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Corporate tax avoidance threatens democracy

Prem Sikka on the billions that could be saved cutting tax evasion by the rich

Bringing corporations under democratic control is one of the biggest challenges of the 21st century. We can all be persuaded to vote for governments which promise investment in education, healthcare, transport, infrastructure and improved social welfare rights but the very next day corporations and their executives threaten governments. 'Give us more tax concessions, don't touch our tax haven excursions, transfer the tax burden to labour, consumption and savings, or we are off', they say. Through their control of newspapers, radio, TV stations, funding of think-tanks and political parties, and jobs for former and potential ministers, corporations are very adept at ensuring that their agenda masquerades as public choices.

Corporations are engaged in a race-to-the-bottom and their ultimate aim is to dodge all taxes. In case governments dare to stray from the corporate leash they are disciplined with threats of mass exodus and economic panics. Successive governments have allowed the economic blackmail to work and prioritised the interests of few companies and executives over the interests of the rest of society. Corporate tax rate has declined from 52% in 1973 to 28% in 2010 and will be further reduced to 24% in 2014. But that is not enough. Corporations want to make profits in the UK, enjoy the benefit of property rights, courts, security, infrastructure, subsidies, aneducated workforce, and healthcare for their workers, but resent paying taxes to finance them. In the age of globalisation, corporations owe no loyalty to any place, product, community or country. Money is their only God, a far cry from the Quaker capitalism of Rowntree and Cadbury.

In the era of the internet, companies can easily restructure head office and arrange meetings in exotic places to satisfy the arcane rules that they are resident somewhere else and can thus avoid UK taxes. United Business Media and WPP have said that they would move to Bermuda, Switzerland and the Irish Republic should British tax legislation proposals designed to target profits derived overseas be enacted. Under the ownership of Kraft, Cadbury is considering shifting some of its operations to Switzerland to enable it to avoid UK taxes.

In 2009, Diageo, the drinks company, closed its bottling plant in Kilmarnock with the loss of 700 jobs and then warned the government that companies will move their headquarters out of London if the UK tax regime becomes unattractive. Its chief executive warned, “if ever our presence is taken for granted, or indeed the threat of tax becomes onerous, we will look at all our options”.

Lord Levene, Chairman of Lloyd's of London, wants lower taxes for corporations to blunt the lure of offshore tax havens even though the organisation reported a doubling of profits to a record £3.9 billion. Many have already taken the plunge. In 2008, Alliance Boots, the parent company of high street shop Boots, switched its headquarters from Nottingham, where it was founded, to the Swiss tax-haven canton of Zug. Shire, the pharmaceuticals group, is shifting its residence to the Irish Republic to save on taxes. The London based private security firm Aegis Defence Services has created a holding vehicle in the Swiss city of Basel to enable it to escape UK taxes. Dragon Oil has restructured its business into a Bermuda-incorporated holding company. Brit Insurance, the Lloyds of London insurer, is hoping to move from Britain to the Netherlands. William Hill, the betting shop, has relocated its operations in Gibraltar. It may soon be joined by its rival Betfair. Wolseley, the plumbing and building materials supplier, has unveiled plans to locate in Switzerland for tax reasons. Informa Group, the publisher of Lloyd's List, has also upped sticks and changed its residence to Switzerland to enable it to escape the higher corporate taxes in the UK. Satellite broadband provider Avanti is hoping to save some £300 million in tax by restructuring its operations and moving them to Cyprus. Life insurer Zurich has relocated to Dublin.

Banks have received billions in public subsidies. They have a business model that enables them to privatise profits and socialise losses. As the public demands reform of banks and higher tax on bankers' bonuses, banks threaten to cause even more economic mayhem. JP Morgan may quit UK over the Government's proposed bank levy. Goldman Sachs is said to be reviewing whether to move some of its operations out of London to lower-tax jurisdictions. A number of prominent hedge funds, including Brevan Howard and Bluecrest, have set up offices in Geneva to allow their top staff to avoid the new taxes and levies. In case ministers get off their bended knees and split the retail and speculative parts of banks and make them bear the losses arising from their gambles, banks are ready to wield the big stick. HSBC, Barclays and Standard Chartered say that they may move their headquarters out of the UK if the government decides to break up the banks. Royal Bank of Scotland Chairman Philip Hampton and Standard Chartered chief executive Peter Sands say that tighter bonus rules would drive bankers and traders away from London.

The above tax dodges can be tackled by taxing companies at the place where value is added rather than some mythical place where they claim to be resident. Boots, insurance companies and banks make their profits in the UK and that part of their profits should be taxed in the UK. Governments should not be taken in by sham corporate structures designed solely to shift profits. But governments are in awe of companies and have done little to change the rules. Corporations will face even less scrutiny as around 20,000 jobs at Customs and Revenue offices are set to disappear. Rather than tackling corporate power, successive governments have shifted taxes to labour, consumption and savings. The poorest people will be hit the hardest by the 2.5% rise in VAT. Hard won social welfare entitlements are being eroded. None of this will aid economic recovery as ordinary people will spend even less to keep the shop tills ringing. Progressive taxation should be used to redistribute wealth to create a just, caring and equitable society. Instead, taxation policies have been used to transfer wealth to a select few.

No political party is keen to tackle organised corporate tax avoidance. In such a vacuum, ordinary people have always resorted to protest, rebellion and civil disobedience to air their grievances. Citizens are now picketing companies engaged in tax avoidance. The shops of Vodafone have been blockaded as the company has allegedly been allowed to forego an unpaid tax bill of somewhere between £1.5 billion and £6 billion. The company is also under scrutiny in India where it has lost the initial legal skirmishes. Its appeal to the Indian Supreme Court is accompanied by a threat that it may scale back investment in the country if the company loses its appeal over a $2.7bn (£1.7bn) tax bill.

Protesters have also targeted Sir Philip Green's Topshop in major cities in the UK. Sir Philip has advised the government on civil service efficiency and is estimated to have a personal fortune of over £4.5 billion. He owns Topshop, Burton, BHS, Dorothy Perkins, Evans and Miss Selfridge through the Arcadia Group. The controlling interest in Arcadia is held by his wife Tina who is officially resident in Monaco. This enabled her to avoid around £300 million of tax on the £1.2 billion dividend paid by Arcadia in 2005. Shops and offices of Boots, HSBC and Barclays have also been targeted by protesters.

Organised tax avoidance is part of the brutal tactics of enhancing corporate profitability and high financial rewards for a few. They seek to undermine hard won social rights and deprive millions of people of decent housing, food, education, childhood, healthcare, pensions, security and clean environment. We can have rampant corporate power or democracy, but not both. The writing has been on the wall. Abraham Lincoln is reputed to have said, “I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country; corporations have been enthroned, an era of corruption in High Places will follow, and the Money Power of the Country will endeavour to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war.”