Friday, 29 August 2014

Burger King coffee deal brews up a whopping great tax avoidance problem

Prem Sikka

The US$11 billion merger of Burger King and Canadian coffee and doughnuts chain Tim Hortons is the latest example of a tax inversion move. The deal will see BK transfer its company headquarters from the US to Canada and is clearly not driven just by a quest for control of the markets, but also by tax considerations.

The headline corporation tax rate for the US is 35% – though after numerous allowances and deductions, the effective average rate of tax is around 12.6%. The headline Canadian rate is around 26%. Some might see scope for tax savings here depending on the effective tax rate of the companies concerned, but that is not the whole story.

Playing the inversion game

The US Treasury has identified “earnings stripping” as a key motive for corporate inversions. Here are a couple of examples. Companies can locate intellectual property in subsidiaries that are in low/no tax jurisdictions. They then licence other group members to use the same name for royalty payments. The payment is marked as an expense in the country of the paying company. It is tax deductible and so reduces taxable profits.

Another strategy is to play the borrowing game. The company located in a high tax rate jurisdiction is loaded with intragroup debt. The payment of interest attracts tax relief and reduces taxable profits. Profits are therefore shifted to other entities located in low/no tax jurisdictions and result in lower tax bills.

Burger King is not alone in the inversion game: 47 US corporations have moved their tax base overseas through corporate inversions in the past ten years – far more than during the previous 20 years combined and the game appears to be accelerating.

UK companies play this game too. Boots, the UK high street chemist, generates about 40% of its revenues from NHS prescriptions, all funded by taxpayers. After a £9 billion leveraged buyout it shifted its control from Nottingham to Zug in Switzerland. The debt is mostly left in the UK although it is not entirely used there. Because the UK government gives tax relief on debt interest payments, Boots was able to reduce its UK taxable profits by £4.2 billion from 2007 to 2013 and so reduce tax payments of nearly £1 billion.

The tax avoidance toolkit

Tax inversions are part of a corporate race to the bottom. They are holding governments to ransom and saying “give us what we want, or we will cause economic havoc”. And the current system lets them get away with it.

Companies can do these kind of deals because they sit on mountains of cash. And rather than investing directly in productive facilities they use this cash for mergers and takeovers, which produce tax savings. US companies alone may be sitting on US$2 trillion.

Plus, there is a constant need for profits to rise. Stock markets expect it and executive remuneration is commonly pegged to profits, causing executives to find ways of mutually benefiting themselves and their companies.

On top of this, neoliberalism, a key defining ideology of our times, does not offer any moral guidance about how much profit or pay in enough. In this vacuum, bending the rules to increase profits has become a much sought-after skill. Armies of accountants, lawyers and other experts dream up wheezes. Tax inversions are just one part of the tax avoidance toolkit.

Fundamental reform needed

Politicians have become subservient to corporate interests and show little sign of checking inversions or any other form of corporate tax avoidance. They can abolish or limit tax relief on debt interest payment, but they don’t. And companies are given special treatment in this regard. After all, individuals borrowing money to buy a house or anything do not receive tax relief on any mortgage interest payments.

All companies migrating for tax purposes should be required to return all subsidies and loans and make good on all environmental damage.

And more fundamental reform is needed because the current corporate tax system is the outcome of treaties and protocols established in the early 20th century when our modern form of transnational corporations did not exist. The European Union is advocating an approach known as the Common Consolidated Corporate Tax Base, which is a variant of unitary taxation. Under this, companies would be taxed on the basis of their economic activity rather than where they are located.

The key principle is that a corporation like Burger King would be treated as a single global entity rather than a disparate collection of independent subsidiaries, located in different places where it can shift its tax base to. Instead, a global taxable profit would be calculated.

The profits of the company as a whole could be allocated to each country of its trade on basis of a formula which takes into account all of its sales, the location of its assets and employees. Each country can then tax it in accordance with its democratic mandate. Such a system would negate earnings stripping and profit shifting.

