Tax: can we find someone to blame?

If you’re a regular reader, you may know that I work in Luxembourg, and in tax. To many, those key words are enough to see dollar signs rolling in front of your eyes. So when the ‘LuxLeaks’ scandal broke out, it provided justification to many around the world: “those quasi-tax haven countries are unjust”; “they cheat”; “they’re becoming more and more powerful”; “they’re being utilised more and more by an increasingly wealthy elite to evade tax”. Do you think that’s true? Then did you also think the same about Panama?

A journalist organisation recently unleashed nearly 40 years of a Panamanian law firm’s records, which exemplifies how many prominent political figures and wealthy people have used offshore bank accounts to conceal assets. The Prime Minister of Iceland lost his job over the scandal. But it’s also tarnished the reputation of more than 140 other politicians and public officials from around the world – Ukraine, Argentina, Russia, China, Britain, and many others.

Some people ask so what? They quote Judge Learned Hand:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

It’s a great quote, since it unveils the hypocrisy of many critics. Yes, people do make voluntary donations to the state. But they’re the minority. Most people use every available legal tool to lessen their tax burden, and if they had the wealth to invest somewhere with less tax, would do so in a heartbeat. What’s more, capitalism encourages people to do whatever is legally permissible in order to maximise their capital assets. Thus within the rules of the game, it is not only perfectly reasonable, but more than that positive, to see people increasing their wealth with tax. Is there someone to blame?

Let’s take the example of British Prime Minister David Cameron’s late father. As a multi-millionaire stockbroker, he registered his own investment fund in Panama, and personally managed it until his death. Through this fund, the elder Cameron was a client of Mossack Fonseca – the Panamanian law firm in question. And even the fund’s prospectus explicitly stated that the fund intended to remain resident outside of the UK for tax purposes. So did the elder Cameron do wrong by using taxes to maximise his capital within a system called capitalism? Or is that system at fault?

Richard Hay, a specialist legal counsel to various British offshore centres, summarises the question well:

“There’s no surprise that criminals carry on activities in financial centres, because that’s where the money is. The real question is whether it is systemic.”

One of the main reasons why this story in Panama has attracted such attention is the widespread assumption that such criminal, or at least borderline criminal, activity is widespread. Although Mossack Fonseca itself claims that it applied all KYC (Know Your Customer) and AML (Anti-Money Laundering) due diligence procedures, the ICIJ (International Consortium of Investigative Journalists) reported that many banks, law firms and third parties involved in the transactions referred to failed to adhere to legal requirements. In other words, they did not carry out sufficient due diligence to ensure that their clients weren’t involved in criminal enterprises, tax evasion (illegal), or political corruption. Some of the documents even show that intermediaries deliberately acted to conceal certain transactions.

As a FATCA and CRS specialist, it’s my job to put due diligence procedures in place, and ensure they’re 2016-04-28 (2)implemented. So I have sufficient insight into this world to understand that it is not only possible, but indeed highly probable that sufficient due diligence was not carried out. Yet please don’t read any sort of conspiracy into what I say. It’s great that more focus is being given to the issues at hand in the press, and by politicians. But international cooperation on this matter is already getting better at a break-neck pace, and has has been for many years – especially following the 07/08 financial crisis. Indeed you need only take a random snippet from the FATF recommendations (international standards on combatting money laundering and the financing of terrorism and proliferation) to have a guess at how many institutions around the world will/will not be able to accord with such requirements in the next couple of years:

“Financial institutions should be required to maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.”

Given the number and complexity of new laws and regulations that companies need to comply with, and the fact that none of the due diligence work is funded by governments, it’s no wonder that application varies from one institution to the next. And can individual countries even monitor all the data that’s currently being requested? Of course they can’t!!

Therefore, although responsible individuals always have to take blame, I have to say that the ultimate fault, or problem, lies with the system itself. Yes, the days when secrecy was one of the main selling points for ‘tax havens’ is fast becoming history. But nonetheless the lack of a truly global tax organisation – similar to the WTO, but for tax purposes – is a significant hindrance to any truly synchronised efforts at tackling tax evasion. Such a tax organisation (and no the OECD does not, and cannot fill this requirement) would bring FATCA, CRS, UK CDOT, BEPS, and perhaps even model tax conventions, and bilateral tax agreements under its umbrella. With such oversight it could easily replace many of the complicated requirements with a simpler, and at the same time more rigorous, set of compliance requirements. But more than that, it could work towards rebalancing the existing inequities of the international tax system, which presently give huge bias to certain countries (and not just tax havens).

