Global Tax Avoidance: Who's Responsible?

JULIA TAYLOR KENNEDY: You're listening to Impact from the Carnegie Council. I'm Julia Taylor Kennedy.

Each episode, we explore a topic in global business ethics. This time it's tax shelters.

I'm here with Impact producer Amber Kiwan, who agreed to find a country that's deeply affected when multinational corporations hide their revenues in tax shelters.

So Amber, what did you come up with?

AMBER KIWAN: Well there was unfortunately no shortage of good examples, but I ended up focusing on Zambia, where multiple factors have made the problem particularly extreme.

JULIA TAYLOR KENNEDY: Factors like what?

AMBER KIWAN: To start, Zambia is a small, land-locked country in Southern Africa with abundant copper resources. Mining is big business in Zambia—it's a multibillion dollar industry that attracts multinational mining corporations—but tax avoidance is the norm. Mining accounts for more than two-thirds of Zambia's exports. But, according to the Extractive Industries Transparency Initiative, it represents less than a third of the government's tax revenue. By some estimates, Zambia loses around $2 billion per year as a result of tax avoidance. This is an especially painful loss in a country where around 60 percent of its people live in poverty.

Zambia recently amended national policy to make mining companies pay higher taxes on their operations, but the plan backfired, and I wanted to understand why. So I called an expert to walk me through it.

PAMELA CHISANGA: Where does government get revenue to fund public services? If we want citizens to claim their rights, particularly to basic social services, we also need to figure out how these social services are funded, and one of the key ways in which government raises revenue is through taxation.

AMBER KIWAN: That's Pamela Chisanga. She's the country director for ActionAid Zambia. It's an organization that works to further human rights and end poverty. Chisanga has more than 15 years of experience in the development sector and she helped make tax justice one of ActionAid Zambia's key priorities.

PAMELA CHISANGA: One of the challenges is essentially that the country really had no capacity to effectively collect taxes, whether it's from the formal sector like the mining sector or from the informal sector. The main challenge with the mining sector is essentially that for a long time we haven't had a unit in the revenue authority that understands all the details of mining to be able to really understand how to tax the mines.

AMBER KIWAN: She says it's not just that the government doesn't understand the mining sector—mining companies actually make the government's job much harder by failing to provide details about their profits and costs of production.

PAMELA CHISANGA: The kind of information that they're not providing, which can easily be generated if they wanted to, actually indicates that there are serious aspects of tax avoidance by the companies not wanting to produce this information.

AMBER KIWAN: In recent years, Zambians have been building a movement to fight back. Chisanga says tax justice is one of the top issues that people are talking about in Zambia. This was evident in the country's recent presidential elections.

PAMELA CHISANGA: The presidential candidates obviously capitalized on this. They talked about it. They made this an issue for the campaign. What was interesting for us was that the person who eventually won the presidential election actually highlighted three key areas that he was going to address if elected into office.

One of those areas was the issue of taxation. It got a lot of people, including us as an organization, very excited, because we had somebody who was committing to do something about the challenges that we have with taxation in Zambia.

AMBER KIWAN: In fact, as soon as he was elected, President Edgar Lungu's administration implemented a plan that had been in the works under the previous administration. In an effort to increase transparency and close up loopholes, the government scrapped a 30 percent corporate income tax. Instead, they upped royalties—which are harder to avoid.

But then mining companies, like Barrick Gold, threatened to pull out of Zambia, which would mean thousands of jobs lost. So, the government backed off. In April it reinstated the 30 percent corporate income tax, and cut royalties again.

Then, in July, the government attempted a far more modest approach: to bring the rates up to match those charged to non-mining companies—35 percent. But Zambia's Chamber of Mines—the body that represents the mining companies—argued against the increase, saying it would discourage investment and processing. The chamber proposed the Zambian government revert back to the original 30 percent corporate income tax, and drop royalties to an even lower rate—6 percent for the entire industry—and it looks like the proposal is being put into law by the government.

From the outside, the back-and-forth tax feud is dizzying, but for many Zambian voters, it has been a great letdown.

And multinational corporations operating in Zambia continue to wield power over the government, avoiding taxes because they, ostensibly, provide other social and economic benefits.

PAMELA CHISANGA: The companies tell us that we don't know what we're talking about. They also tell us about how much they're doing for our country. For instance, in 2012 we did an exposé on a British multinational company essentially talking about how much tax this company had avoided over a period of time.