Naturally, this is opposed by big corporations and until this kind of system is enforced, we will continue to see tax avoidance moves made by them for the foreseeable future.

This article first appeared on The Conversation website

Wednesday, 27 August 2014

Is pensions policy to blame for youth unemployment?

Andrew Fisher

There's one theory that says we're all living longer and are now enjoy longer working lives. The end of the default retirement age means workers aren't automatically thrown on the scrapheap at 60 or 65 and are free to work as long as they like - so that employers and society more generally can continue to benefit from their skills and experience.

I don't buy it. But it's a theory.

Another theory suggests people cannot afford to retire and are forced to continue working. There's some evidence for this theory, which I list below:
  1. The state pension age is increasing. So people and especially women (whose state pension age was 60 until relatively recently) are now forced to work longer
  2. Public sector pension ages have been increased too - but more than this schemes have been downgraded, so that public sector workers are paying extra contributions for a lower pension at a later age. 
  3. Private sector workers have seen occupational pension schemes reduced, and final salary schemes virtually removed.
  4. The economic crash caused a stock market crash that devastated private pension values and low interest rates have damaged schemes and reduced the value of savings
  5. Longer term, the 1980s saw the Lawson raid on pension fund surpluses and the 1980s and 1990s saw corporate contribution holidays. The result has been pension scheme values have been reduced. 
Of course, their is a class impact to all this: richer workers are more likely to be in good occupational schemes and due to their higher wages have paid off their mortgage and have enough savings to still retire early. For poorer workers the prospect is working longer and dying sooner since their life expectancy is lower.
The data exposes some clear trends. The three graphs below show the general adult unemployment rate and the 18-24 youth unemployment rate:

As you can see adult unemployment never reached the levels of the early 1990s recession following the 2007-08 crash and has been on a largely downward trend. Contrast this with youth unemployment:

The difference here is clear: youth unemployment was dropped after the early 1990s recession, but started rising from mid-2003 and rose to new heights following the 2007-08 crash.

At the other end of the labour market, since 2010 an extra quarter of a million workers aged over 65 are employed in the UK, up 36% to over 1 million. And  early retirement seems to be a thing of the past too with an extra 800,000 50-64 year olds in work since 2010, up 8%.

While older employers shouldn't be written off or described as job-blockers (the labour market equivalent of the derogatory hospital 'bed-blockers'), there can be little doubt that the squeeze on wages and pensions is forcing many older workers to carry on, and the labour market is failing to create sufficient jobs and training opportunities for younger workers.

The response to rising youth unemployment is of course the demonisation of NEETs (those not in education employment or training) and to create ever more draconian welfare to work schemes - an intensification of the workfare agenda.

An example of this absurdity is the introduction of traineeships - a spurious addition to the labour market lexicon, which are a sort of sub-apprenticeship, unpaid and notionally voluntary, but subject to conditionality should a young unemployed person sign up to one and subsequently quit it (like many of the other workfare schemes for younger workers). Traineeships have been welcomed, unsurprisingly by the CBI and disgracefully by the TUC ... though not without some dissent:

(And it is understood that as well as the BFAWU President, other unions have made their feelings clear)

The advent of traineeships follows on the already downgrading of the term 'apprenticeship'. In most people's understanding, apprenticeships are paid employment while learning a skill or a trade. But the provider of most UK apprenticeships under the coalition government is the supermarket Morrison's. It's clear that apprenticeships with sub-minimum wage pay rates are now just cheap labour rather than structured on the job training, that provides young workers with a skill.

The problems of the labour market, and the failures of pensions policy, are hitting younger and older workers. This is being driven by the weakness of the UK labour force - buffeted by a deregulated labour market with weak employment rights and restrictive trade union laws.

Addressing those issues would be a socially just solution, but the political orthodoxy is for forcing older workers to work longer and younger workers to work for ever lower, and even no, pay.

Socialism or barbarism, as Rosa Luxemberg once said.

