Tax evasion part of corporate culture

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Most people would think that countries like Spain, Greece and Portugal would rank among the very top of countries for tax evasion schemes. But even though the US has a relative low tax rate the country tops the list of places where tax evasion seems to be part of corporate culture.

So how big a problem is tax evasion? Take a look at the table below from Tax Justice Network, a London-based watchdog that fights against tax havens and for more transparency.

America’s “black” or “shadow economy,” represents 8.6% of GDP, while the percentage is by far the smallest of any of the countries on the list it does represent a significant monetary post and represent roughly the GDP of Denmark the 32 biggest economy in the world according to the IMF.

How does the companies in the US manage to avoid tax? Well, one suggestion is that companies like Google, Apple and Amazon manage to cut their tax bill by one third through a series of moves that involves countries in Europe and in the Carrabin, a system is also used by big European companies to transfer funds to tax havens. My friend Sarah Wenger has created the infograph titled “The master of Tax Evasion” that explains how the system works.

Masters of Tax Evasion
Created by: www.MastersDegreeOnline.org

Socialist government will tax multinationals – Nestle is next

Creating Shared Value Forum 2010

Image by Nestlé via Flickr

The new socialist minister of Tax Thor Möger Pedersen will upgrade the Danish treasury organisation with an extra 160 employees in order to investigate international companies on their tax books.

“It is high time to intervene. The Government will increase the transparency of companies’ payment of corporation tax. All the promise and all must contribute to the Danish economy back on its feet – even the multinationals’ he says

In practice this will mean that multinationals tax information will be posted on the treasuries website and their books will looked into. The claim is that these companies even during the good times up to 2008 (or 2007) did not pay their fair share and now that things are bad they claim even higher tax reductions.

One of the companies that are being named is Nestle a company that have been under scrutiny in several countries around the world for their ability to pay very low taxes. They even have tax manager positions that make around 100’000 Euro with the purpose of reducing the tax paid by the company.

With the prospect of being named and shamed the company is threatening to move their Nordic headquarter to Sweden. Which is strange is this country is even higher taxed than Denmark but I guess they had not really thought the idea fully through. As the Danish CEO of Nestle Fred Holm puts it.

“We have our Nordic headquarters in Denmark, but if we are to be exhibited in this way, then we might as well move to Sweden. Then there is no reason to be in Copenhagen. We want to be here, but we will not be shown, when we just follow the rules, “says Fred Holm, who says that Nestslé has 230 men employed in Denmark.

To be honest I find the idea appealing. What could our society do if we all contributed to the same pot? Some of these companies have made billions of Euros on operating in these countries and have not paid their fair share of tax for several decades. Their ability to hide and shuffle their money around has been remarkable and clever. While I do not think they have done anything illegal they could at least be challenged on their morals and ethics.

On the Nestle website the company proclaims that they are all for share value e.g. the Kramer and Port kind I would guess, but in the interpretation it means that

Creating Shared Value is a fundamental part of Nestlé’s way of doing business that focuses on specific areas of the Company’s core business activities – namely water, nutrition, and rural development – where value can best be created both for society and shareholders.”

So according the Nestle interpretation of CSV it does not include tax so one could hardly claim that they are unethical on that point on the other hand leaving it out does say something about the company mind-set and approach to the societies it operate in.

If a link between profit and society can’t be established it is not in Nestle mind CSR and therefor is tax not included.

I for one will be looking forward to what the Danish government will do and how they will go around the business of making multinationals pay more back to the society that they operate in. One must not forget that there are companies that do pay their fair share and that they are put at a disadvantage by companies that have the ability to shuffle money around. It could actually be a competitive advantage that tax paying companies can utilize in the Danish market as tax evaders leave and create new market opportunities which were out of reach before.

The Marx Solution in times of trouble – The Communist manifesto

The grave of Karl Marx in London.

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In time of trouble we tend to think that back in the days everything somehow were better, that the economy was better, more had jobs, that there were more peace and security, etc. And when we face a situation as we do now with large and even global scale problems we might think about what alternatives that is out there.

In the preceding year and for sure in the coming month we will see proponents of fundamental socialism come forward and offering solutions which at the outtake might seem attractive. So I would like to remind you what fundamental socialism is all about and why it is a dangerous road to tread.

  1. Abolish all property in and applications of all rents of land to public purpose.
  2. A heavy progressive or graduated income tax
  3. Abolition of all rights of inheritance
  4. Confiscation of the property of all emigrants and rebels
  5. Centralization of credit in hands of the state by means of a national bank with state capital and exclusive monopoly
  6. Centralization of the means of communication and transport in the hands of the state.
  7. Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan
  8. Equal obligation of all to work. Establishment of industrial armies, especially for agriculture.
  9. Combination of agriculture with the manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the population in the country.
  10. Free education for all children in public schools. Abolition of child factory labor in its present (1848) form. Combination of education with industrial production, and so on.

The manifest is of cause a product of its time and we have in the western economies no longer as much industry as we had in the start of the century. But even translating the words into a modern contact does not make them any more appealing and it would be difficult to imagine that such principles could be implemented without the extensive use of violence. Just imagine what would happened if we took everybody’s right to inheritance away and gave it to the state or if we nationalised the banking system. Which was actually proposed by some left-wing activist during the 2008 crisis. Or what if we told certain percentage of the population that they had to farm the land even though they had lived in the city all their lives.

I for one would not like to live in a country were the tax was even higher than it is now (I live in the number one or two most taxed country in the world) or see that immigrants or people who were in opposition had their estates confiscated just because of their ethnicity or the belief system they subscribe to.

So think about the alternative when contemplating what we can do and what we should do in the future and that the easy solution seldom is the best in the long-term.

A short list of events that Karl Marx anticipated would happen but didn’t includes:

  • It was anticipated that the rate of profit would decline because of the inability to exploit workers forever – This has never been the case and even more capital have been accumulated over time as new markets and products have been introduced.
  • The working class has not fallen into greater and greater misery. Wages for one have risen almost on continues bases ever since the manifest was written. All the industrialised countries have seen a dramatic increase in living standards for the average worker and they have never been as educated as they are today. The middle class have not disappeared but have rather expanded to such an extent as we talk about different layers of middle class.
  • There is little or no evidence that industries have concentrated in the capitalist societies. One could argue that Industry clusters is a type of concentration but these are drive my totally different incentives such as access to labour, infrastructure and skill.
  • None of the socialist societies have been prosperous or given any benefits to the people who live in them, which have not been, surpass by capitalist countries. In all areas capitalism have outperformed socialist countries like healthcare, technology, education, innovation, small business, human rights, labour rights, environmental issues the list just goes on.
  • Despite several setbacks in the form of depression, bubbles, recessions large scale fraud and even evil doing the capitalist system seem to prevail and flourish as never before.
  • Marx believed that price and labour were dependent on each other and there for more labour intensive product would be more expensive than capital driven business. However, it seems to be the other way around that the more labour your are able to take away from the product the more value you are able to add to the final outcome.

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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’?