14.04.2016

Close down offshore

Transnational companies and the super-rich routinely get away with not paying taxes. But, writes Michael Roberts, something can be done about it

The Panama papers contain 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider, Mossack Fonseca, including the identities of their shareholders and directors. An anonymous source made the documents available to the German newspaper Süddeutsche Zeitung, beginning in early 2015.

Law firms generally play a central role in offshore financial operations and Mossack Fonseca is one of the biggest in the business. Its services to its clients include incorporating and operating shell companies in friendly jurisdictions on their behalf. They can include creating complex ‘shell company’ structures that, while legal, also allow the firm’s clients to operate behind an often impenetrable wall of secrecy. The leaked papers detail some of their intricate, multi-level and multinational corporate structures. Mossack Fonseca has acted on behalf of more than 300,000 companies - most of them registered in financial centres which are British overseas territories. The firm works with the world’s biggest financial institutions, including Deutsche Bank, SBC, Société Générale, Credit Suisse, UBS, Commerzbank and Nordea.

The documents show how wealthy individuals, including public officials, hide their money from scrutiny. The papers identified five government leaders from Argentina, Iceland, Saudi Arabia, Ukraine and the United Arab Emirates, as well as government officials, relatives and associates of various heads of government of more than 40 other countries. The British Virgin Islands is home to half of the companies.

Reporters found that some of the shell companies may have been used for illegal purposes, including fraud, drug trafficking and tax evasion. Igor Angelini, head of Europol’s Financial Intelligence Group, recently said that the companies used for this purpose also “play an important role in large-scale money laundering activities” and corruption: they are often a means to “transfer bribe money”. The Tax Justice Network has called Panama one of the oldest and best-known tax havens in the Americas, and “the recipient of drugs money from Latin America, plus ample other sources of dirty money from the US and elsewhere”.

The most shocking thing about the Panama papers is not the criminality and drug laundering, but that it is legal. It is legal in most countries to set up an ‘offshore’ account for a company or trust, as long as the directors are not resident in the country where taxes should be paid. The company may be subject to local taxes, but these are minimal or non-existent. So if you run a fund and it is registered in Panama or Luxembourg and all the revenues go into that company if they were earned in the country of origin, no tax is paid at home. Of course, if you take the money out and put it in your home bank account, you are supposedly then liable to tax. But it can stay ‘offshore’ until you retire abroad, or you can use it to buy property or diamonds abroad. The British overseas territories like the Virgin Islands or Jersey operate for these purposes and are the main source of revenue for these islands. In the US, Americans can set up an ‘offshore company’ in Delaware or other states like Nevada - they do not even need to go to Panama.

Two-thirds of the purchases were made by companies registered in four British overseas territories and crown dependencies, which operate as tax havens - Jersey, Guernsey, the Isle of Man and the British Virgin Islands. British overseas territories play an important part in the role that British imperialism has developed as the global financial centre and conduit for international capital flows. These old colonies in the Caribbean were ‘encouraged’ to develop a financial services industry, by allowing the former colonies to benefit from tax treaties with the UK (and thereby access to the global financial system), while making their own arrangements regarding the local taxation of offshore shell companies.¹

Three ways

As I have pointed out before, large global corporations with many operations can switch their tax liability around the world to find the lowest tax liability through special companies set up in the so-called tax havens of the Cayman Islands, Channel Islands, Luxembourg and secret jurisdictions like the City of London itself. Barclays alone has 30-plus such ‘shell companies’ to avoid tax. In his devastating 2012 book,² Nicholas Shaxson exposes the workings of all these global tax avoidance schemes for the big corporations and how governments connive in it or allow it.

There are three ways that somebody (person or corporation) can reduce their tax or pay none at all. They can lie about their earnings (tax evasion); they can employ batteries of accountants to come up with schemes that are designed for no other purpose but to avoid paying tax (tax avoidance); or they can simply refuse to pay (tax compliance).

One of the most notorious cases of refusing to pay tax that is due under the law has been that of the global mobile telephone corporation, Vodafone. It owed the UK government £6 billion because it had salted away profits in a subsidiary, registered in Luxembourg, purely to avoid paying UK taxes. The law was clear. The UK government pursued the company for the money, but at the last minute a secret deal was struck whereby it paid just £1.2 billion - £800 million now and the rest over five years. The reason given for the deal - when it was exposed - was that it was a “good cash settlement”. But that is only because Vodafone was fighting every inch of the way through the courts.

According to the Tax Justice Network, around £25 billion is lost through tax avoidance schemes in the UK, while up to another £70 billion is unpaid as a result of tax evasion by large companies and rich individuals. Also, because of the lack of tax staff, another £26 billion goes uncollected.³

The rotten irony is that the very people in accounting firms organising these tax avoidance scams get jobs in the government tax collection departments to chase tax avoiders! Edward Troup, the boss of the UK’s revenue and customs (HMRC) - the government department overseeing a £10 million inquiry into the Panama papers - was a partner at a top City law firm, Simmons and Simmons, that acted for Blairmore Holdings and other offshore companies named in the leak, when the firm had contacts with Mossack Fonseca. Troup, who described taxation as “legalised extortion” in a 1999 newspaper article, built a career advising corporations on how to reduce their tax bills before joining the civil service in 2004. While working in the City, Troup led the opposition to reforms put forward by Gordon Brown to curb corporate tax avoidance in 1999, putting out a press release headed: “City lawyers call on government to withdraw proposals to tackle tax avoidance.”

According to The Guardian, “More than £170 billion of UK property is now held overseas ... Nearly one in 10 of the 31,000 tax-haven companies that own British property are linked to Mossack Fonseca.” British property purchases worth more than £180 million were investigated in 2015 as the likely proceeds of corruption - almost all bought through offshore companies - according to land registry data.