Sunday, 24 August 2014

Interview: Does that option still exist?

In the year that Tony Benn passed away, a new book looks at the high point of 'Bennism' in British politics. Andrew Fisher, author of The Failed Experiment, interviews John Medhurst, author of That Option No Longer Exists: Britain1974-76, published next week by Zero Books.

Tell us what the book is about? 

It's about a brief period in the 1970s (1974-76) during which Tony Benn and the Labour left tried to implement a socialist economic and industrial policy in government, and how that ultimately failed to come off.  It looks at the reasons for that, and argues that the left's policies for industry and finance were much more constructive than is usually assumed. It is mainly political, but it does briefly cover some of the social and cultural movements of the early to mid 70s as well.  

So what is the option that no longer exists ... 

It does exist, although obviously adapted to 2014. The phrase is a direct quote from Jim Callaghan's famous dismissal of Keynesian economics at the 1976 Labour conference. I used it because it summarised the turn to Thatcherism by political elites in the late 70s, but I wasn't endorsing it!

The book argues that the left's Alternative Economic Strategy was a viable alternative to stalled Keynesianism and rising Thatcherism. Many of its core policies - strategic direction of investment, progressive public ownership, firm regulation of financial markets and the City - are desperately needed today. 

So is it fair to say that the mid-70s represents a critical junction at which capitalism could no longer be contained by the post-war settlement? 

I think it is, although we should distinguish different types of capitalism. The "Nordic model" of Scandinavian social democracy, or even Rhineland capitalism, delivered some real containment of capitalism's worst exploitation and inequality. Those models took a lot longer to fracture than the "Anglo-Saxon" model of capitalism, which was always inherently unstable and which began to turn on the welfare state in the 70s. 

The British economy has always been dominated by the City and by a financial sector that seeks nothing but a quick pay-off regardless of social consequences. Benn's great crime in the 70s was to challenge that.  

In your view does Ed Miliband's "responsible capitalism" offer a challenge to the current model? 

It's a challenge insofar as it represents a mild departure from the fundamentalist neo-liberal model that the Thatcher-Blair years saddled us with, and which led directly to the crash of 2008. So it's better than the coalition's barbaric Victorian capitalism. But we should heavily qualify that: it's not that much better. 

A real challenge would involve extensive public ownership including the banks, tight regulation of hedge funds, support for an international transaction tax, and a massive crackdown on corporate tax evasion. Even that wouldn't be a socialist alternative in itself but it would seriously challenge the dominance of capital over the rest of society, and it would be a good start.  

So what should activists learn from the experience of the Bennites and other socialists in the 1970s? 

Two things, I'd say. The main lesson is, ironically, the one that revolutionary socialists have levelled at the 70s Labour left, which was that it did not have a realistic understanding of the hidden political and institutional forces that would defeat it. The Leninist left said this because it thought that no reformist socialism could ever succeed, but personally I think history shows the opposite - that reformist socialism can establish real bridgeheads in capitalism, while revolutionary socialism is a utopian dream. But the warning is valid. Unless the socialist left has a crystal clear conception of long-term systemic change, and strategies to carry it out, any small advances will be reversed very quickly. So real coalitions on the left - not just here but in the EU and internationally - have to be built up.  

And secondly - as some socialists like the Lucas Aerospace trade union combine suggested in the 70s - is the need not just to control capitalism but to fundamentally question the underlying ethic of "growth" itself.  Unrestricted economic growth is counterproductive. It just leads to faster climate change and social collapse. Without a sustainable, low carbon economy that places quality of life over the GDP, it's a zero sum game. It will all crash eventually. But that is a whole other topic. 

Friday, 15 August 2014

Danny Alexander: Lib Dems will slash taxes if elected (but not for the poorest)

Richard Bagley in the Morning Star

LIBERAL Democrat Treasury Secretary Danny Alexander threatened a vicious new wave of public spending cuts yesterday with a £12.2 billion election vow to slash taxes.

