying billions of dollars in taxes every year, money that could have paid for better public services, decent pay for our essential workers and help the neediest people in our society
The accountancy firm Grant Thornton worked out that the UK’s 54 billionaires paid income tax totalling just £14.7m (0.01%) on their £126bn combined fortunes. The Observer, 2007
In 2018, Amazon paid $0 in USA federal income tax on more than $11 billion in profits before taxes. It also received a $129 million tax rebate from the federal government. Apr 4, 2019- CNBC.Com
Apple has faced mounting criticism in recent years for avoiding taxes in the US and Europe. Wednesday, it offered critics 38 billion replies. More precisely, Apple said it would pay an estimated $38 billion in tax .…, but it’s also a pretty good deal for the company; they saved $50bn. Wired, Jan 18, 2018
General Electric is a multinational giant that made $27.5 billion in profits from 2008-2012 but got a total of $3.1 billion in federal tax refunds and paid an effective tax rate of negative 11.1 per cent, according to Citizens for Tax Justice
Our wealthiest companies and billionaires are siphoning off billions of dollars from the public coffers every single year. And leaving a hole in public coffers that could have paid for better schools, hospitals, decent pay packets for our teachers and nurses, better housing and welfare for our neediest citizens. They do it in plain sight, flaunting it in our faces. They make billions of dollars in profits for their shareholders while paying little or no tax. You and I, the ordinary taxpayers, make up the shortfall getting less and less in return.
Apple said it would pay an estimated $38 billion in tax .…but it’s also a pretty good deal for the company, they saved $50bn
The international tax system is broken. The losses to people and countries throughout the world are staggering. You are probably wondering if we know which companies are not paying taxes, why don’t we just knock on their doors and collect the amounts owed. It is legal to ‘avoid’ taxes; using loopholes in our tax laws. You might ask why we don’t seal the holes which are causing this leakage? Large, powerful companies use an army of lobbyists and millions of dollars in donations to politicians to keep the loopholes open, change current laws to their benefit, get tax rates reduced. Even when the IRS charges them, they often fight in court using expensive law firms to delay judgement for years. Landing taxpayers with millions of dollars in legal fees.
It’s not just the large multinationals who avoid paying taxes; it’s also the billionaires and some smaller fry.
Robbing a bank or stealing a car, spells a lengthy jail sentence. You can hardly be regarded as a respectable member of the society, live in a fancy suburb. Or play golf with the most powerful people in the country.
Tax avoiders can don a cloak of respectability – exploiting gaps in the laws they helped create – saying they abide by all the laws and pay all due taxes.
The Panama papers leak and investigations cast a light on how rich listers’ and powerful politicians use tax havens. Lux leaks showed how major corporates used Luxembourg to avoid taxes.
A Brief History of Taxation
History of taxation is as long as the history of civilisation. First records of taxes were in Egypt around 3000 BC, where a fifth of all crops was given to the Pharaohs. Taxation was also prevalent in other ancient cultures like Greece, Roman, Aztec, Mughal emperors in India.
Early forms of taxation related to sales, purchases, import duties, taxes on property and even a head tax. During Greek and Roman times property taxes were levied to provide additional funding to fight wars. Modern forms of taxation began with the growth of imperial Europe and industrialisation, when taxes on doing business, became as valuable as taxes on farming.
Then as now, taxation was often a topic of political controversy. It was the refusal of American colonists to pay tax to the British which sparked the war for independence and the slogan – “No taxation without representation’. Resentment of taxation was also a significant factor in the French Revolution.
First World War saw an escalation of taxation and taxes continued to be high after the war to fund increased public services. The New Deal in the USA in the late 1930s, the 2nd World War, the funding required for public services like health, education and the Cold War led to high levels of taxation being a permanent feature in most countries. Rise of capitalism also required taxes to be levied to transfer wealth and reduce levels of inequality.
The last major shift in taxation began in the 1980s with the advent of neoliberalism. Ronald Reagan and Margaret Thatcher supported by neoliberal economists like Milton Friedman started a shift towards smaller government and lower taxes. A belief that this would spur economic growth which had stalled following the oil price hikes in the 1970s. Spur growth, it hasn’t, economic growth between 1950 and 1970 was higher than the periods following.
We have a seen a wide divergence in tax and welfare policies since the 1980s between countries like Scandinavia, France, Germany and the Anglo-American countries – USA, UK, Australia, New Zealand. Anglo American countries have moved to cut taxes and reduce public services and welfare, along with deregulation leading to sharply increased inequality. European countries have managed to retain relatively higher levels of taxation, a good standard of public services and lower levels of equality.
The starkest extremes are in the USA. Tax cuts have been so lopsided that the wealthiest 400 billionaires now pay a lower level of tax than everyone else including the bottom 10% of earners. The billionaires now pay less than half the rate they used to pay in 1962, while their wealth has increased a staggering 24 times at the same time.
