Taxation: Evasion and Avoidance

Lord Browne of Ladyton Excerpts

Thursday 6th June 2013 Lords Chamber

[Lord Browne of Ladyton]

My Lords, I congratulate my noble friend and my good friend Lord Foulkes of Cumnock on securing this timely and important debate, and on his characteristically robust speech of introduction in which he covered quite a lot of the waterfront. He constantly promised that others would add to it. I am not entirely sure that he has left much room for anybody to add anything, but I shall do my best while trying not to repeat what he has already said in great part.

It is disappointing that so few Members of your Lordships’ House consider this issue important enough to make a contribution to the debate because it is hugely important. The scale is mindboggling in the United Kingdom, as my noble friend has already said. According to Her Majesty’s Revenue and Customs, the tax gap—the difference between what Revenue and Customs believes should have been paid and what it received from the entire economy—amounted to £32 billion in 2011-12. One can disaggregate that, and it is interesting to see that it is not all corporation tax. Quite a substantial part of it is VAT, there is some customs and excise avoidance and a comparatively smaller amount is income tax. It is a significant amount of money. As my noble friend said, it is a third of the deficit for 2012-13. If this money were brought in, it would obviate the necessity for any further spending cuts; it would deal with that issue. While I accept the remonstrations of the noble Lord, Lord Forsyth, that we should be careful not to conflate tax avoidance and tax evasion, I do not think that there are any positive consequences from either of them for our community.

The tax avoidance industry is clearly damaging the interests of developed countries, including our own; there is no question. It is almost certain, however, that the harmful tax practices are an even greater problem for economies in transition and for developing countries. The leader of my party said recently:

“If everyone approaches their tax affairs as some of these companies have approached their tax affairs we wouldn't have a health service, we wouldn’t have an education system”.

Thankfully, everyone does not, but he makes a very important point. This is exactly the case in many of the world’s poorest countries. Because of the way in which businesses approach their tax affairs, many of these countries do not have these basic services that we can continue to sustain. It is estimated that countries in the developing world lose three times more money—three times more—to tax dodging than they receive in aid every year. The estimate is that they lose about £160 billion a year through tax dodging. If that money stayed in those countries, rather than being spirited away to the offshore accounts of multinational companies, it could be transformative. These tax havens—to which I will come back in a moment—are the life support system for that tax dodging, and the plug needs to be pulled on them. They play no useful role in the global economic system.

In 2004—I cannot find any more recent statistics but perhaps the Minister can—half of the world’s trade appeared to pass through tax havens. That is 50% that at some stage passed through a tax haven, even though these jurisdictions contributed then only 3% of the global GDP. Recent ActionAid research—which I believe is the research that my noble friend held in his hand while making his speech—reveals among other things that the taxes lost to Zambia from tax haven transactions from just one United Kingdom Company, Associated British Foods, was a sum 19 times greater than the United Kingdom’s aid to Zambia for hunger—19 times more from the activity of one British company. That would be enough, ActionAid estimated, to send 48,000 Zambian children to school each year. This is a scandal, which needs to be addressed. I will accept the remonstrations of the Minister, which no doubt we will receive, that nothing was done about this for a significant time when we were in power, and we have to live with that. However, we are learning much more about this now and there is much more understanding of the effect of these issues. What is now necessary is collective action, to which we on these Benches and across this House should contribute.

I turn for a minute to the issue of morality. Frankly, I am fed up with being lectured to by chief executives of industry, who tell me that they have some kind of moral duty to minimise taxation. I will address that point in this way. In September 2012, writing in the context of the revelation that the then presidential candidate Mitt Romney revealed—or was forced to reveal—that he had been subject to an income tax rate of “at least 13%” for the previous 10 years, Joseph Stiglitz, the US economist and celebrated professor at Columbia University, wrote on his blog:

“Democracies rely on a spirit of trust and co-operation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme”.

He goes on to say:

“Both alternatives are unacceptable … More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and co-operation can survive only if there is a belief that the system is fair. Recent research has shown that a belief that the economic system is unfair undermines both co-operation and effort. Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice”.

In concluding, he wrote that,

“tax avoidance on Romney’s scale undermines belief in the system’s fundamental fairness, and thus weakens the bonds that hold a society together”.

That is my first point about morality—and I rely on Joseph Stiglitz, who put it better than I could.

