Author and Page information
- by Anup Shah
- This Page Last Updated Monday, January 07, 2013
- This page: http://www.globalissues.org/article/54/tax-avoidance-and-havens-undermining-democracy.
- To print all information e.g. expanded side notes, shows alternative links, use the print version:
We might not like the idea of paying taxes, but without it, democracies will struggle to function, and will be unable to provide public services. This affects both rich and poor nations, alike.
Individuals and companies all have to pay taxes. But some of the world’s wealthiest individuals and multinational companies, able to afford ingenious lawyers and accountants, have figured out ways to avoid paying enormous amounts of taxes. While we can get into serious trouble for evading payment of taxes, even facing jail in some countries, some companies seem to be able to get away with it. In addition, if governments need to, they tax the population further to try and make up for the lost revenues from businesses that have evaded the tax man (or woman).
Why would companies do this, especially when some of them portray themselves as champions of the consumer? The reasons are many, as this article will explore. In summary, companies look for ways to maximize shareholder value. Multinational companies are in particular well-placed to exploit tax havens and hide true profits thereby avoiding tax. Poor countries barely have resources to address these — many have smaller budgets than the multinationals they are trying to deal with.
Yet, companies and influential individuals also pour lots of money into shaping a global system that they will hope to benefit from. If the right balance can’t be achieved, not only will attempts to avoid taxation and other measures undermine capitalism (which they claim they support) they will also undermine democracy (for even responsible governments may find it hard to meet the needs of their population).
Corporations and corporate-funded think tanks, media and other institutions are often the ones that loudly cry at the shame of welfare and the sin of living off the government and how various social programs should be cut back due to their costs. What is less discussed though is the amount of welfare that corporations receive.
Corporate welfare is the break that corporations get both legally and illegally through things like subsidies, government (i.e. public) bailouts, tax incentives and so on. Corporations can influence various governments to foster a more favorable environment for them to invest in. Often, under the threat of moving elsewhere, poorer countries are forced to lower or even nearly eliminate certain corporate taxes to these large foreign investors.
This distorts markets in favor of the big players. As such influence spreads globally, it contributes to a form of globalization that seems less like true free market capitalism that they talk of, but more like a modern form of the unequal mercantilism that prevailed during colonial and imperial times.
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When we talk about crime, we think of the violations of law caused by individuals, some of which are horrendous. However, almost rarely talked about (especially in corporate-owned media) is the level of crime caused by corporations. Such crime includes evasion of taxes, fraud, ignoring environmental regulations, violating labor rights, supporting military and other oppressive regimes to prevent dissent from workers, including violent crime against workers, and so on.
In the US, for example, back in the mid-1990s it was estimated that corporate crime cost the country about $200 billion a year.
Since writing the above two paragraphs originally when this page was created, the issue of corporate crime, in the U.S. particularly has taken on a whole new dimension. Events after September 11, 2001, have highlighted massive corporate failures and controversies all the way up to the President. While for now it is beyond the scope of this page to discuss all those issues (though some points are made below, as well as additional links), Benjamin Barber, professor of Political Philosophy is worth quoting, as he highlights an important issues:
But business malfeasance … arises from a failure of the instruments of democracy, which have been weakened by three decades of market fundamentalism, privatization ideology and resentment of government.… The truth is that runaway capitalists, environmental know-nothings, irresponsible accountants, amoral drug runners and antimodern terrorists all flourish because we have diminished the power of the public sphere. By privatizing government functions and refusing to help create democratic institutions of global governance, America has relinquished its authority to control these forces.
— Benjamin R. Barber, A Failure of Democracy, Not Capitalism, New York Times, July 29, 2002
Barber is highlighting that even in the most freest of societies, the United States, corporate influences have been so strong as to undermine fundamental democratic principles.