Impacts of reduced taxation
“The missing money means schools not funded properly, hospitals not built. For Russian people it’s not funny money, it’s killing them.”
– Elena Panfilova, the Moscow head of Transparency International, on élite Russian money stashed in Europe
Since the 1980s we have been cutting taxes for the rich and corporations while cutting benefits for the poor, Robin Hood in reverse. Tax cuts sometimes by more than 50% and a plethora of loopholes have led to poor healthcare, education, food insecurity, higher mortality rates etc. Deregulation and vastly reduced influence of unions has led to very insecure jobs while at the same time reducing the safety net for those who lose jobs.
In developing countries, the effects are far worse. Governments are struggling to provide even the most basic services, people starve or even die due to lack of food and healthcare.
Helping hands
“At some point . . . such conduct passes from clever accounting and lawyering to theft from the people.”
– US Internal Revenue Service, in a case dealing with KPMG’s “phoney tax losses.”
“The agents who create and maintain this secrecy space include some of the most powerful and privileged elites with society. It is bankers, lawyers and accountants who create and operate the corruption interface linking illicit activities to the mainstream economies.”
– John Christensen, Director, Tax Justice Network
“Offshore companies bled Guinea’s resources, facilitated by western lawyers, accountants, advisers.”
– Alpha Condé, president of Guinea, Jan 2014
The enablers- tax accountants, lawyers, bankers make large sums of money helping these companies to avoid taxes. These professionals, along with trade associations like The Institutes Chartered Accountants and CPAs lobby to influence tax regulations favourable to their clients, loopholes open. Our accountants and lawyers, use our public education systems to get their education, use the same knowledge to rob public coffers that paid for their education.
Our accountants and lawyers, use our public education systems to get their education, use the same knowledge to rob public coffers that paid for their education.
The Big 4 Accounting firms like KPMG and Deloitte are particularly pernicious in lobbying and peddling their ‘products’ to help avoid taxes. PWC wrote Luxembourg’s tax regulations to establish the tax haven.
They will tell you that tax avoidance or using loopholes in the law is legal and acceptable if not ethical. What they conveniently forget is that they influenced and lobbied to keep these holes open, in some cases reopen those that have been closed. They even push authorities to punish whistleblowers with criminal charges. In Luxembourg, it was the good guys, the whistleblowers who were charged, on a complaint by PWC. They push schemes which are likely to be considered illegal, because any penalties will be wet bus tickets, compared to the money they stand to make.
Tax Havens
Have you ever examined UK trust law? All our bankers and financial lawyers say that if you really want to hide money, go to London and set up a trust
– Luxembourg politician talking to UK MP Dennis MacShane, after he had complained about bank secrecy
However hard it is for them to enter the Kingdom of Heaven, the super-rich has no difficulty entering the United Kingdom of Tax Haven.
– Michael Meacher, UK Labour MP, writing about Britain’s domicile rule, 2007.
Tax havens are countries or states or territories, who charge ultra-low tax rates, sometimes zero tax. To help corporate and wealthy individuals avoid taxes in other countries. The name tax haven may sound like a tropical island in the middle of nowhere; the reality is different. The USA now ranks as the 2nd largest tax haven in the world in terms of tax dollars avoided; over twenty states offer significant tax benefits to foreign corporations. Five of the major tax havens are British territories, including the largest tax haven in the world – Grand Cayman Islands. Two biggest financial centres of the world – Wall Street and the City of London are the hubs that act as conduits to tax havens. It doesn’t end there, many prosperous, seemingly respectable countries are also tax havens – Netherland, Luxembourg, Ireland, Switzerland, Singapore, Hongkong, Dubai.
The USA now ranks as the 2nd largest tax haven in the world
Most of these countries are supposed to be bastions of democracy, hold the interests of ‘We the People’ supreme, it doesn’t appear to be the case. In the words of Leona Helmsley, property heiress “We don’t pay taxes. Only the little people pay taxes”. In the words of Warren Buffett – “I pay a lower tax rate than my secretary”.
The effect on developing countries is a significant drain of funds on people who can least afford it, live below the poverty rate of $2.50 per day.
Politicians
“A Labour Chancellor will not permit tax reliefs to millionaires in offshore tax havens.”
– Gordon Brown, Hansard, 1998
Not just a light touch, but a limited touch . . . a million fewer inspections every year
UK Chancellor Gordon Brown, 2005, as he launches his “Better Regulation Plan.”“In 1995, Congress adopted legislation intended to limit securities litigation … insulated from the suits, the accountants now willing to take more ‘gambles’.
– Joseph Stiglitz, in his book The Roaring Nineties
Ronald Reagan and Margaret Thatcher made taxes unfashionable. Tax cuts for the rich and corporations were staggering, some nearly halved overnight. Politicians are part of the problem. Many of them held a misconception, without any evidence that lower taxes boost the economy or lower taxes encourage greater compliance.
