02 April 2004
As governments wrestle with funding growing public services, big business is getting away with millions in tax avoidance schemes. Tightening tax laws could claw back vital cash for social investment
Throughout the Western world, ageing populations, crumbling social infrastructures and the fight against terrorism are calling for substantial public investment. Meanwhile, in their keenness to be seen as friends of major corporations, governments have been pursuing deregulationist policies and reducing corporate taxes. They have not enforced tax compliance laws, with the result that the tax avoidance industry has become rampant.
Now, new priorities are coming to the fore. The recent UK Budget included proposals requiring tax practitioners and corporations to register their tax avoidance schemes with the Inland Revenue. Any scheme operated without prior clearance risks being labelled 'unlawful' and may have serious consequences for the practitioners and their clients.
Will the tax avoidance industry fall in line? A tax partner at a major accountancy firm summed up the industry's mood: 'No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken.' Such naked pursuit of self-interest will increase government determination to shackle accountancy firms.
Britain is losing an estimated £25bn–85bn a year due to tax avoidance schemes. Standard tactics include tax havens, special purpose vehicles, complex corporate structures, creation of spurious assets and transactions with little or no commercial substance.
According to Oxfam, developing countries are losing around $50bn (£27.4bn) each year in taxes avoided by multinational companies, an amount large enough to provide health care, clean water and primary education to many.
Russia is now cracking down on oil giants and charging top business people with tax evasion. The European Union is trying to develop co-ordinated tax policies and putting Switzerland under pressure to share information about transactions sheltered by its tax avoidance industry. Yet Jersey is planning to introduce a zero rate of corporation tax — and is seeking to shift some £200m of taxes to individuals.
In the US, Senator Joe Lieberman told the Senate Committee on Governmental Affairs that the 'ranks of lawyers, accountants, and financial consultants have abused the law and their own professional ethics simply for the sake of huge sums of money to be made helping their clients evade taxes'. The US is estimated to be losing some $170bn of tax revenues each year. Following the revelations at Enron, WorldCom and Tyco, various inquiries have pointed the finger at the Big Four accountancy firms for their aggressive avoidance schemes. All face lawsuits and regulatory action.
The UK tax avoidance industry has flourished in the era of low corporate taxes. Companies pay less in social security costs than their Belgian, French, German, Dutch, Portuguese, Spanish or Swedish counterparts. The UK's 30% corporation tax rate is lower than that of Austria, Belgium, Canada, France, Germany, Italy, Japan, Portugal, Spain, the US and the Organisation for Economic Co-operation and Development average. Companies and their tax advisers, while having few qualms about claiming public subsidies, go to enormous lengths to avoid taxes.
Yet the tax burden on individuals has increased disproportionately. Overall income tax collection has increased from £48.8bn in 1989/90 to £109.5bn in 2002/03. For the same period, amid vast growth in corporate profits, the collection of corporate taxes has increased from £21.5bn to only £29.3bn — barely 2.5% of GDP. With annual rates of inflation averaging at 4% and company profitability at 12%, this represents a massive real reduction in corporate tax payments.
But, rather than curbing the tax avoidance industry, successive governments have preferred to tax labour, pensions, consumption and capital that is relatively less mobile, and to impose stealth taxes.
Increasingly, governments have recognised that there is a limit to how much they can borrow to finance public investment. Ordinary taxpayers are resisting the imposition of further taxes and are unlikely to vote for any party promising to raise income taxes. The new realities are forcing governments to consider raising revenues for social investment by tackling the tax avoidance industry and curbing its aggressive tactics.
Organised tax avoidance is a major threat to democracy's very existence. Citizens can vote for a government that promises to invest in health care, education, pensions and social infrastructure — but, through tax avoidance, companies can prevent governments from implementing democratically agreed policies for reducing social exclusion, poverty, hunger and homelessness.
Therefore, the question is, who governs: people — or major corporations and their advisers? Curbing the tax avoidance industry will be one of most crucial issues of the twenty-first century.