AMBER KIWAN: The company reacted by printing glossy ads in the newspaper showing how they've supported things like local schools and community sports programs.

PAMELA CHISANGA: They were essentially trying to say "Look, even if we haven't been paying, here is what we have done." When you look at what they have done, it's essentially small and little projects here and there that would not add up to the amount of money that they have avoided in paying in taxes.

AMBER KIWAN: Without that tax money, the government doesn't have the revenue to fund social services, not even for things like schools.

PAMELA CHISANGA: Last year I went to one of the rural communities we work with. We were doing a review of the programs that we have there.

AMBER KIWAN: In the course of the review, she discovered that schools in the area hadn't received government funding for months and weren't able to buy basic school supplies. So, the schools were forced to find other ways to bring in money.

PAMELA CHISANGA: It's basic things like that that you find get affected because of not having adequate resources. Children, instead of learning, have to spend part of their time to go and work in the fields to earn money in order for the school to buy basic things like chalk. This is what has been really heartbreaking about this campaign.

AMBER KIWAN: Lower-income Zambians—children and their families—are hit the hardest when the government doesn't have enough revenue coming in. Because the country needs the mining industry and the jobs it provides, the Zambian government seems hostage to mining companies' interests. Chisanga thinks the government could do far more to change this dynamic, and that the companies could pay more of their share of the taxes. But right now, things just seem stuck.

JULIA TAYLOR KENNEDY: Zambia isn't the first country to falter in its attempts to close corporate tax loopholes. The way tax revenues escape from the markets where business is conducted involves many more players than just a company and a local government. All of these players reinforce the system to maintain status quo—and so the question of responsibility gets really complex really fast.

The system built up around multinational companies looking to save on their taxes stays in place because of a complex web of incentives. Most tax shelter activity is technically legal, even if many consider it unethical. Plus, it's a web that for a long time no one wanted to look at.

HAROLD CROOKS: I'm Harold Crooks, and I'm the director of The Price We Pay.

Before I got into documentary filmmaking, I was trained, or am trained, in economics—you know that old cliché about death and taxes. There are two subjects that even if you're trained in economics, you would maybe prefer to avoid them and kind of look to other areas.

JULIA TAYLOR KENNEDY: The Price We Pay is a documentary about corporate taxes. Clearly, Crooks came around on the issue.

HAROLD CROOKS: Once I realized that the question of taxation is really a window into who has power in society, who doesn't have power in the society, and whether the regular person has a chance of getting ahead in life, then all of a sudden I was hooked.

JULIA TAYLOR KENNEDY: Crooks spent the next couple of years examining the global tax system and understanding how its elements relate to one another. First, he needed to understand how tax shelters began. When did companies start figuring out how to stash money offshore?

HAROLD CROOKS: The story really in some senses goes back to the end of the British Empire. Up until that point in the early '50s, London had been the global capital of international finance.

JULIA TAYLOR KENNEDY: After all, the revenues of companies operating all over the world came back home, through England. But when the colonial empire dissolved after World War II ....

HAROLD CROOKS: The question really was: How was London going to maintain this role after the end of the British Empire?

JULIA TAYLOR KENNEDY: The answer was to create a jurisdiction that didn't tax the revenue flowing through it.

HAROLD CROOKS: A secrecy jurisdiction is just what it says. It's where corporations can incorporate, where individuals and corporations have a kind of freedom from regulation that is not available on shore. This became a very critical part of the development of the financial infrastructure for the offshoring of the world's wealth.

JULIA TAYLOR KENNEDY: In theory, a secrecy jurisdiction wins, because economic activity flows through it. And the companies win, because they pay taxes where they are headquartered. And in this case, they are headquartered in a jurisdiction that doesn't charge much in the way of taxes.

So, the UK figured out how to build these tax shelters, and even today, many of the world's tax havens are under some kind of UK jurisdiction. Think of Grand Cayman, or Bermuda, or a tiny British Channel island called Jersey.

JOHN CHRISTENSEN: It's a lovely, lovely place. It's a very beautiful—lots of lovely beaches. But I grew up on a farm.

I am John Christensen. I am director of the Tax Justice Network. I'm an economist by background.

JULIA TAYLOR KENNEDY: In the 1960s, when Christensen was a boy growing up on Jersey island, it was barely a tax haven.