They are also highly susceptible to lobbyists who promote loopholes, especially if they come bringing gifts, hefty campaign donations. Laws are often designed to fail. They are also hypocrites – what they say during the election campaigns are quite different from what they do once in power as quotes above from Gordon Brown illustrate. What they say in private to their backers is quite different from what they say in public. Tax cuts are often followed by slashed welfare for the neediest people in society.
The Good Guys – The Tax Activists
Several activist organisations are fighting against overwhelming odds to make a dent in the tax avoidance/evasion industry. Tax Justice Network https://www.taxjustice.net/, operates out of UK with branches around the world, including in New Zealand https://taxjustice.nz/. They use their website, a monthly podcast, lobbying to create awareness and push governments, regional and global organisations like the EU, OECD.
International Committee for the Reform of International Corporate Taxation (ICRICT) is another prominent activist organisation https://www.icrict.com/the-commission); who include Nobel prize-winning economist Joseph Stiglitz and another influential economist Gabriel Zucman, amongst its members. There also US-centric organisations like Citizens for Tax Justice.
Whistleblowers, journalists and news organisations are essential assets in the fight against tax theft. Several high-profile investigations which have received attention include the Panama Papers, Paradise Papers and Lux Leaks.
Global Tax Action, or is it inaction?
”It does not surprise anyone when I tell them that the most important tax haven in the world is an island. They are surprised, however, when I tell them that the name of the island is Manhattan. Moreover, the second-most-important tax haven in the world is on an island. It is a city called London in the United Kingdom.”
– Marshall Langer, a leading pro-tax haven analyst, Tax Notes International, 2001
“The game plan is to be positive but hope as little as possible happens,” is how Paul Oosterhuis, a tax partner of Skadden Arps, the US law firm
There is an OECD initiative to reduce tax avoidance since June 2016. There is some progress; however, significant problems remain and significant roadblocks. The primary and possibly intractable problem is that OECD countries account for 50% of tax avoidance globally, therefore unlikely to agree on any significant reduction to their revenues. For some of them like Ireland and Luxembourg, tax haven revenues ‘stolen’ from other countries are a substantial part of government revenues.
There could be progress if major countries like the USA and UK support these initiatives. Unfortunately, they are both significant tax havens. The Trump administration has even gone to the extent of threatening retaliation against any attempt by countries who are initiating tightening of tax avoidance laws.
EU has been trying to reform international taxation in Europe for years. These initiatives have failed to produce any significant reforms or even transparency, blocked by tax haven countries within the EU.
How are taxes avoided?
Corporates and Rich Listers
The same mechanisms allow tax evasion, tax avoidance, corruption, and organised crime money to flow — it’s all the same. We have left these loopholes open because it’s beneficial to multinationals and the rich. To be able to structure their money to minimise tax, we let a hell of a lot more going on under this.
– Anthea Lawson, Global Witness
A recent news item highlighted the ‘Double Irish Dutch sandwich’ used by Google to avoid tax. Tax avoidance typically involves a company that is a subsidiary of a multinational group registered in a tax haven charging for services to companies in the group operating in other countries. Income in the tax haven is taxed at a very low rate, while the company gets large tax deductions in high tax countries.
Royalty payment, Licensing Fees – while R&D for product development or brand building is done mainly in their home countries. For some inexplicable reason, corporates are allowed to register these in tax havens. These payments can be quite large as they are unique and cannot be easily compared to a market price. For companies like Google and Apple, these fees can be $billions for just one year.
High Value, High-Interest Loans between branches –Loans are given to subsidiaries in high tax countries at high-interest rates. Tax on interest income in tax havens is minimal while saving in tax bills around the world.
Round Tripping –Sending money to countries like Singapore, Hongkong as Foreign Direct Investments and getting cash back as Foreign Investments.
Complicated transactions using tax havens – An example would be the ‘Double Dutch Irish sandwich’ which uses Netherland, Ireland and Bermuda.
Using Foreign Trusts – Used primarily by rich listers, income is transferred to a Trust in a tax haven, paying little or no tax on such income. New Zealand is highlighted in the Panama papers scandal as a place used to register foreign trusts. No beneficiary information was required at the time, making it an ideal place to hide assets and income.
How the little guys do it
Trusts – A high earner using a trust to distribute profits to children, who will pay at lower tax rates is a legitimate way to reduce taxes.
An article in Spinoff, written by Michele Duff outlines some of the ways commonly used by small to medium tax cheats. Most of the tax saved by the little guys is tax evasion or breaking the law and punishable if caught.
