The government adopted tax campaigners’ rhetoric at the G8, but much of the status quo is still intact

Here’s my post on the LSE Politics & Public Policy blog.

The Enough Food for Everyone If campaign – successor to Make Poverty History – has succeeded in making tax haven secrecy the centrepiece issue of public debate around the G8 summit, which closed yesterday in Eniskillen. It also chalked up a genuine success, in pushing the UK’s overseas territories to join a multilateral initiative to share tax information.

But what emerged from the summit itself (and indeed, what David Cameron proposed ahead of it) was a set of ten ‘principles’, with no concrete commitments beyond endorsement of developments already taking place through the G20 and OECD. “The public argument for a crackdown on tax-dodging has been won but the political battle remains,” said the IF campaign. This outcome is not illogical, because competency on tax most definitely resides with those other organisations, rather than the G8. Indeed, some of the developing countries in the G20 would likely bristle if asked to implement a decision taken by the G8.

Over the past few days, it became increasingly difficult to distinguish the campaigners’ messages from those coming out of the government. This demonstrates a real success on the part of campaigners in shifting the public debate. As Melanie Ward, of development charity ActionAid and the IF campaign, wrote yesterday, “at points it was bizarre watching David Cameron, the UK prime minister, use language that could have been written by those working in development agencies.”

The fight against tax haven secrecy was portrayed as Cameron’s personal mission in much of the media coverage, not least a Guardian interview on the eve of the summit. “The PM appears increasingly isolated in his bid for a tax evasion clampdown as world leaders hold talks at the G8 summit” said Sky News.

But the adoption of campaign rhetoric by politicians comes with risks, too. I’ve argued before that in the tax debate, it’s very easy for governments to say one thing in public and do another behind the scenes. The political yield for Cameron from the media portrayal of his global leadership on tax evasion will have been significant, and yet as campaigners have been saying, nothing agreed at the G8 is in itself likely to make a big difference to tax haven secrecy or to developing countries. In particular, there was no commitment to making public registers showing the beneficial ownership of companies, to help track down offshore income.

This puts me in mind of a couple of other headline-grabbing international summits. In 2009, Gordon Brown hosted the London G20 summit in the midst of the financial crisis. That summit has been back in the news because of the allegations of espionage, but there was something interesting in the Guardian’s account of how Brown did achieve a breakthrough:

“The key to Brown’s approach was to build up momentum before the summit behind the stimulus he and the newly elected Barack Obama favoured. The European participants met in February 2009 in Berlin in an attempt to reconcile their internal differences. Brown also travelled further afield to the US, Brazil, Argentina and Chile in the days immediately leading up to the summit to build up a loose coalition behind the stimulus plan.”

It’s not at all clear that the government invested in any similar preparatory work ahead of this G8 summit, despite it being such a difficult area. At a public meeting organised by the IF campaign last month, Treasury Minister David Gauke refused to set out the government’s position on any of the campaign’s proposals. Those favouring conspiracy theories might suggest that the failure to reach agreement could have been built into the strategy: much of the status quo is still intact, but the maximum political benefits from appearing to challenge it have been reaped.

On that crucial test of a register of beneficial ownership, for example, the UK has said it will lead by example, but the example is pretty lukewarm. It relies on Companies House, which admits it is incapable of enforcing existing transparency requirements. Meanwhile the issue of public transparency of the register is kicked into the long grass of a consultation.

Another summit this reminds me of is the last G8 hosted by the UK, at Gleneagles in 2005. The unprecedented Make Poverty History mobilisation called for Tony Blair and Gordon Brown to use the summit to push reforms in three areas: aid, debt and trade. That summit is remembered as a partial success: Bob Geldof famously gave the G8 “10 out of 10 on aid, eight out of 10 on debt,” though he seemed to forget about trade.

On that occasion, Blair and Brown got the media fillip they wanted, lauded as the “Lennon and McCartney” of global development by Bono. And while that summit undoubtedly was a watershed moment on aid, many of the promises later unravelled. In an evaluation published earlier this year, Oxfam concluded that, while “the G8′s $50 billion aid promise acted as a catalyst to significantly boost total aid levels…it is true that it’s not all been good news. The G8′s collective $50 billion promise was missed by around US$20 billion at the 2010 deadline, and European countries remain remarkably off-track for meeting their collective promise to the 0.7% GNI target by 2015.”

