Monday, 12 March 2012

Still the unacceptable face of financial capitalism

Barclays Bank’s grim reputation for a predatory approach to business is undiminished, says Prem Sikka

The banks have got it made. They have ripped off people with exorbitant charges and measly returns on savings. They have picked people’s pockets with the mis-selling of payment protection insurance, endowment mortgages, personal pensions, precipice bonds and split capital investment trusts – to name just a few.

Banks have driven up the price of food and commodities through speculation, a major cause of commodity inflation. The state has guaranteed their profits through the Private Finance Initiative and the channelling of pensions and benefit payments through bank accounts. The taxpayer has bailed out banks through loans, subsidies and guarantees that add up to more than £1 trillion. Yet, in return, the banks cannot be relied on to pay democratically agreed taxes.

Barclays Bank is the latest example of the unacceptable entrepreneurial culture where bending the rules to avoid taxes and boost corporate profits is considered to be a skill. In 2009, Barclays paid £113 million in corporation tax to the United Kingdom – about 2.4 per cent of its £4.6 billion global annual profit.

Now the British Government has announced that Barclays tried to avoid £500 million of tax through two novel schemes. The first was designed to ensure that the profit arising to the bank from a buy-back of its own debt is not subject to corporation tax.

The second bit of alchemy was a scheme to convert non-taxable income into an amount carrying a repayable tax credit in an attempt to secure “repayment” from the Exchequer of tax that has not actually been paid. The £500 million that Barclays sought to avoid is equivalent to the cost of 100 new primary schools, or employing 16,000 nurses. Yet Barclays and its tax advisors were not bothered about the social consequences. The bank’s defence was that other corporations are also doing the same and it has not broken any laws.

Each year, Barclays publishes what it calls a Citizenship Report and claims that it is a socially responsible organisation. In 2008, soon after the banking crash, Barclays’ chief executive Bob Diamond publicly said that, in future, banks would be good citizens. In November 2010, major banks, including Barclays, signed the Government’s Code of Practice on Taxation and promised that “that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law” and “not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament”.

All the promises have been broken and show the folly of relying on voluntary codes. The Government will collect the £500 million in tax, but there are no penalties for violating the Code of Practice, which was lauded by Prime Minister David Cameron as a step towards “responsible capitalism”.

Barclays is no stranger to controversy. Last year, the World Development Movement estimated that Barclays generates a profit of around £340 million a year through food speculative activities, a major cause of hunger around the world. Barclays and 15 other banks are being investigated by the European Commission to ascertain whether they have colluded and/or may hold and abuse a dominant position in order to control the financial information relating to credit default swaps, which are complex financial instruments used to manage risks.

In April 2011, Liberal peer Lord Oakshott urged the government to investigate Barclays over the $12.3 billion (£7.4 billion) sale of toxic assets to a Cayman Islands company. The company was called Protium and was founded with a $12.6 billion loan from the bank. The deal had the potential to enable Barclays to avoid millions in taxes and a headline in the Daily Telegraph screamed ”Barclays’ Protium deal is all that’s wrong in the City”. Barclays is thought to have 174 subsidiaries and ventures registered in the Caymans, a place that does not levy any corporation tax and is known for lax regulation. The extent of speculative and tax avoidance activity routed through tax havens is not known.

Barclays and other multinational corporations indulge in tax avoidance for two main reasons. First, stock markets exert incessant pressures on corporations to report higher profits. Rather than competition, innovation, investment, better services to customers and communities, many companies find it easier to boost profits through tax avoidance. Second, this suits executives as their remuneration is linked to profits. Barclays’ chief executive Bob Diamond has been receiving mega-bucks in salary and bonuses, but there is silence on the extent to which they are financed by tax avoidance.

Tax avoidance enriches few and impoverishes many, but banks do not publish any meaningful information about their indulgence in tax avoidance. The annual accounts do not provide any indication of the profits boosted by tax avoidance schemes. Neither do they provide any information about the sales, profits, employees and taxes for each country of their operations.

Such information would show that subsidiaries in tax havens do little trading, have skeletal staff but somehow report huge profits, or that large amounts of revenues are generated in the Britain, but corporate taxes are avoided. This information would help to focus attention on the artificial shifting of profits, but successive governments have done nothing to create this transparency.

Organised tax avoidance affects us all. Democracy, responsibility and accountability should be mobilised to check it. All corporate tax returns and related correspondence should be publicly available so that we can all check corporate claims of social responsibility and good citizenship. The threat of public sunlight has the potential to check selfish impulses.

At the moment, there are no personal consequences for directors indulging in complex tax avoidance schemes or for accountants crafting complex avoidance schemes.

Many of the avoidance schemes have been declared to be abusive by the courts, but still there is no retribution against directors and accountants. The lack of penalties has created a gaming culture which drains the public purse. Legislation should be enacted to make directors and designers of abusive avoidance schemes personally liable for up to 10 times the amount of tax involved. The prospect of personal costs would provide some food for thought.

This article first appeared in Tribune

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