Before and since September 11, various companies and ordinary employees, shareholders and others have suffered because of accounting irregularities being highlighted, that showed that inflated stocks and other estimates of the company’s status were seriously wrong. More than just a few “rotten apples” that various economists and business elite tried to describe as the cause, is the system itself. As the previous link also points out, the systemic problems had long contributed to inequality and other problems, but now that even other aspects are being affected, it is now highlighting the deeper problems even more:
The crisis is not the result of a few bad apples. The entire barrel is rotten. In this case, the barrel is the framework of rules and regulations for business. Not every executive is a fraud or cheat, but if the system permits cooking the books, defrauding investors, overcompensating executives, rigging prices, polluting the environment, breaking unions and abusing workers, then it puts pressure on every business to move in those directions. The failures of the much-vaunted U.S. model of deregulated cowboy capitalism were already evident in growing inequality and insecurity and a declining quality of life. Now even much of the positive side - growth, profits, new businesses, productivity, soaring stock markets - has been called into question as an accounting chimera. It’s time to question the whole model - lock, stock and barrel.
— David Moberg, 10 Lessons from the Corporate Collapse, In These Times, August 16, 2002
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Tax avoidance is sometimes differentiated from tax evasion. Avoidance often applies to legal means (such as loopholes and clever accounting techniques) to avoid paying the full amount of tax, whereas evasion is often applied to more criminal forms of not paying tax.
As tax expert Richard Murphy notes , tax evasion and tax avoidance can happen on the same transaction for different taxes in different places and often involve elaborate trails involving more than one person, company or organization.
In reality it can be more complicated. For example, some regimes (legitimate or not) may try to extract taxes for questionable purposes and some people may object (often unsuccessfully) to their money being used for such purposes. History suggests that if a population is pushed too far, revolts can be violent. Many empires in the past have used taxes as one of many ways to extract wealth away from those they have subjugated to either enrich themselves or fund other projects, such as wars, in other parts of the world. In these cases, tax issues takes on additional dimensions.
This article, however, does not go into those aspects; instead, it looks at issues of corporations and others avoiding paying taxes that they would normally be expected to pay because everyone else in that society does. This can be through clever mechanisms and loopholes in the law, or through the use of tax havens, shell companies, and more.
The scale of tax avoidance
Through offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses.
For example, in 2000, Oxfam made a conservative estimate that tax havens had contributed to revenue losses for developing countries of at least US$50 billion a year. Side NoteAnd they stress that this is a conservative estimate as it did “not take into account outright tax evasion, corporate practices such as transfer pricing, or the use of havens to under-report profit.”
Individuals too have been involved in huge amounts of capital diversions. For example, former dictator of Nigeria, Sani Abacha, and his associates are said to have diverted over $55 billion to private accounts in foreign banks — Nigeria at one point after that suffered a $31 billion external debt burden.
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Transfer Pricing — Intercepting Wealth
Transfer pricing provides a multinational corporations' tax-avoiding dream. It allows the ability to set up offshore accounts and paper companies through which most transactions occur, without having to pay as much taxes. Internal accounting and costing is therefore adjusted to minimize the costs and maximize the profits.
Much needed revenue for social needs in a country is therefore lost this way.
The following quotes summarize this quite well:
The post-Second World War period witnessed not merely a rise in TNCs’ control of world trade, but also growth of trade within related enterprises of a given corporation, or “intra-company” trade. While intra-company trade in natural resource products has been a feature of TNCs since before 1914, such trade in intermediate products and services is mainly a phenomenon of recent decades. By the 1960s, an estimated one-third of world trade was intra-company in nature, a proportion which has remained steady to the present day. The absolute level and value of intra-company trade has increased considerably since that time, however. Moreover, 80 per cent of international payments for technology royalties and fees are made on an intra-company basis.
— A Brief History of TNCs, CorpWatch.org
(Note in the above quote at the sheer amount of intra-company trade as a percentage of world trade. Bear this in mind the next time corporate-media talk about the growing trade and prosperity for all.)
In this continuing battle over the world’s wealth, “transfer pricing” becomes a crucial aspect in the interception of the wealth of both Third World and First World countries. The multinationals either manufacture in a low-wage country or purchase cheaply from a local producer. The product, is then, theoretically, routed to an offshore corporation and invoiced (billed) at that low price. There the export invoice is increased to just under the selling price of local producers. However, the offshore company is nothing more than a mailing address and a plaque on the door. No products touch that offshore entity; even the paperwork is done in corporate home offices.
In 1980, there were eleven thousand such corporations registered in the Cayman Islands alone, which has a population of only ten thousand. [Many of these funnel a lot of money out of Central and South America] ... These corporations are doubly insulated from accountability. ...