Are we giving up on democracy?

Erdogan, President of a nation that is moving closer to its democratic allies, recently declared that phrases such as “democracy, freedom and the rule of law” have no value in Turkey today. Recep-Tayyip-Erdogan-speech.jpgIt’s not  the first time he’s declared that he doesn’t mind being non-democratic if it achieves his goals. It’s hardly even newsworthy anymore, given that his reforms have already undermined democracy. But he’s not alone. Russia, Hungary, China, Poland, Thailand, Ecuador, Senegal, the Czech Republic, Bulgaria, Romania… The list goes on and on. All of these countries’ political elites are challenging democracy. In fact concerns about democratic backsliding have been present ever since the mid-nineties. Today, there is almost no debate left that democracy is being challenged by authoritarianism. Yet perhaps more worrying is that these challenges are not limited to the peripheries – countries where democracy is only one or two generations old.

In developed, western, liberal, democratic economies, the elites have more deeply vested interests in the existing status quo. So it’s perhaps understandable how little serious analysis exists in these countries. However, millennials (people born from the early eighties to the late nineties), and perhaps even more strongly Generation Z (those who are still teenagers today), have worse career prospects than their parents. It is a fact that these generations seem to be well aware of. Indeed, of 42 nations surveyed by the WHO, the life satisfaction of those aged 11-15 had gone down everywhere! Furthermore, those who polled as being the least happy were all in Europe: Macedonian, Polish, and British teens had the lowest happiness levels. But it’s not restricted to Europe either (see the number of Americans open to non-democratic rule in the chart on the right). As an extreme example of changing sentiments, the US Center for Disease Control and Prevention reported that a staggering 17% of high school students have seriously considered killing themselves!

As a millennial myself, I find it bizarre that I am at once continually shocked by such news, and yet at the same time in agreement with many of those surveyed. I am extremely pro-democracy. But I do not believe that democracy is headed in the right direction. I do not believe that what most people think of as democracy (an election, even with Proportional Representation) reflects the ideal type of democracy (no I don’t mean direct democracy, so please don’t comment about it). And I share the cynicism of those surveyed when it comes to the levels of trust we can vest in established institutions, be they corporate, or governmental. I too, was raised with the idea that I could achieve what I wanted if I worked hard enough for it. As an adult, it doesn’t take long to find out how relative that notion truly is. Are Generation Z finding out these harsh truths earlier? Or are they being extremified, and indoctrinated by media-friendly clips, which only show one small piece of the puzzle? Regardless, these generations are extremely unhappy with democracy today.

With such dissatisfaction, when voters feel lonely, oppressed by the day to day necessities of life, and alienated by politically correct politicians and executives who seem more machine-like than authentic; is it not natural to see a lurch towards populism? In populists such as Italy’s Berlusconi, America’s Donald Trump, Turkey’s Erdogan, and many others, people often see someone who is authentic. Take Trump for example. His language is every day. He says whatever comes into his head, just as if he were sat in the pub talking with his mates. Whatever the reason for it, it’s worrying to see such a lurch from democracy to populism, and for a myriad number of reasons. It evidences our growing frustration with a political system that we don’t perceive to have delivered. In demonstrating that populism has such potential, it further undermines our faith in the political system as we know it. And perhaps worst of all, because the present political system is identified in peoples’ minds with democracy, and its challenges are coming from populist and authoritarian sources as opposed to reformists; it leads people away from identification with democracy.

A recent Guardian article cited several surveys showing that, for example, only 42% of Australian 18- to 29-year-olds thought democracy was “the most preferable form of government”, compared with 65% of those aged 30 or above. A recent poll in Canada found that less than 50% of young adults favour democracy. Having followed such polls for several years now, I can certainly notice a trend. But where will it lead? Are we giving up on democracy? Or are we simply, and finally, casting off that arrogance that once saw us declare that our political and economic systems heralded an ‘end of history’? For now, the verdict is out.

Why did Labour lose the 2015 General Election?