He said the party’s pledge to raise tax-free allowances to £12,500 — a policy also being discussed by the Tories — would “be fair and help to make being in work pay.”

The step would benefit those on “low and middle incomes,” Mr Alexander suggested.

But research by the Institute for Fiscal Studies punctured his claim that a higher tax-free allowance would help the worst off.

The policy would see 69p for every pound of tax breaks — £8.4bn — lining the pockets of the wealthiest 50 per cent of working families.

Just 15p for every pound — £1.8bn — would find its way to the lowest-earning half.

Its detailed study also found that the price tag of the headline-grabbing gimmick would run into billions — which would likely be paid for via public spending cuts.

Tax expert Richard Murphy said the Lib Dem claim to be aiding people on low incomes was “pure politics” masking a “poorly targeted and very expensive mechanism.”

Slashing the “oppressive” 20 per cent VAT rate to 17.5 per cent would cost the same and do much more for the lowest-paid who “spend all of their income and very often more than their income,” he said.

And Left Economic Advisory Panel spokesman Andrew Fisher said the Lib Dem announcement reflected the party’s “utter desperation.”

Millions of people on £12,500 or less on part-time, minimum wage or zero-hours contracts wouldn’t see “any benefit at all.”

But people like “poor” Tory ex-minister Mark Simmonds*, who resigned from his £89,435-a-year post this week complaining that his £27,875 expenses allowance was intolerably low, would get a tax cut, said Mr Fisher.

With corporation and other taxes slashed, he predicted that the multibillion-pound price tag would be plundered from the social security bill and services — hitting the low-paid and unemployed hardest.

“To really help you would increase tax credits, build council housing and provide childcare.”

*More on moron Mark Simmonds below:

Thursday, 14 August 2014

Tories brag about jobs as pay falls

Economic glitter can’t hide rotting core as Bank of England halves wage growth prediction

Conrad Landin in the Morning Star

THE Bank of England dramatically ditched its forecast for a real-terms increase in wages yesterday but cloth-eared ministers are still boasting of a measly fall in unemployment figures.

Bank officials slashed its prediction for pay growth by half — from 2.5 per cent to 1.25 per cent — meaning that wages will grow by less than inflation.

City commentators warned the bank is now less likely to increase interest rates in the autumn.

The news came as TUC general secretary Frances O’Grady blasted the government’s jobs strategy, saying new figures that show 132,000 fewer unemployed people are a mark that “the government is very good at creating low-paid jobs.

“The government is struggling to create the better-paid work we need for a fair and sustainable recovery,” she said.

“It is hugely concerning to hear that the bank has cut its forecast for wage growth in half. 

“The economy’s getting bigger but not better, with Britain’s pay squeeze now set to continue even longer.

“If people don’t have money in their pay packets to spend on goods and services it’s hard to see how we can return to sustainable growth.”

Work and Pensions Secretary Iain Duncan Smith claimed that new employment figures showed the Con-Dem government was ending a “cycle of welfare dependency.”

But Unison general secretary Dave Prentis slammed the coalition for creating shoddy jobs and leaving Britons’ livelihoods in a precarious position.

“Underemployment is now a bitter reality for millions of struggling families across the UK,” he said.

“Too many people are stuck in minimum-wage jobs, on zero-hours contracts and part-time work when they are desperate to go full time.

“Desperate because they need regular, secure employment to feed their families without having to resort to foodbanks, pay their bills without falling into the grip of pay-day lenders and decent pay to rebuild consumer confidence and grow the economy.”

Left Economics Advisory Panel co-ordinator and author of The Failed Experiment Andrew Fisher said: 

“There has been no recovery for the majority of workers and this is confirmation that there will be no recovery any time soon.

“While executive pay rose by over 14 per cent last year, regular pay rose by only 0.6 per cent in the last year.

“This is a reflection of the balance of power between a deregulated labour market wanted by business and delivered by government versus an overly restricted trade union movement.