These secret maneuvers of multinationals, and the huge blocks of uncontrolled international finance capital, make many of the statistics on world trade questionable. “If the sales of offshore American production facilities had been treated as exports, the 1986 American trade deficit of $144 billion would have become a trade surplus of $57 billion.” (Emphasis Added)
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 138.
As an example of corporate evasion, the following is about Rupert Murdoch’s News Corporation:
In March 1999, the Economist reported that in the four years to 30 June of the previous year, News Corporation and its subsidiaries paid an effective tax rate of only around 6 per cent. This compared with 31 per cent paid by Disney. The Economist notes that “basic corporate-tax rates in Australia, America and Britain, the three main countries in which News Corporation operates, are 36%, 35% and 30% respectively”.
The article points to the difficulties of finding out about the specifics of News Corporations’ tax affairs because of the company’s complex corporate structure. “In its latest accounts, the group lists roughly 800 subsidiaries, including some 60 incorporated in such tax havens as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands, where the secrecy laws are as attractive as the climate”.
The article continues, “This structure, dictated by Mr Murdoch’s elaborate tax planning has some bizarre consequences. The most profitable of News Corporation’s British operations in the 1990s was not the Sunday Times, or its successful satellite television business, BSkyB. It was News Publishers, a company incorporated in Bermuda. News Publishers has, in the seven years to June 30th 1996, made around £1.6 billion in net profit. This is a remarkable feat for a company that seems not to have employees, nor any obvious source of income from outside Mr Murdoch’s companies.”
— Tax Havens; Releasing the hidden billions for poverty eradication, Oxfam, June 2000
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Privatizing profits, socializing costs
One of the quotes above, is from J.W. Smith. There he describes the cost of transfer-pricing. He goes on to explain quite well the effects and points out that both high-wage and low-wage countries lose out as the wealth is siphoned to offshore accounts to avoid taxes. This is “historical mercantilism to perfection” by intercepting both the foreign country’s wealth and one’s own.
However, as he goes on to point out, there is a difference in that today’s corporations don’t have any loyalty to any nation, due to greed.
The last 20 years has seen the wealth of the United States reduced as corporations seek out cheaper and cheaper places where wages are less and environmental, safety and other regulatory measures are less or non-existent. (This has the effect of depressing wages and labor rights in industrialized as well as developing countries and therefore affects the wealth of those countries.)
Disparities between the wealthy and poor continue to rise, in the most powerful nation as well as all other countries. As Smith continues to point out,
Looking only at their bottom line, and listening to their own rhetoric, the managers of capital are unaware they are moving society back towards the wealth discrepancies of the early Industrial Revolution; this return to quasi-aristocratic privileges is a recipe for eventual contraction of commerce and destruction of their own wealth along with that of labor.
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), pp. 164-165.
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Tackling the problem, or pretending to do so?
While Smith wrote the earlier piece in 1994, it is applicable today as well, with wave of news about “corporate crime” around the start of 2000 and fascination of some CEOs and other executives as some major American companies have faced bankruptcy or have collapsed.
Yet, the media, while offering an outpouring of news and analysis have by and large concentrated on individual characters and looked for scapegoats (CEOs being the current flavor!). The impacts of the underlying system itself has been less discussed and when it has, often been described as basically ok, but just affected by a few “bad apples.” As media critic Norman Solomon describes,
On the surface, media outlets are filled with condemnations of avarice. The July 15 edition of Newsweek features a story headlined “Going After Greed,” complete with a full-page picture of George W. Bush’s anguished face. But after multibillion-dollar debacles from Enron to WorldCom, the usual media messages are actually quite equivocal — wailing about greedy CEOs while piping in a kind of hallelujah chorus to affirm the sanctity of the economic system that empowered them.
...Corporate theology about “the free enterprise system” readily acknowledges bad apples while steadfastly denying that the barrels are rotten. ... (“Let’s hold people responsible — not institutions,” a recent Wall Street Journal column urged.)
...Basic questions about wealth and poverty — about economic relations that are glorious for a few, adequate for some and injurious for countless others — remain outside the professional focus of American journalism. In our society, prevalent inequities are largely the results of corporate function, not corporate dysfunction. But we’re encouraged to believe that faith in the current system of corporate capitalism will be redemptive.
