Prem Sikka | ukwatch.net

Follow the money

Alex Doherty — Mon, 08 Sep 2008 15:10:30 +0000

Immigration is an emotive issue. The possibilities of a rational debate are constrained as many commentators have already adopted certain positions. The latest proposals are to expel non-EU immigrants after four years. The proponents of such policies are happy to collect taxes from non-EU immigrants, but do not wish to extend social rights to them. Yet politicians have shown remarkable unwillingness to address economic causes of legal and illegal immigration.

In a world of uneven economic development, many people are persuaded to leave their homes, families and friends in search of greener pastures, especially to the western world. Some immigration is encouraged as often the indigenous population is less willing to accept poorly paid jobs. Immigrants from the Mediterranean countries and Eastern Europe are increasingly providing cheap labour for the leisure, tourism and agriculture industry. Immigration helps to boost the reserve army of labour and enables some employers to make excessive profits by driving down wages and working conditions. Unsurprisingly, the Confederation of British Industry (CBI) opposes any cap and claims that immigration is essential for business growth. It is silent on the social rights of immigrants.

Immigrants often have dreams, energy and willingness to work long hours. They have revived the British textile industry and run the ubiquitous corner shop. Immigration also results in huge wealth transfer from developing countries to developed countries. The developing countries bear the cost of producing scientists, engineers, doctors and other professionals, but many then migrate to developed countries.

The main reason for migration to the western world is that it has comparatively good education, healthcare, economic and social infrastructure. Developing countries, often rich in natural and human resources, can also develop such infrastructure but are hampered by local corruption, export of capital and organised tax avoidance.

Due to historical legacies, developing countries are estimated to have an external debt of some US$2.85 trillion. A large part of this is due to theft by many dictators and deposited in western banks. A report by the UK Africa All Party Parliament Group (pdf) noted that “£220 bn was stolen or misused by [Nigeria’s] past rulers between 1960 and 1999 and much of this was held overseas”. Developing countries paid developed countries more than US$540 billion in debt service in 2005. Low-income countries continue to pay out $100 million each day to creditors.

Developing countries are estimated to be losing an additional $350bn-$500bn a year through organised tax avoidance (pdf), often by western multinational corporations. This is more than three times the total of all foreign aid and assistance. Christian Aid reported that tax avoidance prevents investment in social infrastructure and will lead to some 5.6m deaths of young children.

A recent report by Greenpeace e.org/raw/content/international/press/reports/conning-the-congo.pdf noted that logging companies in Congo are avoiding taxes of at least $12m a year. The main tool for this is ‘transfer pricing’, a technique used by companies to shift costs and profits. The sums are not trivial by local standards. In terms of 2000 prices, they are over 50 times the country’s environmental operating budget. Some $12m is equivalent to 80% of the country’s public healthcare budget and could help to vaccinate some 700,000 children under five years of age against deadly diseases.

Altogether, developing countries are exporting nearly a trillion dollars each year to developed countries, leaving precious little for investment in education, healthcare, public administration and jobs. Is it any wonder that those who are mobile migrate to developed countries, either legally or illegally? Curbing the export of capital from developing to developed countries and greater investment in local infrastructure will go a long way towards reducing pressures for immigration. Developed countries have been slow to write off debts, or repatriate the funds looted by foreign dictators. They have done nothing to investigate and prosecute companies that avoid taxes in developing countries.

While some immigration is a feature of the neoliberal global economy, pressures can be significantly reduced by curbing tax avoidance and creating geopolitical structures that promote more equitable share of wealth and power. Without addressing the economic inequities, there is little prospect of curbing the pressures for legal and illegal immigration.

The Conservative state we're in

Alex Doherty — Thu, 21 Aug 2008 19:45:29 +0000

It has become fashionable for Conservative politicians and others to blame the state for almost everything. The state is blamed for rising income and wealth inequalities, the banking crisis, pensioner poverty, failed regulation, housing shortages, rising utility prices, complex tax laws and almost everything else under the sun. They rarely acknowledge the role of their ideologies in creating the very failures that they complain of.

