Never mind the public grandstanding about tax havens, in the lead up to next week’s G8 Summit in Northern Ireland. To stay rich, not only do the world’s eight wealthiest countries want tax havens, they need them.
By tax haven I do not mean a secrecy jurisdiction. Instead I am referring to a transparent, low or zero tax jurisdiction whose ‘right standing’ has been confirmed by the OECD in their updated ‘whitelist’ of countries in substantial compliance with international disciplines on transparency and the exchange of confidential taxpayer information. In fact, the only jurisdiction not on this list is characterised as committed to these rules but yet to implement them.
After the Vatican, this country, covering just 21 square miles (8.1sq.mi), is the world’s second least populated country, with 9,378 residents. As it continues to grapple with one of the highest rates of diabetes in the world, you can imagine that diverting national resources to fix a problem, not of their doing, may not be high on Nauru’s political agenda.
Not all tax havens are created equal, but to survive they must all remain focussed on providing value for money. Moreover, whatever their historical antecedents, population size, and whether are not they are located onshore or offshore; the members of the G8 need them.
Why? The simple reason is competition.
Although the anti-tax haven lobby spends millions trying to convince us that the single biggest cause of poverty is the tax saving shenanigans of immoral multinational corporations (MNCs); and that their primary motivation in using lawful tax avoidance measures is to take ‘food out of the mouths’ of babes’, the reason why poverty persists is just not that simple.
It is easy to preach that the only thing corporate shareholders and executives have in mind is the exploitation of local communities, reminiscent of the ‘slash and burn’ agricultural practices of the past. Indeed, if you allow the recurrent news headlines of corporate malfeasance, especially those involved in the extractive industries, to cloud your perspective, then you are apt to dismiss not as well publicized millions spent on charitable causes by these, and other MNCs.
Is this widespread corporate philanthropy driven by guilt? I don’t expect so.
Just as certain types of business practices are now accepted as unsustainable, so too is a certain kind of corporate ethos. Conglomerates now know that ultimately, the continued viability of their business model is not only dependent on customer retention and brand loyalty. What is also important is the support of the communities in which they operate and at whose behest they are able to source their raw materials.
It just makes good business sense.
The fact is, poverty is a two-sided equation. One half of the equation may be illustrated by the offering of a bribe, but that equation is only ‘balanced’ when the bribe is accepted. Corrupt public officials in the poorest countries, who watch their own people starve, while they enjoy many times a multiple of what they could ever need during their earthly existence, often lies at the heart of the poverty pandemic. This is why the Global Corruption Index is key to tackling poverty which measures the culpability of the parties, on both sides of the poverty ‘equation’, so that real solutions can be found and applied.
If we can step away from the very emotive but sound-bite worthy idea that tax havens cause poverty because they enable bribery and corruption, then maybe we can get to the real reason why MNCs employ so much time and effort in tax mitigation, and the truth about why poverty exists.
One very good reason why tax havens are used by MNCs to structure and manage their global affairs is because of the high rates of tax, principally, but not limited to, corporate income tax, in their home state, and the states where they sell their goods and services. As Apple, Google and others have explained, if the tax burden in the country where your company is set up is just shy of 40%, and the applicable taxes in the place where your goods and services are sold are also in that percentile, it makes good business sense to find a way to reduce the tax burden to manageable portions; in support of the growth of the business; and more importantly, because the generation of profits using legal means, is the company’s fiduciary obligation its shareholders.
Tax avoidance, unless it is proscribed because it is ‘aggressive’, is not unlawful. This is why in the absence of illegality; countries who complain about not getting their “fair share of taxes” invariably have to beseech companies to voluntarily pay more. This itself is another example of charitable giving by MNCs, in this case, to a state’s revenue authourity.
Why are high taxes a problem?
MNCs are in competition for shareholders, customers and the inputs needed to create the goods and services they sell. The easiest way to improve your financial position as a company, just like the case of an individual, is to reduce your taxes. That the MNCs spend large sums of money to optimise tax savings, is testimony to the importance of the exercise and the considerable dividends it can yield.
Again, it all makes good business sense.
Where do most of the world’s biggest multinationals call ‘home’? The countries of the G8. Afterall, you don’t get to be a member of the G8 without having MNCs; that’s why these countries are rich.
It’s in the interest of the G8 countries to support their MNCs and their use of tax havens because of the many back linkages to their own economies, created by solvent companies; such as jobs, foreign currency and other revenue raising measures that can be applied to the activities of the MNCs. Equally important is their listing and cross-listing on the stock markets of the G8, which is itself another driver and indicator of national wealth.
If the G8 don’t want tax havens, then by eliminating the chief reasons why companies go ‘offshore’ they could quite easily undermine the business model of these jurisdictions. The failure of the G8 to modernise their tax laws, which continue to distort global financial markets and create the market for tax havens in the first place, means that the G8 needs low and zero tax jurisdictions; but only those that can be made acceptable to the public by demonstrating transparency and a willingness to share confidential information about their clients.
If the G8 really wants to help the poor and starving, they can do so much more if they take the focus off the size of their tax base and instead deal with the issue of hunger head on. This will not be achieved by vilifying MNCs who, the developed, developing and under-developed states need. In the end, the reason why, despite the protracted recession, the G8 countries are still the wealthiest in the world, is because of the success of their MNCs, and their use of tax havens - everybody’s not so dirty, not so secret, secret.