Time will tell whether the G8 ‘principles’ from Eniskillen will meet the same fate.

Clamping down on Google’s tax avoidance: don’t hold your breath

Image representing Eric Schmidt as depicted in...

Eric Schmidt. Image by Charles Haynes via CrunchBase

This is a post I wrote for the LSE Policy & Politics blog.

Google’s executive chairman Eric Schmidt will stand up to give a talk at the LSE this evening after a week of unprecedented criticism of the search giant. I wonder if he still feels the same way today as he did last October, when he told journalists:

“I am very proud of the [tax] structure that we set up. We did it based on the incentives that the governments offered us to operate…It’s called capitalism. We are proudly capitalistic. I’m not confused about this.

Last Thursday Matt Brittin, the company’s vice president, was told “I think you do evil” by the chair of parliament’s Public Accounts Committee when he made a second appearance to defend what he had openly admitted were the company’s tax avoidance activities.

Coverage of a pre-G8 summit meeting for business leaders at 10 Downing Street on Mondayattended by Schmidt, focused on the tax avoidance questions, and whether the company’s tax practices had been discussed. David Cameron and Nick Clegg did indeed claim to have challenged Schmidt for his aggressive tax position. Just yesterday, Ed Miliband took the fight to the belly of the beast, throwing the company’s own words back at it. He said:

“I can’t be the only person here who feels disappointed that such a great company as Google, with such great founding principles, will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain, it’s fair that it should pay just a fraction of one per cent of that in tax.”

The political consensus appears to be that the international tax system is broken and needs to be fixed by governments – to change those incentives identified by Schmidt – but also that, in Miliband’s words, responsible companies should “do more than obey the letter of the law.”

Here’s the problem with this analysis: the reason that Google (and Amazon, Apple and Starbucks for that matter) pay so little tax in the UK is not simply a matter of exploiting weaknesses in the system. It’s also because that’s how the system is designed. We’ve built a set of global rules that define a company’s tax liability not by how much stuff it sells in Britain, but by where it locates the business functions that add most value to the things it sells.

And the reason we did this is because we thought it suited us. On the global stage, Britain is a reasonably sized, but not huge, consumer market. But British businesses have a lot of customers overseas. So we figured that we would be better off with a system that’s biased towards – in the language of international tax – a multinational company’s place of residence, rather than the source of its revenue. It’s that bias that allows US companies to sell billions in Britain while incurring a relatively small tax liability here – a liability that they can reduce further through tax avoidance.

What our political leaders rarely mention is that the difficulties that e-commerce would create for our tax system were foreseen as early as 1997, and supposedly resolved as early as 2001 (pdf). The crucial agreement here was that the sale of a product over the internet would be treated just like the sale of its physical equivalent. If I stand on the other side of the UK-French border, stretch my arms across it and sell you a book, I’m running a business in France and my profits are taxed in France, even though you, my customer, are in the UK. The same would be true no matter how many books I sold. Under the rules agreed in 2001, exactly the same rule applies if I sit in an office in Luxembourg and transfer a book to your Amazon Kindle, no matter how far away I am.

At a meeting debating international tax rules last year, the UK and US opposed efforts by India and other developing countries to change precisely this kind of rule. They wanted to be able to tax the profits of foreign companies that sell services into their huge and growing markets without needing a physical presence. The UK said no, outright, because it would be a “fundamental change in the balance of source and residence taxation.” The OECD, which is in charge of the current review of international tax rules, says it isn’t aiming to change this balance.

The system as it stands suits countries like the US and UK, which are home to large multinationals that sell services abroad without needing a big physical presence.  Many companies selling services into developing countries are either British or providing the services from Britain, and our government doesn’t want to surrender the right to tax these companies. A side-effect of this decision is that it also means getting less tax from the foreign companies with the biggest consumer presence and visibility here.

David Cameron says he’s going to sort the system out, and no doubt there will be some changes that tighten up some of the areas most exploited for tax avoidance. But untangling the costs and benefits of international tax reform is complex, and it’s unlikely that the outcome will put an end to all of the counter-intuitive tax results.