Wednesday, February 27, 2008

Tesco's tax tricks

Following their fabulous "Tax Justice Goes Bananas" investigation last November into the tax practices of the world's biggest banana companies, Britain's Guardian newspaper has followed this up with another superb piece of work: an investigation into the tax tricks of Tesco, which the BBC has described as the UK's first supermarket superpower.

The BBC asked: "how did this struggling store chain transform itself into a supermarket giant?" Their answers only told the obvious part of the story. The Guardian has given us the more interesting answer. Their headline story goes like this:

Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1bn of tax on profits from the sale of its UK properties. The complex new structures uncovered by a six-month Guardian investigation include a string of Cayman Island companies, each named after a different colour, from aqua to violet. These are being used by the supermarket giant as it proceeds with its announced programme to sell and lease back £6bn worth of its UK stores.

A second story entitled "Every little bit helps" looks in more detail into Tesco's tax gymnastics, setting up, for example, a "transparent tax vehicle" whose tax liabilities are incurred not by the partnership itself but by its 99.9% controlling partners - and those partners are two companies set up in the Cayman Islands. More contortions followed (read the story for the grisly details) and the net result was that "99.9% of the profits on the deals arose in the Cayman Island companies and are not liable to UK taxation." An audio version is here.

The most worrying thing about tax avoidance is the corporate thinking it illustrates. Read this Guardian editorial on the issue, which explores these issues further.

There are many things we could say about this. The first is this: these issues drive a coach and horses through the prevailing debates on corporate responsibility. TJN's position on corporate responsibility is this: corporate social responsibility should start with tax compliance. If corporations don't pay their taxes, someone else has to pay them, and they gain an unfair advantage - in effect, a subsidy - that does nothing to enhance competitive markets. (Richard Murphy's recent comment article explains more.) Vince Cable of the Liberal Democrat party, who always has interesting things to say, agrees:

Tesco's behaviour makes a complete nonsense of any claims that it makes about corporate social responsibility. The Government must also answer why British dependent territories are being allowed to offer large-scale tax avoidance schemes at the expense of the Treasury. If Germany can crack down on Liechtenstein, why can't Britain do the same with territories for which it is directly responsible?"

Tesco, in response, said it had a duty to organise its affairs in a "tax-efficient" manner. These are weasel words (read what Richard Murphy has to say about this euphemism for tax avoidance here.) John Christensen, director of the Tax Justice Network, said:

When Tesco directors talk about operating as "tax-efficiently" as possible they demonstrate a lack of corporate responsibility and a lack of commitment to the communities which sustain their profits. Aggressive tax planning through offshore structures also provides the big supermarket groups with a financial advantage that is not available to their smaller competitors, further tilting the playing field away from fair and competitive markets. The government needs to act decisively to counteract this regressive trend.

The directors of Tesco claim in their corporate responsibility statement that they use their size and success to be “a force for good” in the communities where they operate. Their aggressive tax planning shows their intentions to be the exact opposite.

John remembers the annual corporate responsibility conference at the Royal Institute for International Affairs in London in 2004. He had prepared himself by wading through the corporate responsibility statements of 150 companies worldwide, and found the word "tax" in only two - without relevant detail. So he stood up and asked: "Would the panelists tell the audience what position their Boards take on paying tax in the countries where they operate?" - followed by one of the most uncomfortable silences he can remember, pregnant with accusing glares. It is time for companies to mention the unmentionable word in their corporate responsiblity statements.

Various stories have been emerging recently about how little tax companies pay. Tesco is right to claim that it is not the only company playing these tax tricks: we have already noted how other British firms, as well as Dutch ones, get out of paying tax . (Perhaps we should call Tesco a "Transparent Tax Justice Vehicle" - highlighting how Tesco's main purpose in this case is not so much as a direct target as a vehicle allowing the Guardian to tell a wider story about corporate tax abuse and the structures that encourage and facilitate it.)

In the United States, there has also been much discussion about how the retailing giant Wal-Mart has been using its own nefarious tax tricks to minimise its taxes. In Wal-Mart's case, the issue was partly about whether what it was doing was legal: for one of its tax tricks, for example, a North Carolina judge ruled that it was not. The Guardian is not accusing Tesco of acting illegally. But the key point here is that this question of legality is not the point.

It is now time to change people's mindsets so that they no longer think that what is legal is OK and what is illegal is beyond the pale. Both kinds of abuse are unacceptable. Tax havens are central to our concerns. And, as another Guardian story today points out, we are seeing the start of a major global backlash against these pernicious jurisdictions.


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