They were neck and neck until the very night of the elections. The polls had us all convinced that there would be no majority government, and yet here we are. The 56th Parliament of the United Kingdom has 1 UKIP MP, 1 Green MP, 1 independent MP, 2 UUP MPs, 3 SDLP MPs, 3 Plaid Cymru MPs, 4 Sinn Féin MPs, 8 Liberal Democrat MPs, 8 DUP MPs, 56 SNP MPs, 232 Labour MPs, and majority of 330 Conservative MPs (as well as the speaker, who officially has no ties to any party). Parties such as the Greens and UKIP were defeated by the electoral system, media biases, and the current party funding setup. But the real surprises were for the Liberal Democrats to go from 57 seats to 8, the SNP to go from 6 seats to 56, and Labour to go from 258 seats to 232. Based on the fact that in 1997 Labour held 419 seats, and in 2005 they still retained 356 seats, it has been a great shock to many political commentators to see their vote fall even further. Why did it happen?

The thinking that caused Labour to lose in 2015 is the same thinking that characterizes the current leadership contest: one size fits all. The dominant opinion post election has been that Labour needs to move right, and re-occupy the centre ground. The Telegraph says that Ed Miliband was the wrong leader, who didn’t place enough emphasis on deficit reduction, and sat too far to the left. The Independent argued that Labour moved too far to the left. The BBC’s focus is also on business policies and the economy. Peter Mandelson in the NY Times, argued that more practicalities were called for, and that people viewed Labour’s message as a kind of ideological vendetta, which not only sought to turn inequalities into class war, but also conflicted with the ‘one nation’ sound-bite. Even the Guardian pulls it down to the twin factors of leadership and economic management. Indeed, the idea that Labour’s loss stemmed from fiscal laxity is supported by the fact that Shadow Chancellor Ed Balls lost his seat in the election.

There are some disagreements to this analysis. Len McCluskey, General Secretary of the trade union Unite, and one of Labour’s biggest financial donors, says that Labour’s message was simply too incoherent and confusing. However, Labour’s biggest losses were a) from the SNP, further to the left, b) from UKIP, way to the right, and c) from the Greens, to the left. One thing ties these parties together, and it’s nothing to do with left or right wing politics! Indeed, many of those who pursued economic voting in 2015 (voting for the party most likely to guarantee economic stability) in fact voted Labour in 2010 for exactly the same reason.

It’s the feeling that politicians care about them first and foremost (or rather the lack of that feeling) which really lost Labour the election. Indeed, it is the very same reason that trust in politics is completely shot.

clip_image002As a long term trend, UK party membership has significantly fallen from 2000 to 2010 (despite the current post election surge in membership for Labour and the Liberal Democrat parties).

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Perceptions about standards of conduct in UK public institutions from 2004 to 2010 have fallen greatly.

 

 

Public trust in politicians is at such a low level, that more than three quarters of Britons don’t trust them to tell the truth.

 

 

 

 

According to research conducted by Democracy Index and Democratic Audit, voter-representative relationships are in a terrible state:

“Less than one fifth of west Europeans trust political parties and only about one third trust their governments and parliaments […] If there is a breakdown of trust, we should expect this to be at the national level.” (Democracy Index 2013, p17-19)

“Public faith in democratic institutions is decaying, and reforms aimed at restoring public confidence in democratic arrangements have tended to prove, at best, ineffectual and, in several cases, counter-productive” (Democratic Audit, p9)

Of course these points are all true for the Conservatives as well. So it would be easy to put everything down to the populist messages of the Conservatives on immigration, the EU, and on jobs, combined with the constant scaremongering that defined the election. But if Labour learns this message, it will not win a mandate for fundamental change, because Britons are not all the same, and one size does not fit all. The truth is that politics is first and foremost about relationships. It’s localized, and winning messages are based more on market research than ideological starting positions. Scottish Labour feels like a member of Labour. The perception was that when Scots voted for devolution, they simply wanted Scottish Labour to work more closely with Labour in Westminster. They didn’t. They wanted someone to put them first. The SNP feels like the party of Scotland, and so voters feel like politicians are coming to them, actively forging strong relationships, and then standing up for those relationships, and the concerns that are brought to their attention through those relationships, in Westminster.

Inclusive democracy was at the very heart of this election, and yet almost no-one seems to realize it. If Labour transitions from a majoritarian system of democracy, whereby it targets certain demographics, to an inclusive model of democracy based on the principle that relationships should be forged with all people, and all people should have the right, through such powerful messages as grassroots democracy, digital democracy  and economic democracy, then Labour will win. If they stick with majoritarian democracy, Labour is doomed.