Over the last 35 years, the UK state has been thoroughly restructured to advance the interests of the rich and major corporations. Through financial contributions, lobbying, funding of thinktanks, friendly journalists, consultancies for legislators and jobs for potential and former ministers, they have colonised public policy making. The consensus about advancing social rights, equitable distribution of wealth and developing a just society has been eschewed in favour of markets, laissez-faire, light-touch regulation, corporate profits and tax cuts for the rich.

The state, we continue to be told, is the problem and gets in the way of market efficiency, but neoconservatives are very adept at using the state to serve their interests. The private finance initiative (PFI) developed by the Conservatives and championed by Labour, ensures that the profits of many companies are relatively risk-free and guaranteed by the taxpayer.

Corporate thinktanks, accountancy firms and the mega-rich are closely involved with the shaping of tax laws. The state obliges by giving tax concessions to non-dom millionaires. Tax breaks are created for specialist sectors (eg farming, movies) and soon exploited by others. Tax cuts for companies and the rich have been financed by wealth transfers from the most vulnerable. The last Conservative government reduced the state pension by breaking its link with average earnings and condemned many pensioners to poverty. Labour has not yet restored the link. The recent “10p in the £” fiasco is a continuation of the ideology that transfers wealth to the well-off.

The state has been used to smash trade unions and dilute worker’s rights and their ability to secure an equitable share of wealth. The result is that the share of the GDP going to workers in the form of wages and salaries has been reduced from 65.1% in 1975 to 52.6% in 1996. In 2006, it stood at 55.6%, a decline of 10% on 30 years. The Conservatives opposed the national minimum wage (pdf) and Labour appeased the elites by setting it at a low level. This has produced record corporate profits and fat-cat salaries for few, but hardship for many.

Seduced by the myth that private sector is somehow super-efficient, successive governments have privatised almost everything. Gas, electricity, water, telecommunications and many other industries have been sold at knockdown prices to enable a select few to become millionaires. The Conservatives bribed the electorate with few cheap shares, but none of this offered people any control over fat-cat executives, prices or quality of services. Labour has continued with the same policies. Regulators of gas, electricity, water, mobile phone and other sectors have either come from within the industry or are eyeing lucrative jobs there. All too often they see the issues through corporate lenses and have failed to protect consumers.

Light regulation and trusting the corporate elites has been a key factor in the recurring financial crisis. Normal people have been sold dud pensions, endowment mortgages and financial products. The regulators often do too little, too late. Even though people’s savings, pensions and investments were tied up in the financial system, regulators did not monitor the financial dealings of banks. They were left free to speculate and gamble on stock markets. The regulators took no action even though billions of dollars of liabilities and toxic debts were not reported in the accounts of banks. The same opponents of effective regulation are only too pleased to accept state sponsored bailouts.

We are witnessing the results of the failed ideologies of conservatism, eagerly embraced by all the major political parties. We have bigger financial scandals, pensioner poverty, increasing income inequality and prospects of greater social strife. The dominant ideology of prioritising markets and appeasing corporate elites need to be replaced by policies that prioritise the concerns of normal people. Without this fundamental shift there is no prospect of building a fair and just society.

Groundhog Day for Boom and Bust

Ellie Keen — Sat, 19 Apr 2008 20:35:18 +0000

ANYONE looking at the recent Financial Services Authority report on its failures to supervise Northern Rock properly would be struck by how it neglects the systemic aspects of the current financial crisis. The informed view is that the credit crunch will result in global losses of around $1.2 trillion (£600 billion). About 40 per cent of these losses – or $480 billion – is expected to be absorbed by banks and financial institutions in the United States. Some expect the crisis to spread to the insurance sector. Britain does not come out unscathed. Gordon Brown’s Government has barely managed to bail out Northern Rock – the cost of which could be anything from £25 billion upwards. Huge Government credits are being made available to other banks while the Government is unable find resources to fund a decent state pension, rebuild schools and hospitals.

Not only have the financial regulators failed, there are also failures of other institutions. Credit rating agencies failed to downgrade banks holding toxic loans. Company accounts are supposed to alert markets and regulators, but failed to alert anyone. Company auditors collected huge fees, but their audit reports turned out to be worthless. Consider four examples.

Northern Rock received a clean bill of health from its auditors on its 2006 accounts. The auditing firm also acted as a consultant to the bank and received £700,000 for the non-audit work. The fee dependence is always likely to dull any sense of inquisitiveness.