The hidden economy or the ‘black’ economy is a significant part of small to medium tax evasion. A contractor might tell you that he can give you a lower price if you pay cash, as part of the bargaining process. A restaurant will fail to ring through cash sales and pay some wages in cash, avoiding GST, PAYE and Income Tax, a triple whammy. A construction company will pay some salaries in cash, avoiding PAYE.
Cash is king for tax cheats, including restaurants, retailers, contractors, it’s easy as pocketing it instead of putting it through the books.
They have their helpers too, from friendly accountants who identify loopholes to money launderers and suppliers in the black economy.
How to make them pay
The solutions are not technically challenging, but politically almost impossible, presently
The good news is that we can fix tax injustice, right now. There is nothing inherent in modern technology or globalisation that destroys our ability to institute a highly progressive tax system. The choice is ours– Gabriel Zucman and Emmanuel Saez
Tax Justice Network and economists Gabriel Zucman/Emmanuel Saez propose a Unitary Taxation system. Country by country reporting of revenues can be used as the basis to allocate worldwide profits to each state. Each state will collect their tax based on its Corporate Tax rates. Any uncollected tax will be paid in the home country. This ensures that taxes are paid where the economic activity takes place, rather than where tax rates are lowest. Removing the incentive for companies to book their taxes in tax havens.
Gabriel Zucman and Emmanuel Saez also propose a wealth tax, supported by a global wealth registry and adequately resourced audit function. Furthermore, sanctions against tax havens.
The oft-repeated mantra that the current tax issues due to the advent of digital and online businesses are just a red herring. We do have a problem collecting taxes from digital companies. However, we lose much more money due to the inability to collect taxes from traditional brick and mortar multinational companies. Tax havens didn’t spring up overnight; they have been there for decades.
The mantra that the inability to collect taxes is due to the tax system not keeping pace with globalisation is also a red herring. The problems are due to our politicians looking away and even colluding with the rich and powerful. To weaken our tax system, winking at those who are avoiding and evading taxes.
It is no longer seen as unpatriotic to avoid taxes, not since Reagan and Thatcher started attacking the government as the problem.
New Zealand
“That $500m could pay for 26,000 hip operations, 4,000 doctors or 7500 cops. A boatload of money” -James Shaw – Leader Green Party
“Certain industries are more susceptible to profit shifting and playing games with us. Logically that’s where we put more resources in terms of monitoring”- John Nash, IRD Manager, International Audits
A New Zealand Herald investigation in June 2017, into multinationals operating here highlighted that 20 of them paid only $1.8Mn tax on $10Bn revenue in New Zealand. Just two companies BP and Caltex paid only $4Mn tax on $5Bn of income, some of them even claimed tax refunds! Herald estimated tax lost at $490Mn. https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11607336
Two companies BP and Caltex paid only $4Mn tax on $5Bn of revenue
World Bank estimated the size of our ‘hidden economy’ in New Zealand at $20bn per year, that is 10% of our GDP. If we calculate the loss in taxes at say 20%, that is $4bn every year. Which could have paid for hospitals, better wages for our public servants, a more decent life for our beneficiaries and less tax for all of us ordinary taxpayers.
Progress on tax avoidance and evasion
“The new law will address the problem of companies operating cross-border and using aggressive tax structuring to reduce the tax they pay, the first step towards a better, fairer tax system” – Stuart Nash, Revenue Minister
The Taxation (Neutralising Base Erosion and Profit Shifting) Bill passed in 2018 is a ‘first step’ on tackling multinational tax avoidance. Inland Revenue has also given guidance on maximum acceptable charges for intercompany loans and royalty charges, aimed at putting pressure on these companies. They estimate an increase in the tax take of $200Mn from these changes. We are yet to see if these changes will have the desired effect.
How they do it
No Tax Haven Involved
Company Straight A– Makes profit of $100Mn operating in Country X. Pays Tax of $30Mn at a corporate tax rate of 30%.
With Tax Haven
Company Crooked BB a subsidiary of Company B– Makes profit of $100Mn in Country X
Company Crooked BC, a subsidiary of Company B, is registered in Tax haven Bermuda, where the tax rate is 1%. BB pays tax on royalties of $50Mn at the 1% tax rate, $0.5Mn.
Company Crooked BB now makes only $50Mn after paying royalties; the tax bill is now half of what it should have paid – 30% X $50 Mn = $15Mn
Total tax for Company B who owns BB and BC is now $15.5Mn, compared to Company Straight A who paid $30Mn for the same profit.
A saving of nearly 50% or is it theft?
Acknowledgements
- The triumph of injustice – Gabriel Zucman, Emmanuel Saez
- The Hidden Wealth of Nations: The Scourge of Tax Havens – Gabriel Zucman, Emmanuel Saez
- Tax Justice Network -https://www.taxjustice.net/
- NZ Herald
- The Guardian
- Stuff- https://www.stuff.co.nz/
- The Spinoff -https://thespinoff.co.nz/
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