— Norman Solomon, Renouncing Sins Against the Corporate Faith, Media Beat, Fairness and Accuracy In Reporting, July 11, 2002
In some countries, the business community shouts a lot about government interference (in their profits) and recommends that the government be reduced in bureaucracy. While many governments are plagued with inefficiency, some is due to the powerplay of groups including various industries.
However, without the various governments, entire industries and market economies wouldn’t have got started in the first place. In the US, for example:
- The pharmaceutical industry received research and development funds from the US government.
- The Internet was created with public funds, but is now handed to corporations to profit from.
- Most major industries receive some support or bailout, including:
- Energy industries
- Information Technology
- Weapons/arms/military industrial complex
- and so on.
While the private companies profit, any costs, such as social problems resulting from environmental degradation, resulting social degradation and so on, are all socialized. “Privatizing profits, socializing costs” is a common phrase heard in critical circles.
And politics has gotten even murkier since the aftermath of the September 11, 2001 terrorist attacks on the U.S. Some industries have used the September 11th incident to say that has led to loss of business and to try and ask for government assistance as a result. While it has surely had an effect, for example, in the airline industry, as the UK’s BBC 24 news program on September 27, 2001 at about 8:30pm in an interview, said that before the tragic terrorist attacks some of the airline companies such as British Airways were already suffering quite badly, and this tragedy provided an excuse to get out of it.
Of course, this doesn’t mean all companies were using the excuse, but it does highlight the difficulty of addressing these issues during highly emotional times. Companies are understandably going to try and use this to their advantage, if possible.
Economist and professor at MIT, Paul Krugman highlights this with the case of the highly publicized Enron collapse, in a piece that appeared in the New York Times, quoting here at length:
Enron’s illusion of profitability rested largely on “mark to market” accounting. The company entered into contracts that would yield profits, if at all, only over a number of years. But Enron jumped the gun: it treated the capitalized value of those hypothetical future gains as a current profit, which could then be used to justify high stock prices, big bonuses for executives, and so on.
...the Bush administration has turned to the political equivalent of another increasingly common accounting trick: the “one-time charge.”
According to Investopedia.com, one-time charges are “used to bury unfavorable expenses or investments that went wrong.” That is, instead of admitting that it has been doing a bad job, management claims that bad results are caused by extraordinary, unpredictable events: “We’re making lots of money, but we had $1 billion in special expenses associated with our takeover of XYZ Corporation.” And of course extraordinary events do happen; the trick is to make the most of them, as a way of evading responsibility. (Some companies, such as Cisco, have a habit of incurring “one-time charges” over and over again.)
The events of Sept. 11 shocked and horrified the nation; they also presented the Bush administration with a golden opportunity to bury its previous misdeeds. Has more than $4 trillion of projected surplus suddenly evaporated into thin air? Pay no attention to the tax cut: it’s all because of the war on terrorism.
— Paul Krugman, Bush’s Aggressive Accounting, New York Times, February 5, 2002
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Rich country governments finally acting because it now affects them?
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I have not even scratched the surface of this issue here, at it is large and complex. Since the September 11 tragedy, this issue has ballooned incredibly and I have hardly discussed any of the issues arising since then. However, there are a number of organizations doing more research on this, and critics have pointed out these issues for a long time. You could start off at the following links to learn more:
- Tax Havens; Releasing the hidden billions for poverty eradication, Oxfam Policy Paper, June 2000.
- Global Shell Games; How the corporations operate tax free, by U.S. Senator Byron Dorgan.
- Corporate Welfare and Foreign Policy from Foreign Policy in Focus looks at the US roles in corporate welfare, providing statistics and a collection of articles.
- Essential Information has a lot of information on all sort of issues relating to corporate accountability.
- EnronGate from Alternet.org news web site is an example of many sites providing articles on Enron-related issues
- Explosive Revalation$, from In These Times magazine, provides a look at a banking system that secretly moves trillions of dollars around the world.
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Author and Page Information
- by Anup Shah
- Created: Monday, September 04, 2000
- Last Updated: Monday, January 07, 2013