On January 25 2008, Bear Stearns, America’s fifth largest bank, received a clean bill of health from auditors on the financial statements for the year to November 30 2007. Yet Bear Stearns could not sustain its financial position and, on March 17, it was sold to JP Morgan Chase for $2 (£1) a share, valuing it at £118 million. Just 16 days earlier, it was valued at £30 billion. Under pressure from major investors, the offer was raised to $10 a share.

On February 27 2008, Carlyle Capital Corporation, an £11-billion hedge fund registered in Guernsey, received a clean bill of health from auditors on its financial statements for the year to December 31 2007. The accounts stated that the directors were satisfied the group has adequate resources to continue to operate as a going concern for the foreseeable future. Two weeks later, Carlyle collapsed, as it could not reach financing agreements with its key creditors.

On February 27 2008, Thornburg Mortgage, America’s second-largest independent mortgage provider, published its audited accounts for the year to December 31 2007. These accounts carried a clean bill of health from auditors. Six days later, the company explained that it was renegotiating its financial position. The auditors retracted their opinion.

Although some financial institutions might grab headlines, similar failures have occurred in the recent past, most notably at Equitable Life, Independent Insurance, Barings, Johnson Matthey and Bank of Credit and Commerce International – to name just a few. The usual response after each of these is to tweak the regulatory structures, but little has changed. Above all, no questions are asked about the values embedded within the regulatory and political positions. The regulatory Humpty-Dumpty cannot be put back together by re-arranging the deckchairs. There are too many institutionalised failures.

The financial regulators are part of a political structure that is available for hire to the highest bidder. Corporations and a wealthy elite fund political parties and individual politicians with the aim of keeping threatening issues off the political agenda. They also fund think-tanks and various media to ensure that an ideological climate favourable to their interests is sustained.

Through revolving doors, corporate executives become regulators and regulators looking for higher financial rewards and company jobs go easy on corporate misdemeanours. The possibilities of emancipatory change are stymied and institutionalised social squalor is the inevitable result. Effective financial regulation is unlikely to be developed without a major change to the institutions of politics.

The crisis has been fuelled by the poverty of political policies. Successive governments have vacated the commanding heights and instead placed excessive reliance on interest rates to steer the economy. Companies wanted cheap money and successive governments obliged. With the low cost of borrowing, companies found it easier to make profits. Cheap money discouraged savings and fuelled a borrowing binge. Combined with speculative activities and cheap money, major companies doubled their profits. Yet regulators ask no questions about the quality of corporate earnings. Governments continue to mistake growth in company profits for economic renaissance.

Regulators reflect the broader political culture and are too close to business interests. Banks have been allowed to get way with booking their profits offshore, avoiding taxes, not passing interest rate cuts on to borrowers, slapping exorbitant interest charges on credit cards, imposing excessive overdraft charges and closing branches even though banks make huge profits. Yet no government has charged the regulators to protect the wider social interest. That task would require them to keep a certain distance from the regulated and develop alternative values, vocabularies and agendas. Openness would be a vital part of that drive. Thus all correspondence between the FSA and any financial institution must be publicly available. Yet there is little sign of such changes proposed in the FSA report.

Successive governments have refused to create effective regulatory structures on grounds of cost. Yet they fail to recognise that the lack of regulation also results in “costs”. Just ask anyone suffering from the consequences of the credit crunch.

Now, after Northern Rock, the FSA is promising to recruit additional staff and undertake annual reviews of banks’ strategy and plans. The examples of Bear Stearns, Carlyle and Thornburg show that, with a fundamental shift in the role of finance, the situation changes very quickly and an annual review is simply not timely enough to deal with any crisis. The FSA needs to eliminate accounting firms and instead create a dedicated taskforce of bank auditors or inspectors who are permanently present at banks and conduct continuous audits of business strategy, plans, liquidity, solvency, financial products and accounts. Yet politicians are not ready to take on corporate interests to promote this change.

Successive governments have shied away from doing anything about excessive executive remuneration. Yet this is central to the current financial crisis. At most banks and insurance companies, executive pay is linked to published profits. That provides plenty of temptations to massage company accounts, keep liabilities off balance sheets and even show bad debts as good. Ministers have no proposals to reform the executive reward system – for example, by linking it to broader performance benchmarks which include innovation, services to the local community and free banking for the poor.