Process versus Principle: Why can’t I vote for my beliefs?

“It’s ironic isn’t it?” Phil asked me.

I raised my eyebrow in question.

“We live in an economy designed for choice and yet the choices we make in politics are those nobody wants to take – least of all, the young.”

Phil Badger is standing in the 2015 General Election in Lewisham Deptford, for Democratic Reform. He is a Goldsmith’s Politics graduate who works at the Royal British Legion, and is standing for democracy, social justice, jobs, and affordable housing. He is the candidate I choose.

Why?

When I asked Phil to tell me more, I expected the standard argument of every politician – a justification of his own opinion, with reference to a couple of well-known supporters. Instead, Phil answered with a question – “why can’t I vote for what I believe in?”

On the campaign trail residents asked an equivalent question – can they really vote for what they believe in? We found that people often search for the best funded candidate; those people who are backed by the biggest celebrities, and are most likely to win. Yet it is well documented that politicians have lower transaction costs in representing people like-minded people. By electing the elite, and the vested interests, we perpetuate our existing problems, and make the prospect of genuine reform more unlikely. These problems lie at the heart of democracy’s present weakness, and Phil’s identification of them ensures that he prioritises constituents over vested interests.

As Phil said, irony is everywhere in British politics. Whether it be the difference between equality in principle and practice, the sometimes absurd assumptions of the political elite, the difference between our reputation for corruption and the media reports, or simply those actions and policies which contradict one another – if British politics were a mug, it would be overflowing with oxymora. Phillip’s most unique selling points are his ambitions to localise politics, increase transparency and autonomy, and open Parliament enough to provide all people with opportunities to propose ideas. Indeed, Democratic Reform’s manifesto speaks of such decentralisation that we create “modern Greek city state[s].” Furthermore, Phil’s website shows that he practices what he preaches in putting everything online. Arguably, such practices will challenge oxymoronic political language.

We are among those countries with a claim to be the birthplace of modern democracy, and yet only 44% of 18-24 year olds felt inspired to vote in 2010. Voting apathy, a trend that may have been further induced by Russell Brand’s call to boycott the 2015 election, is not an idle concern. Indeed, non-voters have been increasing in number since the mid-nineties.

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Since 2003, Freedom House has ranked the UK at a level that cannot improve in political right and/or civil liberties. Yet, combine the pessimism and low voter turnout with the way our electoral system (First Past The Post) works (not to mention recent changes to the registration process, which further reduce the number of registered young voters), and we have an almost inevitable result that 2015 MPs will have no mandate to govern the young.

Of course a Democratic Reformist government would implement Proportional Representation, and massive constitutional reforms designed to bring process and principles in line. Yet even without such reform, global expectations and hopes may be of influence. India’s Aam Aadmi Party was founded in late 2012, and based on an anti-corruption campaign, won 67 out of 70 seats in the 2014 Delhi elections. Likewise, Spain’s Podemos Party is founded up on anti-corruption and inequality. Founded in 2014, this party is already Spain’s second largest party in members.

Imagine if that happened in the UK. Imagine what would happen if the non-voters voted. Imagine what would happen if voters put principles before process. That could happen by voting for Phil. He is passionate about electoral, political, and socio-economic reform. He wants a top-down system to be renegotiated. He wants the young to become active, and he wants to engage in a continual conversation with voters – not just during the election.

Phil’s ability to assess different opportunities, make judgements, and choose the best timing to act, gives me hope that such imaginations could bear fruit. In fact, responses on the campaign trail are quite unusually positive. So perhaps hope is on our side. The question is, will the young act on Phil’s vision for democracy? Or will they act on Russell Brand’s vision for a revolution?

Are Corporate Networks Growing or Shrinking in Power?

A corporate network (of people, not computers) is in form similar to any other type of network. It’s a series of connections, linking various corporate interests together. As such, history, composition, and influence, vary significantly from network to network. But treated as a whole, there is a popular assumption that of course corporate networks are increasing in power. This view is challenged by: ‘The Power of Corporate Networks: A Comparative and Historical Perspective’ edited by Thomas David and Gerarda Westerhuis.

