Viva Panama Papers & Taxing Information

It’s in the news again, corporate transparency, albeit not exactly with a focus on directly on companies.

First, the second installment of the Panama Papers is coming out with enormous lessons on transparency in accounting and tax reporting to be had; and second, a newly published paper shows the effects of government surveillance on freedom of information. Both have critical implications on freedom of speech and use of information with significant possible impacts in the struggle to create a more sustainable global economy.

Corporate transparency is imperative for sustainability. We know this. Without it how can you calculate the sustainability implications of how a product is made, what it is made of, how it is marketed etc. And if we can’t know this, how can you put a price value on its inherent contribution to sustainability?

Unfortunately, greater transparency in the economy is typically a game of inches.  This is as true for accounting as it is for corporate sustainability reporting.

Many such as myself, wait with great hope for some dramatic development that will allow us in one fell swoop to gauge the sustainability of any product anywhere, anytime with a single tap of a screen.

Alas not yet. But we can take heart with Panama… the Panama Papers that is. Late last week, Business Insider reported that May 9th The International Consortium of Investigative Journalists will “unleash” another huge data dump on how the TaxAvoider Class hide their cash.

We don’t have to imagine all the phones ringing nervously off the hook at accounting firms. But before we fully judge, let’s be clear, most of the TaxAvoider Class have little to no idea what their advisors actually do with their money, let alone the tax laws and loopholes driving decisions. Some clients might recall the words “aggressive tax stance” or whatnot, but little else.

Plausible deniability or plain stupidity…? (click Continue Reading below the share buttons to continue)

Probably more of something in between, yet still not excusable. Of course the sad irony is that the very phones the TaxAvoider Class are causing to ring, are those very same phones they called for tax advice in the first place. The ringing you might hear in the background are the Advisories’ cash registers as their clients call to double down on dubious advice.

Anything that improves access to information by revealing the dirt under the nails of economic actors, be they celebrities, politicians or their advisors, is flat out good. The impacts of tax avoidance-evasion are vast and anti-civic to the nth.  Let’s take an extreme example to prove the point.

ActionAid, an international development charity, found Deloitte (the Biggest of the Big Four Advisories) was counseling large international businesses on how to avoid tax in some of the poorest countries in the world. Now there may be some merit in denying generally but not universally corrupt African governments a bit of tax money, but avoiding taxes in Africa is bit like asking the hardworking squeeje guy at the light to clean the windscreen of your Mercedes and then tossing him a nickel as you speed away.

Clearly the intent in Africa, the UK, USA or wherever the rich might roam, is to avoid taxes when the sustainable and responsible thing to do would be to encourage fair-minded tax reform and improved anti-corruption measures. I’ve nothing against the rich, indeed I would prefer to be rich, but tax avoidance should be illegal even as it remains nothing more than embarrassingly “poor form.”

This is not enough for anyone to stop avoiding taxes. Of course, shedding light on shady practice might only create even more clever ploys to hide cash. You can believe Grand Cayman, Switzerland, Mauritius and the like will not go softly into the night. Demand will not soon go away either. Consider the soon to be Florida based hedge fund billionaire David Tepper of New Jersey who is leaving the state (in part) because of a 2.6 percent top corporate tax rate differential (6.37 compared to 8.97, although full credit to Mr. Tepper for at least not leaving the country).

It is just as unlikely that the Big Four Advisories (yea I said it, them) and other accounting/consulting firms will push for reasonable change. There are simply too many vested interest in keeping all things Tax in as large a grey area possible. And we know who writes and advises on the laws.

As a historical aside, it was the IMF who argued in the 1990s for structural reform in developing countries such as those in Africa. Part of their call was for sensible tax reform and stronger anti-corruption laws.  Good sentiments, but miserable execution led to massive Bretton Woods protests.

In hindsight, the protestors might have been smarter, pushing the IMF et al to dangle full debt reduction if debtor nations got rid of corruption and crappy tax regimes. ‘Tis a shame they didn’t. Oxfam, another great international development agency, showed the predictable results when they reported last year that Africa lost some USD 850 billion to tax evasion between 1970 and 2008.