The timidity of financial regulators has encouraged banks and financial businesses to become casinos above all. People’s savings and investments entrusted to them are gambled on the likely movement of the price of oil, gas, commodities, food, interest and exchange rate movements, often without adequate public accountability. This state of affairs is promoted as “risk management”, but has inflicted hardship on millions of people. This system has produced neither responsible management nor a vibrant economy. Yet no financial regulator has shown the inclination to tackle these habitual gamblers.

Without attention to the systemic factors and failures of institutions, such financial crises will continue to recur.

Prem Sikka is professor of accounting at Essex University

Fair Dues

Ellie Keen — Tue, 04 Mar 2008 09:05:18 +0000

Corporations are engaged in a relentless race-to-the-bottom. Companies boost their profits and executive remuneration by diluting or abandoning employee pension schemes and tax contributions.

The UK state pension is already one of the lowest in the western world and amount to just 17% of average earnings, compared to an average of 57% for the European Union. Nearly 30,000 pensioners die each winter because they cannot afford to heat their homes. In a United Nations study of child welfare in 21 major countries, the UK was ranked last. Yet companies and their advisers rarely reflect on their latest tax dodge and the social squalor that they create.

HSBC infrastructure, 3iInfrastructure and Babcock and Brown Partnerships are the latest examples of Private Finance Initiative (PFI) companies creating elaborate corporate offshore structures to avoid tax. No additional wealth or economic activity is created, but the financial engineering results in low taxes to enrich a few. In the age of reverse socialism, companies are happy for the taxpayers to finance the cost of policing, security, courts, trade consuls, subsidies, embassies and the environmental clean-up, as long as they can avoid the costs. Normal people continue to bear of cost of this corporate welfare programme.

Successive governments have done little to check the race-to-the-bottom. The UK is the world’s biggest sponsor of tax havens, often known as Crown Dependencies and Overseas Territories. Their secrecy, low regulation and low tax have made them a magnet for the tax avoidance and the rules avoidance industries. The UK is legally and morally responsible for their good governance, but has done little to improve regulation or public accountability. The Treasury select committee should examine the governance of these boltholes. Given the increasing role of UK-sponsored tax havens in global tax avoidance, a special select committee could be formed to examine their role.

The PFI companies are paid by the tax payer, but by locating their operations in tax havens, they have eroded the UK tax base. As a result, normal people have to bear a higher burden of taxes. Corporate affairs remain shrouded in secrecy. Local and central governments are the biggest spenders and should not award any public contract to companies located in tax havens. As full details of these entities are not publicly known, it is inappropriate to give them any public monies. The successful bidders for public contracts should guarantee that they would remain in the UK for the entire duration of the contract.

In a globalised world, companies are easily able to establish residence and control in tax havens. As companies are taxed on the basis of their residence and control, they are easily able to avoid taxes in the places where they generate profits. Thus the PFI companies make money in the UK, but avoid taxes by claiming to be resident elsewhere. The easiest way of tackling this is to change the basis of taxation and tax them according to their economic activity: that is, they should pay tax in the UK on the basis of the profits made in the UK. Such an approach often known as “apportionment formula (pdf)“ is already applied by states within the US and can be applied by EU member states to counter this erosion of tax authorities.

Public information and disclosure is another way of checking this relentless descent to the bottom. All companies bidding for significant public contracts should be required to explain the taxes that they have paid in the five preceding years. Indeed, company tax returns should be publicly available so that concerned citizens can see the tax avoidance schemes and alert the authorities.

All multinational companies should be required to adopt what is known as the country-by-country approach (pdf). Under this, they would be required to publish a table showing the jurisdictions from which they operate, together with income, profits, assets, liabilities, tax and employees in each. This would help to mobilise questions about corporate structures and tax avoidance. Thus we might see, for example, that News Corporation has lots of economic activity in the UK but pays little or no tax.

The tax avoidance industry and the corporate lust for higher profits, at almost any cost, are not easily going to be tamed, but these proposals could make a much-needed start.