“If Labour wants to end the cost of living crisis, unshackling the unions would be the most effective way.”

Unemployment has now fallen by 437,000 over the past year, although the less-massaged “economically inactive” figure has soared to 8.8 million, a rise of 15,000.

Thursday, 7 August 2014

Neoliberalism and the public ownership of living standards

Andrew Fisher on how neoliberalism's failure to deliver decent wages has meant increasing public subsidy

Neoliberalism is currently at war with last remaining vestiges of social democracy. The tension arises from the disinterest of neoliberalism in providing decent incomes for people. Social democracy has systems to reduce poverty and inequality.

Neoliberalism is also deeply opposed to workers' rights and trade union power. We see this expressed in the recently announced policies of the Conservative Party (neoliberalism's preferred vassal) for further restricting trade union law, already the most restrictive in Europe. Likewise we see the Conservative-led government attacking workers' access to employment tribunals, cutting health and safety regulations and the resources to enforce them. This is all to remove the burdens on business.

At the same time public sector workers have been subject to a two year pay freeze, and now a seemingly unending 1% pay cap which will continue into the next Parliament.

Private sector employers are restricting wages too, with pay levels increasing below inflation across the economy. As we've written before, this means we all need a pay rise. Average household incomes are down 8.5% in real terms since 2009/10.

To the neoliberal, workers are a cost and costs should be reduced. In mainstream economic textbooks, the theory is that this is due to the pressure of competition to provide the best price to the consumer. The reality is a little more complicated, and is as much about maximising profit margins, rate of return to shareholders and executives' pay and bonuses.

To the capitalist workers' falling incomes - for over three decades as a share of national income, and in the last decade in real terms too - is an externality. An increasing share of their pay has been passed (externalised) to the state, to guarantee decent living standards.

Earlier this week, Labour's shadow work and pensions secretary Rachel Reeves highlighted how much low wages are being subsidised by housing benefit payments. As Joe Halewood points out the number of working households claiming housing benefit has risen from 430,162 in November 2008 to 1,036,816 in November 2013. Housing benefit payments to working households have increased from £2.2 billion in 2009/10 to £4.6 billion this year and to a projected £6 billion in 2018-19 - which Reeves points out amounts to an additional £12.9 billion between 2010-2018.

As the graph below (via Daily Mirror) shows this is part of a long term trend that has seen wages fail to keep up with housing costs, and housing benefit filling the widening gap.

But housing benefit is only part of the story (and one we've written about extensively, here and here). The rising bill for tax credits also testifies that wages are failing to meet living costs.

There are now 5 million workers in the UK earning less than the living wage (£7.65 per hour across the UK, £8.80 in London). This gap is filled by tax credits too. From the mid-2000s spending on tax credits has been rising at around 8% a year - way above inflation or GDP growth - and now stands at around £30 billion a year.
Data from Budget 2013 (forecast data for 2013/14 onwards)
The increases have tailed off in recent years due to reduced eligibility criteria imposed by the coalition government and the 1% cap on increases. The gap this has meant rising poverty and increased food bank use.

However Reeves claims with regard to tax credit expenditure, "over the next Parliament the cost is set to rise by an astonishing £2.5 billion", according to government figures (see full text of Reeves' speech here).

So is this a recovery based on the dynamism of the British economy, entrepreneurial spirit or ever increasing public subsidy?

This government demonises those on benefits - and under Iain Duncan Smith's over-budget and behind-schedule Universal Credit even working benefit claimants will be subject to conditionality to increase their incomes, or potentially face sanctions.

But this government can't have it both ways - it demonises those on benefits and laments rising welfare expenditure, yet has a policy of suppressing wages that directly fuels rising welfare spending.

Many people would argue its time to re-privatise wages, by setting the minimum wage at the level of the living wage or, as the BFAWU will put to this year's TUC Congress, at £10 per hour.