JOHN CHRISTENSEN: There was some tax haven activity, but it was small. Jersey was a tourism resort. It was a big agricultural and horticultural place.

JULIA TAYLOR KENNEDY: Christensen left the island to go to school, and to work for Oxfam in the developing world. When he returned in the mid-1980s, he found Jersey completely different.

JOHN CHRISTENSEN: The town center had transformed. There were big office blocks. Everyone was driving around in big cars. Young people were no longer working in agriculture or tourism. They were being employed by international banks. That was a major and very noticeable cultural change.

The scale of it surprised me. The speed with which it was growing surprised me. I was very surprised at how quickly it was emerging as the dominant industry in the island.

JULIA TAYLOR KENNEDY: Being a tax haven brought in jobs. It brought real estate development. And even Christensen got into the industry. When he was in grad school, he'd studied the booming phenomenon of tax shelters—and he wanted to understand how companies used them from the inside. So he got a job at the accounting firm now known as Deloitte and Touche. Back in the mid-'80s, it was Touche Ross.

JOHN CHRISTENSEN: You have to be on the inside to what's happening in practice. So for me this was a fascinating apprenticeship in the mechanisms that are used by multinational companies to ship their profits out of the countries in Africa, or wherever they are generating the profits, into subsidiaries based in a tax haven.

JULIA TAYLOR KENNEDY: In his time at Deloitte, Christensen learned the extent of the accounting industry's foray into tax shelter advice. Not only were companies boosting their profits by sheltering revenue, accounting firms were boosting their business by advising companies on how to move money offshore in ways that were technically legal. Then, Christensen left Deloitte to become an economic advisor to the Island of Jersey. There, he learned how the island viewed its offshore status.

JOHN CHRISTENSEN: I think if we look back to the 1980s, I would say that in the 1980s Jersey was really lawless, failing at every single level, failing in terms of its transparency. The policies were designed to enable banks, big law firms and accounting firms, to sell secrecy to their clients.

JULIA TAYLOR KENNEDY: As globalization progressed, and corporations' operations spread out all over the globe, tax avoidance grew along with it.

ELISE J. BEAN: Accounting firms were mass-marketing tax shelters. They had cold-call centers where they were actually calling businesses around the country telling them that their competitors weren't paying taxes, so why are you, so you ought to buy our tax shelter.

JULIA TAYLOR KENNEDY: That was Elise J. Bean, co-interim director of the Levin Center. We'll hear more from her in a minute.

But first, let's take stock. So far, we've walked through several players reinforcing tax avoidance: The companies themselves, who want to reduce their taxes in order to increase their revenue. The developing countries, who want to keep companies from uprooting and moving jobs out of their markets. The tax shelter locations, who want to attract economic activity and jobs in the form of financial organizations and accounting firms. And those financial services firms who benefit from more complex activities companies engage in to avoid paying taxes in the countries where their production facilities sit.

Now, let's turn to some of the other big players in this tax avoidance web, starting with developed countries. That's right up the alley of Elise J. Bean—she used to be on the senior staff of U.S. Senator Carl Levin, and she was in charge of his work on tax issues.

Why would politicians in the U.S. continue to support tax avoidance?

ELISE J. BEAN: Multinational corporations in the United States are headquartered across the country and they have often close relationships with their elective representatives, as they should. They are employers, massive employers with very significant revenue within the states where they are located. But what also happens is that they put pressure on their elected representative to help them minimize their taxes.

JULIA TAYLOR KENNEDY: That pressure can take the form of campaign finance, lobbying campaigns, and threats to move operations out of a politician's district. As a result, some companies have gotten their U.S. tax bills down to zero.

ELISE J. BEAN: I think that you are in a very disheartening spiral because as more corporations find ways not to pay taxes, that puts tremendous competitive pressure on other companies that do pay their taxes and pretty soon you're in a situation where even the honest taxpayers say, "If I'm going to make it in this economy and I'm going to succeed, I'm going to have to start doing the same thing that my competitors are doing and cut corners on my taxes." That's a very hard spiral to break.

JULIA TAYLOR KENNEDY: Take the example of Facebook.

ELISE J. BEAN: Facebook for many years was a terrific corporate citizen, paid their taxes, and really contributed to its community.

JULIA TAYLOR KENNEDY: Once Facebook went public, everything changed.