I have already said that all the economic and social consequences of tax avoidance and tax evasion, which we are debating today, are corrosive, and none of them is positive. Paying tax is one of the fundamental ways in which private and corporate citizens engage with each other and with broader society. Tax revenues are the life blood of that social contract—and, dare I say it, the life-blood of the big society. They are vital to the development and maintenance of physical infrastructure and to sustaining the infrastructure of justice that almost all the people who operate in this system rely on to underpin liberty and their market economy. Why is it, therefore, that tax minimisation through elaborate and frequently aggressive tax avoidance strategies has come to be regarded as one of the prime duties that directors are required to perform on behalf of their shareholders? Why has it been elevated to a moral imperative, when not paying fair taxes is not?

My noble friend made reference to the observations of Sir Roger Carr, the CBI chairman. This man’s views on the issue deeply worry me. He is the representative of British industry. Speaking at the University of Oxford’s Said Business School on 19 May, he said:

“It is only in recent times that tax has become an issue on the public agenda”.

I have to say that I do not know where he has been living, but certainly all my adult life tax has been an issue on the public agenda. He goes on to refer to,

“Starbucks, Google, Amazon—businesses that the general public know and believe they understand”.

I do not understand that part of the sentence. I think he is trying to give an impression that somehow these organisations are a good in themselves and that understanding them somehow means that we like them. We may use them, but I do not have that relationship with those organisations. He continues,

“businesses with a brand that become a perfect political football, the facts difficult to digest; public passions easy to inflame”.

He goes on, in what is clearly a criticism of rhetoric from our Prime Minister. He says that tax avoidance,

“cannot be about morality—there are no absolutes”.

I do not think I need to go much further than that; not many people in your Lordships’ House would not understand why I am disturbed that the man who represents our industry at its very pinnacle holds these views. I would like the opportunity to engage with him about them, but I cannot have that opportunity here. I do not really understand why he feels compelled to make that argument, particularly in the face of the fact that, in January, our Prime Minister said in a speech to the World Economic Forum in Davos:

“Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues”.

I agree with him. He urged multinational members to wake up and smell the coffee, obviously taking advantage of what was in the public domain.

Not entirely but relatively unusually for me, I am on the side of the Prime Minister on this issue. It is necessary for us to spend some time engaging with the view that has permeated our businesses, at least at one level of representation although not universally, about why they think their obligation is to avoid paying fair taxes and to challenge that directly. I ask the Minister, and I am sure that he will find it easy to answer this, whether he agrees with the Prime Minister or with the chairman of the CBI that this is a moral issue. If it is a moral issue, does the Minister agree that we in the United Kingdom, because of the position that we occupy in the world and our relationship with many of these tax havens, have a moral obligation to engage with them in a way that helps to solve this problem and undermines their activity?

While I am at it, can the Minister give some indication of how the Government intend, in the process of putting pressure on these tax havens—as they are— which I commend, to ensure that we do not replicate the situation that we allowed to happen in the first place? That situation put these communities in the position of finding some way to sustain themselves in the absence of natural resources and opportunities for the economy, which forced them into the hands of clever people who showed them a way of making large amounts of money in a parasitic fashion so that they were not a burden on us. We have to accept that part of this deal must be that we accept our responsibility to ensure that people can live in these places at the standard of living that they have achieved—maybe beyond that, in some cases—which does not rely on them having to perform these functions in the world at such a disproportionate rate in order to keep body and soul together.

I commend to noble Lords the briefing I have in my hands from the co-ordinator of the All-Party Parliamentary Group on Anti-Corruption, and the one that was sent to all of us by Action Aid. These are excellent documents. I cannot, in my last minute, do any of them justice, but they have a list of arguments and questions that go to nub of this issue. If others who speak after me can engage with these issues in the way that these briefings deserve, I commend the briefings to them.

I make one final point to the Minister. There is a deeply corrosive effect of the structures that have been created by tax avoiders and tax evaders which we need to interdict: they have created a set of structures of which the crooks of this world are taking advantage. We discovered recently, because of the uncovering of money-laundering through a legitimate process of international banking in cyberspace, exactly what crooks are able to do. That is exactly what is happening in this environment. If the Minister wants evidence for that, he should look at the World Bank’s recent report, which showed that there were 800 corporations involved in the 150 examples of serious money-laundering and crooked use of money, all of them taking advantage of structures that were otherwise legitimately created. We are allowing crooks and deeply tainted money to get into our legitimate exercises and economy.