Corporate Tax Avoidance
Think corporate tax avoidance is bad? It could be about to get even worse.
Paying less tax than the cleaners they employ is mainstream practice for big business today. The close-to-zero tax rate of some of the world’s biggest corporations is widely acknowledged, as is the role of British territories like the Cayman Islands in helping make this possible.
Less well-known is how trade agreements are giving corporations the ability to successfully challenge taxes in secret “courts” around the world. Whether it’s a sugar tax in Mexico, a windfall tax on profits in Ecuador or the removal of tax holidays in Romania, corporations are using special clauses in trade deals to challenge—and often lower—their tax bill. What’s more, they’re often using British tax havens to do it.
If you’re not worried, you should be, because under new trade deals being negotiated (including TTIP) the British government’s ability to introduce certain taxes could similarly be challenged by U.S.-based corporations.
The research that Global Justice Now has released today shows that foreign investors—usually multinational corporations—have already sued at least 24 countries from India to Romania in tax-related disputes. To do this, they use something known formally as an Investor-State Dispute Settlement (ISDS), a sort of secret court system only accessible to foreign corporations, which is embedded in hundreds of trade agreements.
The idea of ISDS was to allow corporations to take action if a foreign government expropriated that company’s assets. Only a rapidly growing legal industry has interpreted an “act of expropriation” as virtually anything that “unfairly” damages a company’s profits. Which could be pretty much anything from putting health warnings on cigarette packages to introducing a new piece of environmental protection to…a new tax on their profits.
In 2007, Vodafone took over much of India’s telecoms industry. The company is now one of the largest mobile network operators in the country, with more than 180 million customers. But it gained its stake through a complex $11-billion deal which used offshore companies that allowed it to pay no capital gains tax.
Indian tax officials understandably weren’t happy, and insisted that Vodafone retroactively pay a multi-billion dollar bill. Vodafone responded with an ISDS claim, arguing that the state was breaching a trade treaty signed between India and the Netherlands in 1995. The case is ongoing.
As part of long-running legal proceedings that began in 2005, Mexico has been successfully sued by a consortium of U.S.-based agribusiness giants, including Cargill and Archer Daniels Midland, after introducing a new tax on the sales of soft drinks containing high-fructose corn syrup. Campaigners claim the tax was helping to impede an obesity epidemic. But the tribunals ruled in favor of the corporations, and Mexico was ordered to pay millions of dollars in damages.
There are dozens of other cases (all of which can be found towards the end of Global Justice Now’s latest report). Multinational oil, gas and mining companies use these tribunals more than any other industry. Ecuador was sued by Anglo-French oil company Perenco for windfall profits levied on the oil sector. UK oil company Tullow sued Uganda over a disputed $400-million capital gains tax bill.
What’s worse, a corporation doesn’t need to have a genuine presence in Britain in order to take advantage of a British trade agreement. That’s because British overseas tax havens are usually covered by these deals. All a company needs to do to make use of a British trade agreement is set up a “mailbox” presence on one of these islands—and multinational law firms have advised companies to do just this.
The current government is well aware this is happening. Their response? “Nothing to do with me Gov.” But that’s not true. At least 20 of the UK’s bilateral investment agreements, signed with countries from Belize to Turkmenistan, were expressly extended to cover investors from Jersey, Guernsey and the Isle of Man. Several UK’s treaties have been extended to cover investors from Hong Kong, the Cayman Islands, or the Turks and Caicos.
In one ongoing case, Canadian mining group Gabriel Resources used its “presence” in Jersey to sue Romania for halting a controversial gold mine in Transylvania after it was the subject of mass opposition from local communities.
If this all sounds worrying, it’s about to get a lot worse under a new set of trade agreements being negotiated, such as TTIP. This deal would extend access to corporate courts to tens-of-thousands of corporations. U.S. big business would be able to directly take British or other European governments to task in these secret tribunals. Any promise political parties might make about taxes designed to improve the environment or national health, or to tax excessive profits, could be up for challenge.
The British government will promise tax is exempt from TTIP. But we’ve heard this before. Almost all trade agreements have tax “carve-outs.” But they have failed to stop the cases. As one veteran arbitrator has written, “In an investment dispute, the very legitimacy of the tax is put into question.”
Of course, individual tax policies aren’t necessarily good. But raising and structuring taxation is a key element of sovereignty. Allowing corporations to challenge these policies—in secret and without the right to appeal—is a threat to the state’s ability to fund public services, redistribute income or just balance the books. As such, deals like TTIP are a clear attack on our sovereignty.
Nick Dearden is the director of Global Justice Now (formerly World Development Movement) and former director of Jubilee Debt Campaign.
—Common Dreams, February 15, 2016