The continent now loses some USD 80 billion annually. How much is that? That’s the combined GDP of the 18 smallest Sub-Saharan countries. It’s also an amount larger than all the economies Sub Saharan Africa save but three.  Is this the way of Europe and the US?

Back to Deloitte. The consultancy was quite right and clear about its tax advisory practice. Strictly speaking their tax advice in the case advanced by Action Aid was entirely legal. This is what they said in response to Action Aid’s observations:

“It is wrong to describe applying double tax treaties, such as the treaty between Mauritius and Mozambique, as tax avoidance. Such treaties are freely negotiated between the Governments of the countries involved.

“Double tax treaties exist to enable the countries concerned to strike a balance between the need to encourage investment, including cross-border investment, to raise tax revenue, and to work together with other countries who have the same legitimate concerns to raise revenue and promote business.

“The absence of such treaties could result in a reduction of investment, and less profit subject to normal business taxes in the countries concerned.

“Any discussion of tax treaties by tax professionals would typically be around the technical and administrative aspects of the treaties and not an expression of favour of any particular country at the expense of any other country.”

Not our fault, the Deloitte response implies. If African countries have porous tax codes and end run treaties how can we be blamed?

And they are right, unfortunately. The key to this issue, said a corporate responsibility expert friend of mine, is understanding why governments negotiated the kinds of treaty arrangement that allow taxfoolery in the first place. He guesses governments saw value in encouraging firms to invest in their country to create jobs, commerce, knowledge, etc. and saw the cost of taxes not paid as worthwhile.

Deloitte would agree, and so might the folks who help illicitly siphon off an estimated USD 30 to USD 60 billion from Africa annually. Many who have been to Africa, and most living there now might take umbrage. Be sure, however, that the tax treaties mentioned by Deloitte do not provide loopholes by mistake.

My friend argued that if governments don’t like the results of loopholes they should close them, its not something difficult to do he contends. Now I wont pull they “you’ve never been to Africa and tried to get policy/legislative change card” on him. Wait, I will. Nothing of the sort gets easily done in Africa, not only because changing any law in any country, Africa aside, is incredibly difficult, but as the Panama Papers show any change to these types of tax laws would thoroughly inconvenience a lot of people standing to lose quite a bit of money. Notably this would include the TaxAvoiding Class advisors. Not surprisingly, those same said advisors are those that also give African country tax authorities advice. No wonder Raymond Baker of Global Financial Integrity says bad tax laws and illicit money outflows are Africa’s most “pernicious” problems.

To all this, I would add: first writing and then quoting from the official Its Not Tax Evasion but Avoidance Handbook hardly changes the result.

Finally, on the transparency front, a recent research paper by the Berkeley Technology Law Journal reported in Common Dreams, found compelling evidence that government surveillance has a “chilling effect” on internet information consumption.

The research found a massive drop off of internet searches for terms associated with extremism after the Edward Snowden’s 2013 mass surveillance revelations. The report’s lead author, Jonathan Penny, said “If people are spooked or deterred from learning about important policy matters like terrorism and national security, this is a real threat to proper democratic debate.”

I couldn’t agree more. Democracies and market economies rely on freedom of information for well informed voters and economic decisions makers. If we don’t have information, or are scared to get it, how can we ever make the informed choices that align with our sense of justice and sustainability? For as the gods great and small know, the liberal left which is primarily responsible for pushing sustainability values, is always good and strong on sentiment but far too often a tad short on facts.

Consumer polls tell us most people will “buy their values” if they had the information or aka millions of middle class and up consumers who would prefer not to buy things made by kids, that exploit women, help make animals extinct etc. But how can they know? Information is out there, kind of, but it’s hard to get and we all have limited time.

Any threat to less corporate transparency and freedom of information is a threat to accountability, without which we can hardly hold our breath for sustainability results via the tax code or through the things we consume.

So I say to you: Viva Panama Papers. Viva Berkeley Tech!

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