Britain and the next Enron

Alex Doherty — Thu, 17 May 2007 15:00:58 +0000

ARE we heading for the next Enron? There are two responses to such a question. The first is that, due to poor regulation and enforcement, ordinary citizens are facing Enron-size scandals on a daily basis.

The second response is that headline-grabbing Enron-style scandals are deeply embedded in capitalist economies where bending the rules for profit or personal gain is often seen as an indicator of business acumen and stealing a march on competitors at almost any price is portrayed as an entrepreneurial skill. These tendencies are aided by inappropriate electoral systems, institutional structures, stock market expectations, executive reward systems and politics that are all too prevalent in Britain. Rising interest rates, falling house prices, the drying up of the consumer boom and corporate lust for more profits ignite the fuse that leads to Enron, Bank of Credit and Commerce International (BCCI) and other scandals.

Daily Enrons are manufactured by corporate abuses of power and weak and ineffective regulation. In pursuit of higher profits and executive remuneration, numerous profiteering schemes are dreamt up. In principle, these could be checked by vigilant regulators and effective enforcement, but Britain lacks such regulators. Too many regulators are “captured” by the very interests that they are supposed to check and regulate. The inevitable result is profiteering, exploitation and abuse of people. A few examples would help to support the case.

Banks, supermarkets, electricity, gas, water, credit card, and mobile phone companies have been indulging in an orgy of profiteering. Railway companies collect huge public subsidies, but public transport in this country is almost the most expensive and dangerous in the western world.

Weak regulation and enforcement has encouraged companies to operate cartels, create monopolies and abuse the public. Argos and Littlewoods fixed the price of toys. Supermarkets sell farmed fish as “wild”, battery eggs as ‘free range’ and frozen chickens which are one-third water. JJB fixed the price of replica football shirts. Fifty independent schools colluded in illegal price-fixing of fees. Sotheby’s and Christie’s fixed the commissions on the sale of fine art, jewellery, rugs and furniture. IMI and Delta have been fined for operating a copper fittings cartel. ICI was fined for being part of a cartel that fixed the price of acrylic glass. Royal Dutch Shell was fined by the European Union for colluding with others to fix the price of synthetic rubber used for tyres. Indeed, the daily Enrons are experienced from “cradle to grave” and exist in virtually all markets.

As regards London’s stock market, insider trading is rife. The Financial Services Authority (FSA) confirms that nearly a quarter of all British takeovers are preceded by share price movements that indicated insider trading. Despite huge publicity, financial services continue to be mis-sold. The pensions, endowment mortgage, split capital invetsment trusts and other scandals are followed by the payment protection insurance scam. The FSA makes noises, but does little to discipline offenders.

All the preconditions of Enron and WorldCom are present in abudance. The “majoritarian” electoral system translates minority votes into huge parliamentary majorities. The political system does not seek to build any concensus or reflect the diverse interests of stakeholders. The system is also captured as political parties are funded and dominated by corporate interests. Britain gave up the commanding heights of the economy, but has failed to develop an adequate interventionist apparatus. Thus, the mantra of the day is self (or private) regulation, deregulation or light regulation to appease corporate interests. In this climate, more Enrons are likely.

Stock markets expect companies to produce ever higher profits. The linking of executive remuneration to profits and share prices provides the incentives to roast the accounts and indulge in shady trading to drive up share prices to secure bonuses and share options. Britain lacks independent regulators that contest corporate values, vocabularies and agendas. Neither does it have an effective Department of Justice to mount prosecutions. Hardly anyone is ever prosecuted for insider trading, or even poisoning the people for inflicting slow-death through Creutzfeldt-Jakob disease (CJD) and Bovine spongiform encephalopathy, commonly known as mad cow disease. Despite the looting of people’s savings through pensions, endowment mortgage and other financial scandals, hardly any company has been prosecuted.

Britain learns little from scandals. The main tendency is to individualise and ignore the systemic aspects. Thus Nick Leeson is blamed for the Barings Bank collapse. The speculative tendencies that underpin the system are ignored. Cover-up is a frequent response to scandals. The fraud-ridden Bank of Credit and Commerce Interntional (BCCI) with links to powerful politicians and corrupt Middle East regimes was closed in 1991, but, unlike the Farepak and MG Rover episodes, the Department of Trade and Industry did not appoint inspectors to investigate and document the frauds. There have been no investigations into the homegrown scandals of Polly Peck, Levitt, Resort Hotels or the Accident Group. There have been no investigations into British operations of Enron, WorldCom, Xerox, Ahold, Parmalat and Hollinger. As a result, little is learned from scandals and appropriate regulatory arrangements are not made.