ELISE J. BEAN: They hire a bunch of lawyers and the lawyers said, "What are you doing? How many taxes are you paying?" And they have them arrange their affairs primarily through a certain stock option loophole.

JULIA TAYLOR KENNEDY: Facebook got its tax payments down to nearly zero in the United States. But that's not all.

ELISE J. BEAN: Despite being profitable, they probably won't pay taxes for the next 20 years but they also have them go back two years and get a refund of $500 million that they have paid over the prior two years.

JULIA TAYLOR KENNEDY: In other words, the company went back and received money from the U.S. government that they had paid over the prior two years.

ELISE J. BEAN: So they got a tax refund and they won't be paying taxes in the future despite being highly profitable. That's not right.

JULIA TAYLOR KENNEDY: Given the power of the U.S. consumer, the United States is probably the best positioned to close corporate loopholes and force companies to pay taxes. That's what Bean would like to see.

But, of course, the campaign finance system keeps individual politicians beholden to corporations and their interests. So, individual countries are hamstrung when it comes to reversing this tax avoidance spiral we are in.

HAROLD CROOKS: Tax competition has been put forward as a kind of legitimate tool for national governments to attract business. What we're seeing more and more is that taxation really, when all is said and done, allows one country to steal from the tax base of its neighbor.

In the 21st century, in a globalized world where multinational corporations operate at a global level, national governments have to begin to operate across borders too.

JULIA TAYLOR KENNEDY: Documentarian Harold Crooks thinks perhaps a coalition of countries is best positioned to change the system together. The logical coalition would be the OECD (Organisation for Economic Co-operation and Development)—but for years, likely due to pressure from members who shelter money for corporations, the organization made no move on tax reform.

If even the OECD can't oppose tax shelters, how is Pamela Chisanga to have any hope of making a difference in Zambia?

JOHN CHRISTENSEN: I have days of optimism where I think that we're seeing progress.

JULIA TAYLOR KENNEDY: John Christensen left his post as economic advisor in the tax shelter island of Jersey to join a growing movement of individuals and organizations that fight for what they call "tax justice."

JOHN CHRISTENSEN: The Tax Justice Network was launched in 2003. It's a very interesting model because we are largely a network of very highly experienced professionals: lawyers, economists, chartered accountants, trade international treaty specialists; a very wide multi-disciplinary network of experienced people who work with civil society organizations, NGOs, organized labor, faith movements, and so on, helping them to feel their way into the whole issue of international tax matters.

JULIA TAYLOR KENNEDY: Christensen's organization educates activists, journalists, and concerned citizens on the intricacies of tax avoidance and helps them mount campaigns for change. It seems that this new network that's opposing tax shelters may be having some impact. Taxes seem to be shedding their taboo as a topic of conversation, both in casual and political conversation. And recently, the OECD has begun efforts to write international tax rules.

JOHN CHRISTENSEN: I'm optimistic because I think that there's a much greater recognition now than there was even five years ago, that this is a very big issue. It's a core issue.

JULIA TAYLOR KENNEDY: President Obama speaks regularly about the need to close corporate tax loopholes. And Christensen is seeing some change in Africa.

JOHN CHRISTENSEN: If we go back 10 years ago when I was busy setting up a tax justice network in Africa—tax simply didn't feature. It wasn't part of their agenda.

Frankly, too many of the political elites and business elites were up to their necks [Laughs] in using tax havens themselves. They weren't going to be supporting measures which would impact on their personal circumstances. I think we're seeing a gradual change in that area. We're seeing more successful investigative journalism disclosing how politicians have been using and abusing tax havens, how multinational companies are abusing or misusing tax havens.

This issue has come to the fore in a way that has generated a great deal of public interest and public anger, precisely because austerity is being imposed, because the public finances don't have the revenue.

People are saying "Well, why don't you start tackling the tax evasion and tax avoidance rather than imposing cuts to educational services and health services?"

JULIA TAYLOR KENNEDY: Political will has certainly increased in the United States. There's been a groundswell of left-wing support for a financial transaction tax, which is essentially a sales tax on financial trades.

And as Harold Crooks found in the course of filming his documentary, voters are ready to talk about ideas like a financial transaction tax in truly nuanced ways. Here's an excerpt from the documentary. The voice you're hearing belongs to a firefighter named Sam Holloway. He's describing the time he proposed a financial transactions tax to Chicago Mayor Rahm Emanuel. It happened just after another firefighter lost his life in a fire.

