When Governments operate through Tax havens

Logo of the African Development Bank (AfDB), p...

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Should the market emulate the state or should the state act more like the market? This has become a hot issue as the became apparent that the new African Guarantee fund will be established in the tax haven rather than in Kenya were it will operate in practice.

The African Guarantee Fund or AGF is supported by Denmark, Spain and the African Development bank and contains around 50 million USD at the moment this figure is however expected to grow to 300 million in three years time. It is expected that AGF will invest in small and medium size companies (SMEs) who need access to credit. The back will operate through other banks in the region and not have direct relations to the customers.

The controversy comes from the way that the bank is going to e operated as AGF is set up as a company limited by shares under the business law of Mauritius, a country that have no urgent need for a access to the bank services. A branch of AGF will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non-bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.

With its headquarters in Kenya it would be natural that the bank would be a legal entity there but this is however not the case. The reason is that the corporate tax on Mauritius is 3% while it in Kenya is 25% (inline with the Danish tax on companies) and therefor it is cheaper to operate offshore maximising the return.

These types of legal set-ups are not uncommon in the world of global business were there the boundaries of companies are fluent and business is conducted on a global scale. Companies have for years been criticised for their tax practices as they often avoid high-tax countries for regions that have lower tax and a more relaxed approach to legislation. The most famous (or infamous) tax havens are Bermuda, The Bahamas, Cayman Islands, Panama, Monaco and Switzerland. The companies that are currently operating through tax havens are big multinationals like Citigroup, Pepsi, Morgan Stanley, Bank of America and Oracle.  Quite a few of these were heavily involved in the financial scandals that lead to the global recession that we are currently experiencing.

The main question is if a Civil Society organisation like AGF, should operate the same way and under the same ethical codex as multinationals that politicians frequently criticise?  One government official from the Danish Liberal Party Integration Spokesman Karsten Lauritzen has rejected criticism that Denmark, which regularly complains about the use by international companies of tax havens, should itself choose to place a financial institution where it pays least tax.

As he puts it “We are not in Mauritius to earn money. The goal is to channel as much money as possible to poor people in Africa, so I cannot see that there is a problem,” He added that the predominant reason for the location was because it was easier and less bureaucratic to set up a financial institution in Mauritius. Which goes without saying when one of the main income sources for the country is to provide cheap and easy access to building offshore companies.

At the same time he basically stamps the Kenyan government and business environment as corrupt and unnecessary bureaucratic.

While some of the stakeholders continue to support the bank project there are critical voices starting to be heard, who really does not like to be associated with this form of speculative thinking. The NGOs are more critical of the banks lack of focus on the poor and people in real need of aid rather than credit than the more complicated tax system in which it will operate though.

But the central dilemma remains the same. If AGF is going to operate on market terms it needs to function as everybody else on the market basically levelling the playing field so to speak. And in this line of business it means that one operate through places were the tax is low and the relative bureaucracy is small translating into less cost and more profit.

On the other hand if one wants to do the ethical ‘thing’ it means that AGF needs to operate outside the market and therefor will not be subjected to the conditions that a only a market can provide. This means that it will not be able to have the same return on investment that other investment banks will be able to provide and therefor it will properly not be financially sustainable in the long run.

The ethics is clear to most. There is a huge difference if a company pays 3% or 25 % in tax and most of us have been critical of big corporations that for years have paid minimum tax while at the same time having huge profits. So when the government does the same by operating a company through a tax haven we perceive this as being unethical and to some extend hypocritical. On the other hand we would like to see that our tax money is put to good use and not eaten up by taxes and other forms of fees along the way.

I think this case highlights a huge dilemma that we are faced with. To what extend should we have an overlap between Government and Private business. With CSR we have already seen a move from regulation by law to self-regulation, self-monitoring and self-reporting. This case shows that the move also goes the other way when governments and CSO starts to operate like business and under the same conditions. While we ‘expect’ companies to some extend to be unethical and hypocritical we maybe in the future that even governments will act in much the same way. The question is if this is really what we want? and does the aim really justify the means even when its for the ‘greater good’?

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UN Guidelines leads the way for Business and States but were to?

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After six months stakeholder communication is the UN guiding principles for Human and Labour Rights finally finished. The aim was to create some form of standard which both business, countries and not least NGO and CSO could positive respond to. In total has the principles been under way for about six years with several draft and papers for discussion been issued during the period.

Again it is the three guiding principles that Ruggi presented some three years ago that makes up the cornerstone of the work, Protect, Respect and Remedy. 

The principles are interpreted as “The Guiding Principles highlight what steps States should take to foster business respect for human rights; provide a blueprint for companies to know and show that they respect human rights, and reduce the risk of causing or contributing to human rights harm; and constitute a set of benchmarks for stakeholders to assess business respect for human rights.”

The principles are organized under the UN Framework’s three pillars:

  • The State Duty to Protect Human Rights
  • The Corporate Responsibility to Respect Human Rights
  • The need for greater Access to Remedy for victims of business-related abuse.

 

While states are a fairly established entity on this planet there are still debate what role business should take. To what degree do we want corporation to take over some of the functions that we normally contribute to the umbrella of responsibility of the state? In the framework presented is “The role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights.” Of cause referring to the functions of business in relation to the three principles described. With this description we can’t narrow the responsibility to just organizations operating within an economic rational but must include organizations as a whole in whatever form they take. The principles go further and state “These Guiding Principles apply to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.”

Furthermore states must provide jurisdiction if there is none to business enterprises basically meaning that business should be empowered to uphold Human Rights. “This requires taking

appropriate steps to prevent, investigate, punish and redress such abuse through effective policies, legislation, regulations and adjudication.”

But are we really interested in that business takes over the role of the state even if the state is weak? What will happen when the state get back on its feet and wants its power back will business give it back voluntarily or will there be strings attached which is dictated by the company itself. These are largely unanswered questions which both business and states need to address in order for the framework to be really effective. In the list of the biggest economies in the world there are now companies like Wal-Mart, Shell, Exxon, BP, Toyota and Total all with significant influence on national economies and not least politics as I have argued before.    

The word Governmentality comes to mind when companies are being tasked with governing themselves beyond the real control of a single state authority but rather with a pseudo from of governance which is more unreal than real power.  Maybe this is what Ruggie is refereeing to when he says that “Endorsement by the Council would enable the global community to move beyond the confusion and polarization of the past by establishing an authoritative point of reference that recognizes the central role that States need to play, gives businesses predictability in what is expected of them, and provides other stakeholders, including civil society and investors, the tools to measure progress where it matters most – in the daily lives of people.”