David and Westerhuis describe how certain global trends can be identified:

  • Late nineteenth century – End of 1920s

The second industrial revolution (railroads, factories, steel and oil industries, electricity etc) triggered the rise of large businesses, and directors of these firms in many instances sat on the board of several different firms. Despite the fact that “during this period the emergence and rise of corporate networks can be observed for almost all countries” (p13), David and Westerhuis explain that the nature and extent of those networks were hugely influenced by politics, and also the strength of facilitative intermediaries such as banks, third party business groups, and colonial firms. In other words they were nationally based, not globalised. Therefore the form of these networks varied from one place to another.

Germany legalised cartel organisations (formal organizations of sellers or buyers, who agree to fix selling prices/purchase prices, or reduce production). Yet the United States (in the Sherman Act of 1890 and the Clayton Act of 1914) passed competition laws that prohibited cartels and monopolies, and outlawed direct interlocks with competitors (the most prominent example of interlock is where directors serve on the board of each firm). As a result of these laws, the “density and centralisation of the network increased [in Germany] in parallel with the growing degree of cartelisation, whereas in the US, mergers were preferred to cartels, and the density of the network declined” (p14).

Banks also played an important role in the rise of corporate networks; providing loans, becoming shareholders, underwriting securities issues, and giving advice. “The density of the Italian network peaked in 1927, when the influence of the larger banks […] reached its apex.” However it wasn’t always banks that played the crucial role. Business groups and colonial firms often acted to facilitate various economic activities. But it was noted that in each example a facilitative organisation was present to support growth.

    • 1930s – WW2

During this period some countries (the UK, Switzerland, France, Finland, Bulgaria and Argentina) continued to experience a densification of corporate networks, whereas others (the US, Italy, the Netherlands, Germany and Portugal) experienced the reverse. For the latter countries, the authors note that this was to a great degree the result of the Great Depression, and the falling number of interlocks between banks and firms resulting from banks’ weaknesses. Legal and political context also played a role. For example Portugal (1935), Italy (1936) and the US (the now famed ‘Glass-Steagall’ Act of 1933) passed legislation designed to weaken the interlocks between banks and firms. And in addition to Germany’s legislation, its expulsion of Jews from the country also expelled many directors with pivotal positions in the corporate network.

    • 1945-1980

The authors speak of an implied consolidation of corporate networks during this period. For Germany and Japan, occupation brought with it a series of US style laws, which resulted in decartelisation and de-concentration. For single party countries such as the USSR, satellite states, and China; firms were interlocked through the party, and the economic plans. Banks also experienced a great deal of growth during this period, particularly in Japan and the UK. Banks therefore contributed to the consolidation of the corporate network, financed a great deal of the post-war recovery, and in various countries contributed to the strengthening of the corporate network.

  • 1980 – Today

The authors speak today of a declining corporate network in many respects. Globalisation has led to less integration within national business networks. Neoliberalism, privatisation and increased focus on shareholder value has led to the shrinking of boards e.g. in Argentina the corporate network collapsed in the last decade of the twentieth century due to privatisation. The fall of the USSR destroyed the party through which many corporate networks were facilitated in the eastern bloc. Moreover, since the financial crisis of 2007/08 there has been a shift in values. David and Westerhuis explain:

“Legal concerns due to new regulations regarding directors’ liability seem to have undermined the social status and prestige conferred to big linkers, which explains the decreasing number of interlocking directorates during this decade.” (p21)

During the Great Recession the roles, power, and prestige, of banks has changed significantly. New regulations such as the Basel accords (and their national equivalents) require banks to hold more tier 1 capital, and bigger capital buffers. This means banks can leverage their assets less, have less available liquidity, are lending less, and can function less ably as global network intermediaries. But beyond this, after the scandals surrounding banks in the crisis, many elites are less than keen to be so closely associated with them. There are other explanations offered by the authors too, such as the use of alternative social networks, or the possibility that corporate elites are acting to hide their networks. But the conclusion is essentially that national corporate networks are now in decline.

