The Panama Papers recently sparked Wikileaks-level of scandal, revealing the (not entirely unexpected) cached accounts of major corporations, and the legal partnerships assisting in their widespread and unaccountable tax avoidance. Financial systems in the UK, US and more have done little to cap this practice, which many view as socialism for the rich. Equitise today examines how tax avoidance became a global hot-button issue and how countries are tackling this issue, which elicits questions of social justice as well as financial reform, in differing manners.
How Did We Get Here?
Moody’s recently reported that the biggest US companies hold approximately $1.1 trillion in cash, with over two-thirds of this amount held overseas. Similarly, almost 400 LSE listed companies are registered in offshore territories, their market capitalisation of £225 billion outside the UK’s purview, not subject to tax. This year, Columbia University found that over $12 trillion has been siphoned out of emerging countries owing to the prevalence of offshore tax havens. $1.3 trillion from Russia alone remains offshore. The transparency offered by these studies and the details recently released by the Panama Papers do little to combat the inaction of government officials, as in the EU where calls to clamp down on tax avoidance have been vetoed.
What Are The Impacts?
LSE listed companies and tech giants like Google are not the only companies using offshore havens for gargantuan sums – criminals and kleptocrats count among those are able to money launder and protect their empires through the present, corrupt system. James Henry, former chief economist at consultancy McKinsey states that countries like Nigeria accept poor financial returns in exchange for the services, secrecy being more valuable than capital investment. Yet the impact of the increased transparency of the internationally practiced tax avoidance by major companies is being steadily felt – Iceland’s Prime Minister resigned in the wake of the Panama Papers scandal, with the polls suggesting the Party supporting major financial reform ill assume government in their snap election.
“The opacity tax havens create is the enemy of good decision-making. If the City regulator and the London Stock Exchange really believe in effective markets, they would not list companies registered in such places” – Richard Murphy, International Political Economy Professor, City University London
Prominent figures from the international political community are calling for reform, suggesting that proper tax regulation could assist in the austerity measures that have marked EU member states in recent years. Predecessor to David Cameron, called for countries to to ensure there are “no treasure islands for the money launderers”.
How Are Countries Tackling The Issue Of Tax Avoidance?
Henceforth, UK resident countries will have to disclose their owners on a public register, but this regulation will not apply to the existing 389 companies whose billions in market capitalisation remain offshore. The Treasury has recently demanded by country-by-country reporting “to stop businesses using gaps in international tax rules to get out of paying their fair share”. Twenty countries supported George Osborne’s international black list of tax havens, and spotlight has swivelled to the US to address their issue of tax avoidance, given America has been resisting reciprocal tax arrangements.
‘There is no doubt that the problem of global tax avoidance generally is a huge problem.’ - Barack Obama
Obama has issued executive orders to close tax loopholes exploited in the US. He has acknowledged that the major issue with the tax avoidance scandal at present is that the activities of the major companies is legal – not illegal.
It’s clear from the global state of affairs that conjoint international government action is necessary to reform the tax system that enables the mass tax avoidance systemic in corporate practice. Although governments have condemned and called for reform, more decisive action must be taken to establish a fairer financial system.