SAM HOLLOWAY: The officer, Captain Herbie Johnson, had his people up there. The fire got really nasty really quick, and there was a flashover. Herbie and one of his people were caught on the second floor. Herbie suffered some pretty bad injuries and he didn't make it.

Shortly after that, we got a visit on my shift from the mayor. He offered his condolences and he also said that he had just come from speaking with Herbie Johnson's family again to see how they were doing and check on them to see if they needed anything. I'm thinking maybe it was a mayor's thing for him to come to us and do that, I thought it was a really classy gesture.

Then he goes with that same demeanor and says, "Now I want to talk about your pensions." So right away the alarm bells are going off in my head, because he was coming around the firehouses before he got elected when he was campaigning, talking about the same issue. What he would tell us is: There's no easy choices, your pension is badly underfunded, if you guys want to have something going forward we're going to have to make some tough choices to ensure that you do.

I don't know what possessed me—I guess I'm sometimes a troublemaker once in a while—so I sort of raised my hand and said, "You know, I've got an idea. While our pension fund has been suffering, and people have been losing their homes, we know that there is one sector of our economy that has been doing pretty well because we bailed them out. It's the banks, it's the investors. If we were to introduce a tiny financial transactions tax on the board of trade, and the mercantile exchange, we could recoup some of these losses and we'll be getting it back from the people who squandered it in the first place. They won't notice it's missing: it will be a tiny tax and you could bring in tremendous amounts of revenue and solve some of these budget crises."

And he said, "I don't support that. If you go down to Springfield, the state capitol, you won't find any legislators who support that. If you think it's a good idea, you should run for office."

The important thing with the financial transactions tax, for me, is that it's not just practical. It's also symbolic. It's saying, "Look, we are not going to let you, investors, bankers, do whatever you want and cause all this damage to all these people who you see as beneath you or not as important. If there's some value in what you do, you'll do it with a smaller profit margin. You'll do it and pay more taxes. If there's no value in what you do, we're going to make it illegal. But until we figure that out, you're going to pay whatever we decide you're going to pay to help recoup some of this loss that you have created, to help repair this damage that you've caused."

But we have to change our thinking as a society in general. Do you want to put another coat of paint on the bond trader's boat, or do you want to make sure that your firefighter has a pension to go through when he retires? Take your pick. It's an easy choice as far as I'm concerned.

JULIA TAYLOR KENNEDY: On this podcast, we are constantly gauging the difference between legality and morality—and trying to understand which actors in society should have a sense of responsibility for doing the right thing. Tax activists often call on corporations to pay their fair share of taxes when they have operations in a given country. That term "fair share" leaves a lot open to interpretation. And according to Crooks, after the myriad of interviews he conducted for his documentary, he found we simply can't expect corporations to police themselves when it comes to taxes.

HAROLD CROOKS: It's not a moral issue for them. It is a political issue for societies to determine what kind of society they want to have. From that, if you want to have a middle class, if you want to have a viable medium- and small-size business community in your country, well then what is the tax base you require in order to achieve those goals?

Then you pass the legislation that makes that all possible. You can't ask Google or Amazon or Facebook or a multinational mining company in Zambia or wherever to get together and have philosophical and ethical conversations about how much taxation they should pay. It's a non-starter, and it's not what anyone is asking for in the tax justice community.

JULIA TAYLOR KENNEDY: That's what makes this problem so hard to solve. There are very few incentives to change—for the companies looking to maximize profits, for the politicians in power in developed countries, for the tax shelter countries looking to attract jobs, and for the developing countries looking to keep them.

But hard problems take time to solve. And, at the very least, it seems that voters and activists are more educated and aware of the issues .... and are no longer afraid to talk about them.

Thanks for listening to Impact from the Carnegie Council. And thanks to Harold for letting us use a clip from his documentary The Price We Pay.

A special thanks to our production team, Amber Kiwan, Terence Hurley, Deborah Carroll, Alex Woodson, and Anna Sophia Young. I'm Julia Taylor Kennedy.

You can find out more about The Price We Pay at thepricewepay.ca. And you can find out more about this podcast at carnegiecouncil.org. You can also find us on www.policyinnovations.org, on iTunes, or wherever you download your podcasts.