Conclusion

The book’s proposition, that national corporate networks are, particularly in countries such as the US, becoming more disperse and less interlocked, is well evidenced. However there is much less attention given to multinational networks. Indeed “global network” comes up nowhere in the whole book, and “multinational” comes up only 7 times. Yet examples of multi-national corporate networks abound:

  • Alumni networks come from every university (and many schools and colleges) around the world. A quick google search for business networks brings up Oxford Business Alumni Network, which has ten thousand members, and of whom a significant number are likely to hold powerful jobs. The Texas Alumni Network (the Aggie Network) has hundreds of thousands of alumni. The University of Pennsylvania’s network currently includes Donald Trump, Warren Buffett, Noam Chomsky, and nine Nobel Prize winners, along with more than 130 clubs around the world. Regional clubs within this network can often boast their own successes. The co-founder of Venmo, CEO of Givology, Executive Director of Apex for Youth, and a Professor Emeritus at the university, are all cited on Pennsylvania’s Asian Alumni website.
  • News based networks are strong within the upper echelons of management. As big media companies deliver news to many of the world’s most successful people, it’s not a big step to use those contact details in order to build a business network. The Economist’s Network is one such large example with a global reach, and a heavily elitist weighting. 88% of its members are senior management level or higher.
  • Industry specific networks are also a significant piece of the pie, and many are quite new. G-Med for example, only founded in 2014, for doctors worldwide. It has over 15,000 members already, and a strong business slant. Type “GMED” into google and the first thing you’ll see is how well the company’s stock is performing. Moreover, many of these industry specific networks are often formed within multi-nationals as opposed to between them. I work in a multinational bank, and even they have recently built an internal social networking site (banks aren’t often high on Forbes’ list of innovative companies).
  • Online networks might not immediately spring to mind as networking tools for the elite. The news stories focus on facebook, twitter, Qzone, Google+, Instagram, Tumblr, Sina Weibo, Vkontakte and Snapchat. But with more than 300 million members, Linked In also high up this list, and it is there not because of the ability to share silly videos, but rather as a professional network. It facilitates introductions, headhunting, and the maintaining of business relationships over time and distance. There are other less well known business networking sites too. But the one thing that all of these sites has in common is that a decade ago, no one even imagined they would be so prominent today.
  • There are also many generic business networks. Business Network International is the biggest among these, with over 170,000 members worldwide. It claims to be able to generate billions in revenue for its customers.
  • Moreover, although not exclusively business related, it would be remiss of me not to mention sites such as Angel’s Club, Affluence.org, Netropolitan and ‘A Small World’. All of these sites ask huge membership fees, and are based upon exclusivity for the rich and famous. Indeed, ‘A Small World’ recently cut its membership from 850,000 to 250,000, in order to maintain the perception of exclusivity.

Therefore the book does not conclusively answer the question as to whether corporate networks are growing or shrinking in power. What the book is successful in doing is showing that national corporate to corporate networks have not, according to this analysis, proved to be the source of that influence since the 1980s. Indeed Cadernas (2012 p315-16) grouped countries based on cohesiveness. In countries such as Italy, France, Germany and Spain, the combination of a bank-based financial structure, interventionist state, firms with blockholders (owners of a large proportion of the firm’s equity and/or bonds), and low economic internationalisation, all lead to a power structure based on unity, concentration and control. Whereas in countries like Canada, Australia, Switzerland, the US and the UK,  a non-interventionist state, market based financial structure and widely held corporations result in a dispersed power structure, in which the corporate network is fragmented. Between 2010-2014 the average GDP growth rate of the former group with a dense corporate network has been (-1.9+0.3+0.1+-1.2)/4) = –0.675%, whereas in those countries with the dispersed power structure the average rate has been (2+2.5+1.9+2.2+1.7)/5) = 2.06%. Given the other factors in play, causality cannot be attributed in this case. However the comparison is indicative of a common consensus among academics: a sparser intra-corporate network does not seem to impede growth. Therefore the shift from dense national networks, to sparse international ones, may not signify the decline of corporate networks, but rather a simple transition from the age of national corporate aristocracy, to the age of global corporate empires.

What’s your opinion? If you have a personal story to share about the strengthening or decline of corporate networks, it would be great to hear from you.

Democratic Reform Movement

Thomas Jefferson famously said that successful democracy requires a revolution in each generation,every generation needs a new revolution and many democratic theorists have supported his argument. Indeed Tocqueville said that in order to interest the apathetic, democracy requires drama. Throughout the twentieth century that drama came from a series of major threats posed to democracy, especially from authoritarianism, elitism, and non-democratic economic ideas. It was against the context of those threats that each generation really did see a revolution, and one that was fought either implicitly or explicitly, about democracy.

