• The business case against tax evasion

    Posted by Trevor

    19 June, 2013

    Bill Gates was in Australia recently and was asked on ABC’s Q&A about the ability of large companies like Microsoft to choose how much (or more to the point, how little) tax they pay. Gates observed that it is quite legal to minimize tax using havens and secrecy jurisdictions, and if governments want to change the rules to collect more taxes they should! (He also said that companies would be happy to pay more in tax but I think his nose grew a little at that point.)

    This is an important contribution to the debate about the way multinational tax avoidance is reducing government revenues both in wealthy nations and in the global South. If there are no legal impediments to aggressive tax minimization by multinational companies, it is bound to flourish. Sadly, taking advantage of low tax regimes and secrecy jurisdictions is part of most major businesses’ global plans.

    Apple, for example, is borrowing $70 billion in order to fund a share buyback and dividend payments, despite having over $100 billion in the bank. The problem – from Apple’s perspective – is that the large bank balances are held “offshore” and if the money is moved back to the US, Apple’s home, it will be taxed. Of course, Apple’s directors knew that this tax on repatriated profits would apply when they set up their offshore companies and structures in the first place, so calls by company executives for it to be allowed to return these profits to the US without paying tax on them are particularly self-serving.

    It is important to note that companies benefit greatly from a range of government-provided (and tax-funded) services in the countries in which they are based and operate. These include basic transport and communications infrastructure, an educated workforce, legal institutions, enforceable contracts and limited liability. In the case of primary industries it also involves access to the land, its produce and resources. Companies therefore have a strong collective interest in ensuring that tax revenues are not critically eroded.

    At a broader level, the fact that companies can play tax regimes off against each other leads to sub-optimal investment decision-making. It promotes poor choices, as projects are not developed in the best location, but rather in the best after-tax location. This leaves everybody worse off. 

    Business works best where the playing field is level and the rules apply equally and transparently to all. Individual companies may prosper through aggressive tax avoidance or by hiding transactions in secrecy jurisdictions, but such practices undermine the positive contribution that business and investment make to the common good. It also undermines public trust in the fairness of national tax systems. 

    From an investment perspective, it is clear that consistent tax rules along with greater transparency around multinational business activity would allow companies to concentrate their efforts on genuinely adding value through generating and selling goods and services – rather than employing small armies of accountants and lawyers to reduce their global tax bill.

    Governments have tended to turn a blind eye to multinational tax avoidance and the web of tax havens and secrecy jurisdictions that make it possible. However, in this age of fiscal crisis, it makes sense to plug some of the gaping holes in the tax bucket. This is why international tax havens and tax avoidance are on the agendas of the G8 summit in Ireland this month, as well as the G20 finance ministers’ meeting in Russia in July.

    For developing nations, the problem is even more acute – far more money is lost through tax evasion than is given in aid. Some 5.6 million children are expected to die during 2010 – 2015 as the direct result of the stripping of financial resources from developing nations through tax evasion and minimisation.

    A system in which corporations leave huge sums idly in the bank, while governments in poor nations can’t pay doctors and teachers clearly needs fixing. 

    Fixing the global tax system requires co-ordination and political will, as the vested interests that benefit from the status quo are powerful. However, greater transparency and stronger action against tax avoidance is both possible and necessary. Australia should take a lead in calling for:

    • Country by country reporting of revenue, profit, and number of employees by all major multinationals;
    • International co-operation between tax authorities to exchange information about cross-border transactions;
    • Tougher rules on the disclosure of the owners and beneficiaries of trusts and companies registered in secrecy jurisdictions and tax havens.

    Time to join the Micah Challenge’s call to our Government to shine a light on tax evasion and corruption.

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    Trevor Thomas is the Managing Director of Ethinvest, and a former Chair of the Board of TEAR Australia. He has worked in the economics department of one of Australia's major banks, as Senior Economist with AP Dow Jones Telerate, and for six years in Paraguay in community development.