Governments have to be able to take action against companies that use unethical tax avoidance schemes, UK government adviser says
LONDON (TrustLaw) – A crackdown on global corporate tax avoidance should include legislation that takes into account an ‘ethical smell test’ so corporations are forced to abide by both the letter and the spirit of the law, said Paul Collier, a development economist who is advising the British government on tax and transparency issues.
British Prime Minister David Cameron announced in January that his priorities as president of the Group of Eight (G8) most developed nations in 2013 will be tax, trade and transparency, with a strong focus on how those areas can be reformed to help developing countries.
“If you talk to the corporate tax experts, they’ll tell you that there is no perfect legal solution,” Collier told TrustLaw.
“There is no magic set of rules that can’t be gamed and so ultimately there has to be a smell test. Is this reasonable ethical conduct? Is this in the spirit as well as the letter (of the law)?” Collier added.
If a company is abiding by the letter of the law but not by its spirit, there should be a way for the government to take action against that company, the University of Oxford economist said.
“If the company’s behaviour stinks, (there needs to be) some sort of override which says ‘well, never mind what you, the company, claim to be your profits, we are going to recalculate them and we are going to tell you what your tax liability is,’” Collier said.
In a speech at the World Economic Forum in Davos last week, Cameron laid out his plans for the UK’s G8 presidency in greater detail.
“We need more free trade. We need fairer tax systems. We need more transparency on how governments – and yes, companies – operate,” Cameron said.
Cameron said that while technological advances in communications and finance have made the world in many ways more open than ever before, in other ways it is closed and secretive.
“It’s a world where – regrettably – corrupt government officials in some countries and some corporations run rings around the letter of and spirit of the law to rip off hard-working people and plunder their natural resources,” Cameron told the annual meeting of the world’s power brokers.
CAMPAIGNERS' REACTION
Tax and transparency campaigners reacted to Cameron’s G8 priorities and his Davos speech with enthusiasm tempered by a desire to see action.
“We are quietly and cautiously delighted that Cameron has decided to say so much about the importance of tax and transparency,” Rachel Baird, a spokesperson for the campaign group Christian Aid said.
“I say cautiously because of course we need him to follow up, and we need the G8 to follow up, on all these very welcome intentions with action,” she added.
Many campaigners were particularly impressed that Cameron had provided significant detail in his Davos speech as to how he thought tax transparency could be achieved.
“To have one of the G8 heads of state talking, not just about tax transparency but specifically about automatic multilateral exchange of information is really extraordinary progress for the movement against illicit financial flows, which is so important for development,” Alex Cobham, head of research at Save the Children UK said.
WHY NOW?
Britain’s development ministry has long championed the need for transparency in development and humanitarian aid but experts say that a number of circumstances, both economic and political, came together in the last six months to push Cameron to make tax and transparency two of his three G8 priorities.
“Given the state of their economies, none of the G8 countries want this year to be a summit that’s primarily about providing money... so having an agenda that is about the key issues of governance and transparency is understandable, as well as being welcome in itself,” Alan Hudson, who leads the ONE campaign’s work on transparency and accountability, said.
However, domestic circumstances also played a part in Cameron’s announcement.
“From the development side, the pressure has been building for the last 5 years ... but what you’ve had in the last couple of years in particular, is the equivalent pressure in a domestic context suddenly just exploding,” Cobham said.
A Reuters report published in October showed that the high street coffee chain, Starbucks, had paid no corporation, or income tax in Britain in the past three years and had paid only 8.6 million pounds ($13.6 million) since 1998.
Over this period it sold 3.1 billion pounds worth of coffee, prompting criticism from politicians and media commentators.
In response, Starbucks said that it had always complied with British tax laws and blamed its low tax payments on a tough operating environment in the UK.
“Starbucks made the whole thing not just feasible, but politically desirable,” Collier said. “Starbucks made a lot of political difference because ordinary people in Britain and for that matter in America saw that this sort of behaviour was unethical,” he added.
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