The twentieth century’s first revolution was the political emancipation of women. Its second revolution centred on the introduction of radical new ideas such as Socialism and Fascism into the political mainstream after WW1 and the Great Depression (termed by many as a “reverse wave” in the advance of democracy). Its third revolution followed in the wake of WW2, with the ensuing waves of national emancipation from colonial powers, radical…

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Tax: Missing The Point in Luxembourg

Over the last few days an international investigation has hit the news following the leak of 28,000 tax documents from Luxembourg, mostly from PWC. It’s triggered a worldwide frenzy of journalistic and political criticism of Luxembourg’s political elite (and to some extent PWC). This is significant for the EU, because Jean-Claude Junker jean-claude-juncker-2-540x304is the current President of the EU Commission (the executive branch), and yet when many of the above documents were written he was Prime Minister of Luxembourg. Worse than that in fact; after 18 years as PM Junker came out with a speech saying that as EU Commission President he would:

“Try to put some morality, some ethics, into the European tax landscape.”

So the story is now that we have a villain and a liar at the head of the EU, as well as a proven tax haven at the very heart of Europe (Luxembourg was one of the EU’s six founding countries). Indeed the news is now peppered with talk about pressure on Junker to step down. BUT, this story is both naive, and also the story that tax avoiders actually want you to buy into. It is a story which harms international cooperation, and prevents focus from being where it actually should be if we want to resolve the problem of lost tax money.

As argued in the tax debate, focus on individual countries, and especially on the political elites, is part of a false and misleading narrative. I work as a Luxembourg Tax Analyst full time (more to assist compliance with government legislation than advice provided to companies, but I know several tax advisors – some of whom work in PWC). In this capacity I have helped to re-organise one of the tax payments systems used. Do companies always pay the cited national level of Corporate Income Tax? No, annoyingly far from it. I remember coming home from work numerous times and complaining to my wife that even in nominal terms we pay many times the amount of tax paid by big corporations. But let me ask you this: do you think companies in the US pay the national rate? How about the rest of Europe outside of Luxembourg? Or indeed anywhere else?

Moreover, I also work as a Political advisor in my spare time. In that capacity I have analysed, and spoken to, a lot of different politicians. My experience is limited, and perhaps it would be different were I to circle with the true elites. But nonetheless, I have never encountered anyone who’s actually clued up about the way that the international tax system works. They all know it’s a problem. But in reality it’s just too complicated for most elected politicians to fully understand. So the problems get shunted off into the administrative elements of the tax system. These administrations are left to understand vague and ambiguous political directions, to which private institutions spend huge sums pandering towards. But, and this is why today’s story misses the point, Tax Administrations around the world all play by the same rules!

This story on the news right now pertains largely to ATAs (Advance Tax Agreements). Within the parameter of these agreements Tax Advisors recommend new structures to clients that will save them tax. Sometimes these structures are complicated. Other times they’re relatively simple. But every time one of these agreements is taken to the Tax Authority, the tax advisors can:

  1. Make an argument of comparison to cases in other countries (appealing to the country’s sense of competition within the rules of the international ‘game’)
  2. Use asymmetrical information to make their argument (local tax authorities have information about their state, and not others – it’s the tax advisors who come to the table having already analysed the big picture)
  3. Make a sales pitch based on whatever ambiguous political values come down from the political elite

Shire is a good example. It’s a multinational drug firm, specialising in treatments for ADHD, Crohn’s disease and rare genetic disorders. Its structure, set up upon advice from tax advisors, sees offices in Ireland, Jersey, the UK and the US. By paying internal loans between these offices (sub-businesses), Shire is able to avoid paying tax on interest payments from countries where tax is high, on the understanding that tax is paid where the interest income is received. But, based on a chart showing money flowing from the company’s headquarters in Ireland, through two Luxembourg sub-units, and ultimately to to other Shire companies around the world; the Luxembourg sub-units could be presented to the Luxembourg Tax Authorities as simply an intermediary between other, larger businesses elsewhere. As part of this presentation, tax advisors can draw up an Advance Tax Agreement (sometimes called a ‘comfort letter’). There, they argue that the onus of taxation falls not on Luxembourg, but really on the final recipients of the interest income, because the loans are really only flowing through Luxembourg.