Numerous episodes show that company auditors have been asleep on the job, usually in bed with company directors. After Enron, the British Government has sought to rebuild confidence by perpetuating the belief that auditors would check crooked practices. This is one of the biggest hoaxes. Company auditors are hired, fired and paid by directors and their companies. They have no independence from their paymasters. Auditors could be kept on the straight and narrow by an effective independent regulator, but this country does not have such regulators.

Auditors do not owe a duty of care to any individual shareholder, creditor or any other stakeholder. In the mid-1990s, under pressure from accountancy firms, the United States introduced the concept of “proportionate liability”, which made it harder for stakeholders to sue negligent auditors. The result was reckless auditing, as evidenced by Enron and WorldCom fiascos. Following the Companies Act 2006, Britain is now following the same path. Thus, damages against negligent auditors, if they can be sued, would be determined not by the extent of negligence, but by agreement with companies. Britain and the EU are now pushing for an artificial cap on auditor liability. More audit failures are inevitable.

The idea of relying on auditors is also doomed to failure. It is doubtful that auditors can effectively audit a bank operating in 170 countries. With electronic money transfers, ex-post audits serve little purpose. Almost all major corporations are placing clever bets on the movement of commodity prices, share prices, interest rates and currency exchange rates. The eventual outcomes depend on uncertain future events but can result in huge losses or gains. It is impossible for any auditor to verify the likely gains and losses reported in company accounts.

The above mix is now complicated by businesses that seem to escape any national jurisdiction of regulation. Anonymous companies can be registered in the British Virgin Islands, owned by another company in Panama and Caymans and with directors in Bermuda. This tangle makes it impossible to regulate them effectively and shield people from their activities. Many hedge funds and private equity firms are financed by high levels of borrowing. Modest levels of increase in interest rates can bring them down. Britain’s consumer boom is funded by high levels of borrowings rather than by investment and is vulnerable to changes in interest rates and will set off a domino effect. At such times, company excutives take desperate steps to maintain the appearance of profits and cook the books.

Overall, Britain is poorly equipped to deal with major scandals. The electoral system discourages good policies and regulatory structures. The regulators are too easily captured and punishments for wrong-doings are low. There is little sign that any political party is willing to undertake the serious and necessary reforms.

Prem Sikka is professor of accounting at the University of Essex

New Labour - the Tax Dodgers' Friend

Alex Doherty — Sat, 10 Mar 2007 13:28:55 +0000

AS A result of organised tax avoidance, Britain is losing between £97 billion and £150 billion of tax revenues every year – sums large enough to make a huge difference to spending on education, healthcare, pensions, public transport and a significant reduction in poverty. The poorest fifth of British households pay nearly 10 per cent of their income in direct taxes and another 28 per cent in indirect taxes. But elsewhere the story is very different.

Companies have developed strategies that result in higher accounting profits, but lower taxable profits. Reneging on pension commitments and tax avoidance are all part of the same strategy. Between 2003 and 2006, the FTSE100 companies doubled their profits. Their senior executives enjoy bumper profit-related remuneration. Yet there is little inquiry about the quality of such profits.

FTSE100 companies have more than 15,000 subsidiaries, many of which rarely trade but enable companies to book profits in tax havens and avoid taxes in this country. Many companies employ ingenious intrafirm pricing schemes to shift profits out of Britain and reduce tax bills. Rupert Murdoch’s NewsCorp generates vast revenues through Sky television and its newspapers, but most of the profits are booked in tax havens. Since the late 1980s, it has paid little or no corporation tax in Britain. Richard Branson’s Virgin empire is controlled from tax havens and pays little in British corporate taxes.

