Sunday, March 27, 2011

Corporate tax avoidance: a global scourge

Almost six years ago, I made the best decision in my life: to stop drinking alcohol. As a convert to sobriety, I feel embarrassed by my past. And so I stayed well clear of Irish pubs last week, for fear of being reminded of how I used to spend Saint Patrick’s Day quaffing a lot more beer than my liver could absorb.

If there is one thing more unsettling than how Ireland’s national holiday prompts many of my compatriots to reinforce national stereotypes, it is the behaviour of the new Dublin government. Enda Kenny, the taoiseach (prime minister), is engaging in a huge deception by claiming that the programme for misery imposed on Ireland by the European Union and the International Monetary Fund can be renegotiated. As the most he will be granted are a few trivial concessions, it would be more honest and honourable to default now than to cripple an entire nation with unpayable debts.

Kenny insists that Ireland’s low rate of corporate tax is sacrosanct and that he will not raise it under EU pressure. Foreign investors will quit the country if they are not allowed to keep the bulk of their profits for themselves, the argument goes. Everyone who tries to question that orthodoxy is portrayed by the Irish establishment as a far-left fantasist.

Simon Johnson, a former chief economist at the IMF, can hardly be labelled as far-left. In a piece published on The New York Times website in November, he stated that at least 20% of Ireland’s gross domestic product derived from “ghost corporations”. Although firms operating in Ireland are officially taxed at 12.5%, the more shrewd among them “are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits,” Johnson wrote.

Kenny is not the only one who is being Jesuitical. Attending his first summit of EU leaders earlier this month, he had a row with Nicolas Sarkozy over Ireland’s rate of corporate tax. Sarkozy alleged that Ireland has an unfair competitive advantage in luring multinational companies to its shores because its 12.5% rate is the lowest in the euro-zone.

But that is only part of the story. The target of Sarkozy’s ire is the statutory rate of taxation, not the actual amount that companies pay. What he neglected to mention is that while France’s statutory corporate tax rate stands at 35%, its effective rate stands at 14%, according to the Organisation for Economic Cooperation and Development. The effective rate gives a more accurate picture, as it takes depreciation and a range of exemptions and reliefs into account.

When the EU holds yet another summit later this week, leaders will try to give the impression they are navigating their way out of the financial crisis skilfully and sensibly. You can be sure they will not bother themselves with ensuring their “solutions” are socially just.

In a recent paper, the Institute on Taxation and Economic Policy (ITEP) in Washington contended that corporate income tax is “one of the most progressive” forms of taxation. “Since stock ownership is concentrated among the very wealthiest taxpayers, the corporate income tax falls primarily on the most affluent residents of a state,” ITEP said. “The wealthiest 1% of Americans held just over half of all corporate stock in 2007, while the poorest 90% of Americans owned just 10% of the total.”

Although that message is cogent, there is a reluctance to make corporations pay tax on either side of the Atlantic. The European Commission has lately recommended a common system for calculating corporate taxes. But national governments will continue to set rates and allow multinationals avoid taxes.

Tax avoidance is a reason why much of the world’s population lives in poverty. In 2008, Christian Aid estimated that trade mispricing – whereby companies underreport their profits in order to wriggle out of paying tax on them – deprived poor countries of $160 billion per year.

Richard Murphy, a prominent tax researcher, stated in August last year that wealthier countries have allowed the concept of a limited liability corporation “to become debased, to become opaque to the point where we know little or nothing about most of the world’s corporations – even to the extent of not knowing where some of them are incorporated or if they even exist on registers anywhere.”

Through banking secrecy rules, many EU countries or their dependent territories have become tax havens. In 2009, the Tax Justice Network published a league table of 60 tax havens or “secrecy jurisdictions”. These included the Cayman Islands, Madeira, the British Virgin Islands, Austria, Cyprus, Luxembourg and Hungary.

Because tax avoidance is a global scourge, it must be tackled on a global level. Yet Europe is preventing this from happening. Last summer the United Nations launched an inquiry into how it can beef up its capacity to promote international cooperation on tax. In a submission to that inquiry in January, the EU argued against giving more power to a UN committee of tax specialists. Britain is particularly opposed to the idea because it wants to preserve the City of London’s status as a tax haven.

One of the most inspiring protest groups formed in recent times is UK Uncut, which targets corporations that avoid tax. There is a desperate need for this to grow into a truly international movement, so that corporations are finally made to pay their fair share.

·First published by New Europe (, 20-26 March 2011.

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