A masked demonstrator leaves a Starbucks coffee shop in central London in this December 2012 file photo. Big companies in Britain now pay less tax than they did 12 years ago despite a big jump in profitability, a Reuters analysis of official data shows. (Luke MacGregor/Reuters)
“Tax is the foundation of good government and a key to the wealth and poverty of nations, yet it is under attack,” John Christensen, an economist and director with the Tax Justice Network, a London-based activist group.
Read Hamida's report here: How the rich avoid paying their tax bill
Q: In your piece, you write “economists and businessmen say the root of the crisis is that the world’s wealthiest citizens and corporations refuse to pay their share of taxes by moving enormous sums to tax havens where there is little or no income tax.” Will this ever change?
A: The problem is we’re talking about huge amounts of money, hundreds of millions of dollars in profits and revenues. Every multinational worth its salt moves their money to offshore havens to minimize their tax bills. So there is a lot at stake. It is hard to see what motivation there is to change unless governments push through new laws. There is increasing pressure from the public in places like Britain and France because people are suffering from cuts to public welfare programs while the one per cent is perceived as greedy.
Remember Google chairman Eric Schmidt’s comment that he was “proud” of his company’s tax practices? The question is whether that political pressure will mean a change in the laws.
Q: Many people see “tax” as a bad word. Why is tax so crucial to good governance?
A: I became interested in this issue after living in the United Arab Emirates where there is no income tax. The rulers don’t need it – they are sitting on enormous amounts of cash because of oil. Abu Dhabi for example has a sovereign wealth fund worth an incredible $627 billion.
The rulers can build schools, offer universal health care, even give free houses to their citizens without giving them the vote which would mean they have a say in how they are governed. Emirati citizens are generally happy with this paternalistic arrangement. I mean, the government will fund their entire university education, even if they want to study overseas.
But in Europe tax helps bind the social contract between citizens and their governments. In other words, people pay income taxes and vote for the government that decides how that money will be spent. But in Greece that agreement is breaking down. The Greek government does not have funds to pay for schoolbooks, for example, because it does not have enough revenues from taxes to pay for them and citizens are protesting in the streets because the perception is the government is not living up to its end of the bargain. The whole social contract in Europe is fraying.
Q: James Henry, former chief economist at consultancy firm McKinsey, says “approximately $12 trillion of unreported, private financial wealth from the developed world is held in about 80 tax havens” How can so much money be hidden without anyone noticing?
A: The problem is tax rules were written in the 1920s and these guidelines outdated. There are loopholes and gaps which the super rich and multinationals can exploit to their advantage. If you want to hide $30 million from the taxman you need a pretty good accountant to do this for you without anyone noticing. There has been an attempt to create a ‘blacklist’ of tax havens and impose sanctions against those countries which have them but it has gone nowhere – partly because the countries that would be punished are powerful such as Switzerland and America and have baulked at the suggestion of sanctions.
Q: As you mention in your piece, people tend to associate tax havens as “sunny islands such as the Bahamas, where yachts moor in crystal-blue harbours”. Is this a fair description?
A: The cliché is that tax havens are sunny places for shady people.
It is also an outdated description. Many are in places like The Netherlands, Liberia, or Ireland or the United States so some prefer to call them ‘secrecy jurisdictions’. The state of Delaware, for example, is one of the biggest offshore havens in the world – it has 900,000 companies registered but there is hardly any information on who they are, what they do, who owns them and where the money comes from.
Q: What details surprised you about tax havens?
A: The mind-boggling numbers involved. James Henry from McKinsey told me that $12 billion of unreported wealth from Europe, America and Canada is being held in offshore havens. But when you take into account the Middle East, Asia and Africa the figure is closer to $32 billion. It has huge implications for development and aid. If the wealthy elite of those developing countries kept the money in their nations the revenue from interest that is taxed would help pay for a lot of wells, clinics and vaccination programs.
Q: Is the EU headed for a collapse?
A: No, I don’t think so. The European Union is still very wealthy and politically stable. There is inertia, for sure, as not many politicians seem to know how to cope with this problem. I am certain we will hear a lot about this issue in the coming year. Every week you hear about another company accused of dodging tax, Google, Starbucks, Barclays bank, the list goes on.
Q: What is the advantage to a country in having a tax haven if they don't get much money from the companies who register businesses there?
A: They hardly get any benefit from it. Places like the Cayman Islands, or Jersey in the UK suffer from what tax experts call the “financial curse.” A small minority of people, lawyers and accountants, benefit because they can make a lot of money. One economist told me they can also lobby the government on behalf of their clients to prevent anyone from getting access to information about their bank accounts. Having a tax haven in your midst also crowds out other economic sectors which makes the place increasingly dependent on tax haven activity in the same way that oil and gas economies end up being dependent on a very narrow sector. Saudi Arabia is the classic example of that.
Hamida Ghafour is a foreign affairs reporter at The Star. She has lived and worked in the Middle East and Asia for more than 10 years and is the author of a book on Afghanistan. Follow her on Twitter @HamidaGhafour