Of course, tax breaks for corporations and the rich, along with tax increases for the average household and the poor, are not confined to the UK. International Monetary Fund researchers estimated in July 2015 that profit-shifting by multinational companies costs developing countries around $213 billion a year, almost 2% of their national income. The Tax Justice Network estimatesthe global elite are sitting on $21-32 trillion of untaxed assets.

Thomas Piketty has pointed out that, in 2014, the LuxLeaks investigation revealed that multinationals paid almost no tax in Europe, thanks to their subsidiaries in Luxembourg. In 2016, the Panama papers have shown the extent to which financial and political elites in the north and the south conceal their assets. There is still a complete lack of transparency, as far as private assets held in tax havens are concerned. In many areas of the world, the biggest fortunes have continued to grow since 2008 much more quickly than the size of the economy, partly because they pay less tax than the others.

In the US, few big companies actually pay the official 35% corporate tax rate. Profits are up 21%since 2007, while corporate America’stotal tax bill has dropped 5%. American corporations are making billions in record profits, but 60 of the nation’s largest companies are parking 40% of their profits offshore in an effort to escape US taxes, according to the Wall Street Journal.⁴ In president Obama’s last budget for 2016, he proposes to stick a “transition toll charge” of 14% on the more than $2 trillion in corporate earnings parked overseas. The proposed one-time tax is aimed at just one of the various loopholes and manoeuvres that domestic businesses use to offshore their profits, beyond the reach of Internal Revenue Service.

The best known trick is so-called ‘tax inversions’: US companies can move their headquarters abroad, while keeping executives stateside, thus scoring government contracts and taking full advantage of public benefits for employees. And guess where ‘inversions’ were first started? Panama! Tax inversion was pioneered in 1983, when the construction company, McDermott International, changed its address to Panama to avoid paying more than $200 million in taxes.

Inversions are not the only way to dodge the taxman. Foreign profits are not taxed until they are ‘repatriated’, so companies can hoard earnings in subsidiaries or divisions abroad. Between 2008 and 2013, American firms held more than $2.1 trillion in profits overseas - that is as much as $500 billion in unpaid taxes.

Piketty’s economic colleague, Gabriel Zucman, recently published a book showing that $7.6 trillion in assets were being held in offshore tax havens, equivalent to 8% of all financial assets in the world.⁵ In the past five years, the amount of wealth in tax havens has increased over 25%. There has never been as much money held offshore as there is today.

Falling profits

Apart from greed, there is a very good economic reason for a tax system that benefits corporations and the rich, and hits the average family and the poor. An increasing share of profits in the US capitalist system is coming from overseas and from the financial sector. This has arisen along with the pressure of a falling rate of profit under capitalism.

Rising inequality of incomes and wealth - well documented for most countries in the last 30 years - is not simply a result of greed and cheating on tax. It is the result of increased exploitation of labour by capital. There has been a rising rate of exploitation, along with a huge switch of value into the financial sector, which is owned and controlled by the top 1% - or even just the top 0.1%. The so-called ‘neoliberal period’ was characterised by holding down wages, globalisation, a reduction in job security and privatisation of public services - all of which boosted the rate of surplus value. So we entered the world of super-managers, oligarchs and top families, avoiding and evading tax.

Lowering the corporate tax burden has been a big part of counteracting falling profitability of capital in the major economies. Look at the trend in the effective tax rate on US corporations, compared to the effective tax rate on their employees. The effective tax rate is a measure of what is actually paid compared to income, rather than the headline tax rate. Whereas in the 1950s US corporations paid an effective tax rate of around 40-45% of profits (without damaging profitability or economic growth then, by the way) by the 1990s that rate had fallen to 30-35%. In the last decade it dropped further to under 25% and reached an all-time low in 2009 at the depth of the great recession.

The trend is clear: corporations are being taxed less and less to preserve their profitability. In contrast, the effective personal income tax on employees has remained pretty steady at about 35%. Less tax for capitalists and more tax for workers. In his latest budget, UK chancellor George Osborne announced a further cut in corporation tax to a record low for G7 countries of 17% by the end of this current parliament.

While corporations and wealthy individuals pay less tax at home and salt much of their gains in tax havens abroad, the rest of us have had to pay for the loss of these tax revenues. As the effective rate of US corporation tax plunged, income taxes on households were static until the great recession led to unemployment and falling incomes. Median income in the United States is down 8.5% since 2000.

What needs to be done? In the UK, the government should end the tax-haven statuses of the overseas territories. Companies there must pay the same taxes as in the UK. If the poorest in these tiny enclaves suffer loss of income, then the UK government can compensate them. Governments should agree to an international agreement to end tax havens like Panama and impose economic sanctions against them if they will not. Above all, the tax-launderers and avoidance operators must be taken over. We need to take into public ownership and control the major banks and financial institutions that dominate the globe and encourage and provide services for the rich and corrupt elite (as revealed in scandal after scandal).

This would provide not only extra tax revenue to meet the real needs of people in public services and investment: it would also enable banking and finance to be put to use as a public service in providing credit for investment.

Of course, such measures will be vigorously opposed by most current governments and their rich backers and ignored by most left opposition movements. But without such measures the Panama story will continue.

Notes

1. See https://thenextrecession.wordpress.com/2016/02/24/british-imperialism-the-city-of-london-and-brexit.

2. N Shaxson Treasure islands, tax havens and the men who stole the world London 2012.

3. See https://thenextrecession.wordpress.com/2011/03/28/britain-is-open-for-business-wide-open.

4. www.wsj.com/articles/SB10001424127887324034804578348131432634740.

5. G Zucman The hidden wealth of nations: the scourge of tax havens Chicago 2015.