An Early Day Motion in the House of Commons pointed the tax avoidance finger at Alliance and Leicester, Allied Domecq, Amersham, Arcadia, Barclays, BAT, BOC Group, Compass Group, Dixons, GlaxoSmithKline, Honda, Kelda Group, Lloyds TSB, Merrill Lynch, NewsCorp, Nissan, Northern and Shell, Portland Enterprises, Prudential, Rolls Royce, Sage Group, Severn Trent, Shell, Tesco, Toyota, Virgin Atlantic, Virgin Trains, Vodafone and WPP. However, the Government has shown little interest in plugging the leakage of tax revenues to tax havens.

Under the private finance initiative (PFI), taxpayers are already committed to paying at least £150 billion to companies. The same corporations are shrinking the tax base by not paying taxes. For instance, Innisfree is one of the largest providers of funds for hospitals and schools. Its directors have been enjoying bumper rewards of £10 million. However, the company’s audited accounts for the financial years 2004 and 2005 show that it did not pay any corporation tax in this country. Nearly one-third of the company’s shares are held in Jersey by Coutts Bank for some faceless beneficiary. This party receives dividends, effectively paid by British taxpayers, but pays no taxes.

In 2005, retail entrepreneur Philip Green’s Arcadia Group, which owns Burtons, Topshop and Dorothy Perkins, declared a dividend of several billion. A staggering £1.2 billion went to Mrs Green, but she did not have to pay income tax of nearly £300 million because she is resident in Monaco. Philip Green was knighted in 2006.

Britain is now the world’s first onshore tax haven. Millionaires can live here in style, enjoy all the benefits of our social infrastructure, but pay little or no personal tax. Last year, Britain’s 54 billionaires had an estimated income of £126 billion. At the normal rates of income tax, they should have paid nearly £50 billion in tax, but are estimated to have paid only £14.7 million – an effective tax rate of only 0.14 per cent.

The Government’s insistence on light-touch regulation has created opportunities for private equity firms. These firms enjoy capital gains tax concessions and also siphon-off profits through interest payments, often to tax havens. The siphoned-off profits return to Britain as borrowings and the interest paid then qualifies for even more tax relief with the inevitable outcomes. Despite combined sales of more than £12 billion and operating profits of more than £400 million, five of the largest 10 private equity firms paid no corporation tax during 2005/2006. Most reduced their tax bills and four of the top 10 firms received tax credits.

The Finance Act 2006 has created new tax avoidance opportunities. In January 2007, the British Government launched real-estate investment trusts (REITs). In essence, an REIT is a company that owns and manages income-generating property. However, it comes with a huge tax perk. If most of its income is paid out as dividends to shareholders, then the company is exempt from corporation tax. Yet little attention has been paid to the use of REITs for tax avoidance.

In the United States, following advice from Ernst & Young, Wal-Mart has used REITs to avoid paying taxes. Brief details of the schemes are that one or more Wal-Mart subsidiaries pay rent for occupying properties to an REIT. This REIT is either wholly or substantially owned by another Wal-Mart subsidiary and it can pay out its dividends without paying any corporation tax. Wal-Mart is effectively paying rent to itself and all payments stay within the same group of companies. The scheme enables Wal-Mart to claim tax relief on its rental cost and avoid corporate taxes on the income. In one four-year period, the REITs strategy enabled Wal-Mart to avoid paying $350 million in taxes.

In the British setting, investors receiving the dividends are also exempt from higher rate income tax (40 per cent) on their dividend income. Even worse, these investors could be located in tax havens and would pay no income tax on their dividends.

In the US, Senate committees led by Senator Carl Levin have targeted the tax evasion industry. Its hearings looked at major accountancy firms and led to KPMG being charged with the largest-ever criminal tax case. The firm was fined $456 million and a number of its partners are facing prosecutions. One of its partners subsequently told a US court: “I wilfully aided and abetted the evasion of taxes.” Here, KPMG’s global chairman Michael Rake received a knighthood and his firm has close links with the Treasury. The Treasury Select Committee has shown no interest in investigating the tax avoidance industry.

Under “new” Labour, the poor are subsidising the rich. The tax system discriminates against British citizens by giving privileges to non-citizens. The tax base in this country is being eroded and will not enable any government to make the required investment in social infrastructure or redistribute wealth. The present Government has shown little imagination or determination in checking the tax avoidance industry.

Prem Sikka is professor of accounting at the University of Essex.