The battle is clear: rising poverty with a public subsidy only partially mitigating it, or you take on neoliberalism. That should be #TheChoice at the general election.

Sunday, 3 August 2014

New rules on banker bonuses are more bark than bite

Prem Sikka

The 2007-2008 banking crash ushered in an era of austerity and pay freezes, but bank executives have continued to enjoy disproportionate rewards even though their institutions have been bailed out by taxpayers.

With a general election on the horizon, the UK government had to be seen to be adopting populist policies, and the response has been a consultation paper by the Bank of England on checking executive remuneration in the financial sector. The key populist proposal is that the payment of bonuses should be deferred for three to five years as a way of aligning risks, incentives and outcomes. The other half of the proposal is that in the event of misconduct the firm, with the help of regulators, should be able to clawback the bonus during another five to seven years after the payment.

The press coverage has been positive, but the proposals raise a number of questions. The finance industry been involved in scandals such as frauds on mortgages, pensions, precipice bonds, payment protection insurance, interest rates, tax avoidance/evasion and money laundering. Despite mounting evidence, there have been no prosecutions. Perhaps, the government would seek to deprive key executives of the gains made from predatory practices. But that will not happen either because the rules for clawback will only apply to bonuses awarded from January 2015.

The proposed rules are not an attempt to check the massive remuneration packages paid to bank executives. They only seek to claw back some portion of the previously declared bonus for misconduct. Once again the regulators have assumed that shareholders will check fat-cattery, something they have shown no interest in doing. The Parliamentary Commission on Banking Standards concluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. It is difficult to see how they can shackle executives.

The clawbacks are supposed to be triggered by misconduct, but how will regulators become aware of misconduct? Bank executives are not in the habit of owning up to misdeeds, especially when it could hit them financially. All major banks have audit committees and ethics committees, but none informed the public about any of the predatory practices. In the period leading to the crash, external auditors gave a clean bill of health to all distressed institutions even though depositors were queueing outside some banks to rescue their savings. Audit fees depend on appeasing directors, of course. Unsurprisingly some accounting firms colluded with banks to enable them to massage their accounts.

The UK regulators also have a poor record. For example, following revelations of fraud the Bank of Credit and Commerce International (BCCI) was closed in July 1991, but to this day there has not been an investigation. The Bank of England went out of its way to conceal the identity of wrongdoers and it took five and half years of litigation to secure some of the names. In short, there is no clear mechanism for identifying misconduct.

Any allegations of misconduct will be contested. Investigations and protracted litigation could last for years. The arbitrary limit of seven years for clawback means that some will escape retribution. Why is there a need for a time limit?

These malpractices are the outcome of incessant market pressures on banks and other corporations to report higher earnings and meet profit forecasts. Executives have economic incentives to bend the rules as their remuneration is linked to profits. In western culture, the worth of a person is frequently judged by accumulation of material wealth and financial rewards. Such pressures will not be abated by the proposals for clawback. The finance industry will inevitably arbitrage the proposed rules with creative schemes. For example, executives could receive higher fixed pay and little in bonuses, thus reducing the amounts which are vulnerable to clawback. The consultation paper does not pay any attention to structural pressures for misconduct or the creative games which will surely be enacted.

The idea of clawing back financial rewards for failure is a sound one, but the Bank of England proposals are unlikely to work without a major reform of the system of corporate governance. For example, to ensure that financial regulators can’t bury the bad news, they should be supervised by a Board of Stakeholders representing a wide range of interests. All executive remuneration contracts should be publicly available. Employees, savers and borrowers have a long-term interest in the sustainability of banks and should elect directors and vote on executive pay and bonuses.

They are unlikely to sanction big remuneration packages when they are getting a poor deal on savings, borrowing and wages. In the era of globalisation and easy movement of money, regulators need real-time information about any misconduct. This would require real-time monitoring of financial transactions and possibly placing monitors at all material bank branches. However, the consultation paper pays little attention to any of the governance issues.

This article first appeared on the Conversation website