A year in tax
Following on Ethical Consumer’s work on tax avoidance and public service providers in 2012 Leonie Nimmo reports on our campaign so far.
Public anger over tax evasion and avoidance has reached fever pitch. When companies winning public sector contracts avoid tax, the inequities of our current economic system are laid bare. It is becoming increasingly apparent that money is haemorrhaging out of the system, flowing from the pockets of the people to the offshore accounts of corporations and their shareholder beneficiaries. Small businesses are hit with a myriad of taxes that help to render their survival improbable, and VAT serves to keep poor people in their place.
The cost of maintaining vital public infrastructure, in addition to attempts at financial stabilisation in the face of uncontrolled, chaotic capitalism, falls ever more heavily on the shoulders of ordinary people. Claims by political parties to be addressing the issue of tax avoidance are barely credible given the current levels of redistribution of wealth, from the poorer to the richer, through the combined mechanisms of taxation and privatisation. The system that facilitated such a situation is currently set to remain fundamentally unchanged, regardless of politicians’ promises.
Britain is also going through a process of economic structural adjustment, which has significantly ramped up a gear since the coming of the Coalition. And as the remaining assets of the State get sold off, we’re told that austerity measures are a necessary evil for us all.
People are, however, fighting back. This article looks at tax avoidance and public procurement in the UK, developments in the international arena and where Ethical Consumer will be focusing its resources next.
Tax and procurement in the UK: finding pressure points
In February 2012 Danny Alexander, second in command at the Treasury, was hauled into the firing line in the House of Commons after it emerged that the head of the Student Loans Company (a public body) was being paid through a tax avoidance scheme. He promised action on this, stating that accounting officers should consider the wider cost of lost revenue to the Exchequer when evaluating value for money.
Ethical Consumer wrote to Mr. Alexander to ask whether the same principles should be applied when awarding government procurement contracts. He answered our question in his speech at the Liberal Democrat conference in September 2012, stating that he had shut down the civil servant scam, but discovered that there was nothing to stop the companies winning public contracts avoiding tax. He said he had tasked HMRC and the Cabinet Office with finding a ‘workable solution’ to this problem.
But Ethical Consumer discovered that a 2007 document produced by the Treasury, ‘Managing Public Money’, instructs government bodies to restrict contractors’ use of tax havens.6 We flagged this to Labour MP Michael Meacher, who asked the Chancellor of the Exchequer, George Osborne, what steps the Government has taken to monitor and enforce the principle, how many violations had
occurred and what penalties had been imposed.
On 6th November, it was Danny Alexander who replied. He admitted that he didn’t know if any violations had been identified, that there are no penalty regimes in place, but that contractors risked losing specific contracts. He again referred to the ‘workable solution’ apparently being cooked up by the Cabinet Office and HMRC, this time stating that it was part of a review of procurement and tax.
Mr. Alexander doesn’t have to wait for HMRC and the Cabinet Office to tell him what to do. All he needs to do is listen to the people across the world demanding more information from companies about their activities. The only workable solution is greater financial transparency, and the only credible way of getting that is through country by country reporting.
Country by country reporting
Country by country reporting by corporations is a pivotal demand from civil society groups campaigning on tax. At the moment, companies are only required to disclose financial information at a group-wide level, so things like profits and taxes are aggregated and it’s impossible to see whether companies are contributing their fair share of taxes where they are due.
Country by country reporting would mean companies had to disclose key financial information, plus the number of its employees, in each jurisdiction they operate. Slowly but surely, country by country reporting is making its way on the international stage.
In June 2012 Norway’s Minister of Finance Sigbjørn Johnsen announced that country by country reporting would be introduced for Norwegian companies operating internationally by January 2013. A primary aim of the initiative is to increase accountability for companies operating in the extractive industries such as the oil and gas sectors. “Our aim is to make cashflows visible and empower the authorities in the countries where our companies operate to take responsibility for the revenue they earn from their natural resources” said Johnsen.
In June 2010, the Île-de-France region of France announced that it would require full transparency of financial institutions with which it did business, in the form of country by country reporting. Largely in response to the public’s targeting of election candidates, ten other regions have since followed suit, and other regions have taken less concrete steps towards pushing for transparency by financial institutions.
The European Commission’s Committee on Legal Affairs recently announced that it wanted to require companies operating in the extractive industries to report country by country. The deal has yet to be agreed by the 27 national governments.
In America, the Dodd-Frank Wall Street Reform and Consumer Protection Act was a response by Congress to the financial crisis. It was signed into law by Obama in July 2010. Subsequent corporate lobbying went into overdrive. It took two years for the relevant regulator (the SEC) to adopt rules laid out in the legislation requiring the extractive industries to disclose payments made to governments. The SEC was subsequently sued by oil and gas corporate lobby groups in October.
Public contracts and tax: the international landscape
How to address tax avoidance by government contractors and suppliers is a question currently being asked throughout Europe and one which is likely to gather significant political momentum in the near future. Mass mobilisations in France, Finland, Sweden and Norway and have resulted in some national politicians taking serious action on the issue.
On 12th September 2012, Helsinki City Council voted to counter and avoid co-operation with companies that have links to tax havens. A study has been commissioned that will examine the legal implications of different options.
These include compulsory reporting requirements; voluntary arrangements with companies as part of the procurement process that allow for auditing if suspicions arise regarding tax haven connections; and a break clause in contracts in the event of not enough information being provided or unethical practices being found.
Politicians in the Swedish city of Malmö have campaigned for a new procurement Code of Conduct to prevent the city dealing with companies that invest profits in tax havens. Consensus was not reached amongst legal experts that it was possible to exclude candidates from the bidding process on the basis of tax haven links.
The City is now considering further options: whether it is possible to require financial transparency within the specific terms of the contract, or to apply a principle related to public access to tax-funded activities in the welfare sector.
France announced legislation to deter economic relations with ‘uncooperative states’, a quaint euphemism for tax havens, in 2009. Its list of countries was adapted from the Organisation for Economic Co-operation and Development’s (OCED) list of uncooperative states and adjusted to exclude European countries and those with which France had information-sharing agreements.
The list is revised every year and in 2012 only eight countries were on it. It has been criticised as inadequate by campaigners due to the fact that it excludes the most significant tax havens, or ‘secrecy jurisdictions’.
Our next steps on procurement
Public sector contracts
We want local councils and other public procurement bodies to take into account corporate tax strategies when they award public contracts. The law isn’t clear in this regard, and they would need to navigate complex European legislation as well as figure out whether the UK has any relevant or useful national legislation. We’re commissioning a legal opinion to find out more and will be publishing the results.
Crowd-sourced data gathering
We’re planning a mapping exercise of the UK, showing procurement bodies and the impact of the cuts. We want to record information about the sell-off of services such as libraries, youth centres and crèches, and relate it geographically to councils and other procurement bodies. We’re going to see whether the companies they have contracts with avoid paying their taxes. It’s quite a big undertaking and we want you to help us. We think it could help you too, in your local campaigns.
If you'd like more information on our campaign or to get more involved please email leonie[@]ethicalconsumer.org