To the Luxembourg Tax Authorities this idea of tax transparency seems quite normal. Most countries recognise tax transparent companies, where the onus of taxation is not on the company, but rather on the final beneficiaries from the company’s income. In other words the company exists for administrative purposes, and tax just flows through. Moreover, Luxembourg is of course a very small country. It seems easy to believe that it is indeed being treated as no more than a flow-through entity. Therefore, Luxembourg’s tax collectors agreed that they did not need to perform a rigorous tax assessment of Shire’s operations, because the assessments should really be performed elsewhere. Of course this is a very positive light in which to paint these activities. But what I wish to press is that these arguments are easily made, information is often incomplete, and similar things happen all the way around the world. Moreover, every single act now perceived to be immoral was perfectly legal, and not only that, but encouraged under the existing corporate and capitalist systems in place.

The American system of Corporate Governance is the one which dominates almost all global corporations (Germany is a sometimes cited exception because of the power it gives to employees, but even there the pattern of change is towards the global consensus, and not away from it), and it says that the corporation’s primary goal should always be maximising shareholder value. Given that this defines the goals of almost the entire global network of competing businesses, is it really any wonder that Shire was able to justify its actions as below?

“Shire Holdings Europe No.2 Sarl [the Luxembourg sub-unit], is part of our overall treasury operations. We have a responsibility to all our stakeholders to manage our business responsibly; this includes managing our tax affairs in the interest of all stakeholders.”

If someone beats you in Monopoly, do you cry out that they were cruel and unfair to leave you bankrupt? Of course not! They were supposed to do that, because that’s what the game asks. Besides, if you target one player in the game and continually criticise them as being unfair, then you will probably find that while you’re distracted, someone else is even more busily trying to bankrupt the both of you. This is why, when political leaders such as US President Barrack Obama and UK Prime Minister David Cameron come out in speeches labelling multi-national tax-avoiding corporations as “unpatriotic”, they sound to many in the corporate world like the Monopoly player whining about their losses, and in a world where they have as much power as anyone else to affect real change in the rules of the game. This is why it is crucial that we focus on tax reform where it matters most: in the arena of international taxation.

The OECD’s Base Erosion and Profit Shifting Initiative (BEPS) is trying to resolve problems such as these (and many others) right now. The latest update relating to BEPS came just a few days ago, with the OECD releasing a discussion draft pursuant to action 7 of BEPS, in which they call for changes to the definition of ‘Permanent Establishment’ (one of the legal requirements necessary to set up residence in a country). So let’s focus on initiatives such as this. Let’s bring them into the limelight. Let’s raise their profile. And let’s challenge their fundamental assumptions too. The OECD is effectively a rich country’s club, as you can see from the map below.

OECD_member_states_map.svg

Talk about tax fairness is commonly about compliance with the OECD Convention, and the OECD’s rules on tax transparency (which countries like the UK and US are not compliant with). But what is not normally recognised is the fact that the OECD Model Convention stands contrary to several principles initially laid out in the 1928 League of Nations Treaty, and later promoted by Keynes when the Bretton Woods Institutions were being set up. These principles gave substantial taxing rights to source countries (where the income comes from). The OECD model benefits developed countries in which investors choose to reside their companies e.g. Luxembourg, the US, the UK, Switzerland, the Cayman Islands, Hong Kong and others. In fact the UN had to create an alternative model in 1980 to more fairly deal with the source countries.

If we’re going to be realistic about what we can do, and we do actually want to support tax fairness globally, and not just for ‘us’, whoever that us happens to be, then we’re going to have to:

  1. Bring the UN in on the BEPS initiative.
  2. Raise the profile of international tax
  3. Work towards a much broader state of cooperation, such that we can found an International Tax Organisation, with similar institutional capacities to the World Trade Organisation

The campaign for tax fairness is not a battle that can be fought and won. There will always be vested interests spending countless hours trying to find loopholes and exploit tricks of the system. An International Tax Organisation would ultimately be able to monitor these efforts, and provide assistance to all states seeking to protect their legitimate taxable incomes. But as that organisation is a long way off, then let us cooperate more on what is on the table today. And let us not turn to childish bickering and the age old classroom ‘blame game’. If we do go down that route i.e. the blame game; our problems will be worsened, not solved. The players don’t need to be changed. The rules do!

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