INTRODUCTION – The G20 Summit
Australia recently hosted the G20 summit Australia which brought together the political and thought leaders and of the world’s 20 largest nations to tackle what they saw as being the big issues in the global economy. The nations looked at a broad spectrum of issues which spanned global warming, trade agreements, security, world issues such as Ebola, to name a few.
The collective G20 group are also signing up to a package of reforms around transnational tax affairs which are designed to stop companies shifting profits under transfer pricing schemes from one country to another to cut their tax bills. The collective action was based around a key set of recommendations arising from their “Base Erosion and Profit Shifting Project”.
The outing of the tax minimisation behaviours and strategies of multi-nationals such as Apple, Google and Amazon also has led to an international outcry for reform. As a result 44 countries covering 90% of the global economy have agreed to sign up to the series of recommendations which are designed to shutdown the existing ability of multi-nationals to avoid their tax payment obligations.
Countries such as Ireland have been singled out for criticism of its hosting of multi-nationals and the ability of such companies to do what is called the “double Irish” tax trick. Under this strategy a global company earns money in any number of foreign destinations but then transfers the profits to Ireland.
Ireland has a nominal tax rate of 12.5% but the money is simply switched again elsewhere where little or no tax is paid at all. It is this sort of behaviour that the G20 and the OECD have singled out as being morally wrong and the need for an intervention at the transnational level.
The growing consensus is that the inequity behind this set of entrenched tax minimisation strategies cannot continue. However it is an issue that corporate leaders have largely distanced themselves from and try to palm off onto others as not their concern.
The Contrasting Stance of the B20 Summit
In the lead up to the G20 Summit in Brisbane Australia in 2014 also hosted the Business 20 summit. This meeting brought together the thought leaders and CEO’s of the corporate world to tackle what they saw as being the big business issues in the global economy.
The Master of Ceremonies was Richard Goyder who is the CEO of Wesfarmers. He announced the stated aim of the B20 meeting was to “focus on practical steps to boost growth”.
This was a business leadership forum designed to come up with ideas that could then provide input into key forums such as the G20 group and the OECD based business think tanks. The intent of the B20 forum was publicly stated as being a 2 day event to forge practical ideas that member governments could quickly implement to unlock global prosperity.
The implication was that the B20 group had all citizens in mind and that big business could be the vehicle by which reform could enrich us all through business growth. Many key issues were covered and canvassed in this 2 day global leadership summit.
However unlike his counterparts at the later G20 Summit, the elephant in the B20 room which no one was prepared to highlight was the critical topic of multinational corporation tax evasion via offshore revenue shifting. The related outcome topic which then also bore no discussion was the devastating impact this growing practice is having and will have on growth of personal and national economic wealth.
Mr Goyder passed off media questions of tackling multinational tax avoidance and minimisation by passing the buck to governments as it being their issue. He did not admit the gathered group represents some of those enabled to execute these tax avoidance practices nor that many in the forum were indirectly or directly linked to companies who practice the very tax evasion measures of global concern to the G20 Summit.
It is not like that corporate leaders are not versed in the issue when the tax evasion issues are now common “strategies” recommended to them by the major legal and accounting firms they retain as advisors. They as leaders have already been alerted to community concern that these practices are seen as unethical, immoral and possibly illegal.
It was recently disclosed that Richard Goyder’s remuneration in 2013/14 totalled $9.4 million. He and the Wesfarmers Board were forced to defend their position that they must pay their executive such exorbitant sums in order to retain such talent.
Mr Goyder expressed that he was “conflicted” on this issue, but he did not demonstrate any positive behaviours to the audience by saying that he resolved such conflict by donating large parts of his salary to say a charity for the poor!! If you are I are conflicted on our values then we as reasonable adults find constructive ways to resolve such conflicts.
What we are seeing instead in corporate culture is an aloof group of executives whose wealth inequity as against the normal taxpayer makes them indifferent or at least blind to the real issue of comparative pay and its effect on leadership stances and roles in the business world. As one shareholder pointed out at the Wesfarmer’s AGM, “you are not looking back and saying what is a fair wage to run the company”.
Another shareholder challenged the Wesfarmer’s Board to devise a formula for executives based on pay being a fixed multiple of the average wage or the lowest wage of its employees. The Board through its chairman Bob Emery did not support the proposition and noted “I just don’t think that’s the way it operates”.
What one sees here is a sense of entitlement that is normalised within the organisational culture and which is defended to outside stakeholders who struggle to see the moral justification for such excessive practices. The line of argument is akin to back scratching by the business elite where if we each say that we must pay exorbitant salaries because the rest are then we create a self justifying argument by group think and group behaviour.
The irony is that we are then asked to accept that this same business elite are those who should then stand up and be the unquestioned thought leaders of such an eminent group and who will then consider macro level business issues for the common good rather than their own self interest. This is the same group who struggles with stakeholder input from the community in which it operates that demands action of the pay remuneration policies of the G20 type leaders.
For instance we now see that bodies such as the EU and the OECD are now demanding action be taken on the various corporate tax issues and cast that message into very members who make up the Business 20 summit. Wesfarmers itself is a good corporate citizen and pays tax on all its earnings which are retained within Australia and treated under Australian tax law.
However it is also not like corporate leaders do not take an interest in taxation matters but leave them for governments to deal with. If one considers the recent campaigns by big business against the Carbon tax and the Mining tax of recent years then we find that big business is quick to take a position when the taxation policy would adversely affect their profits and shareholders.
The B20 stance on corporate tax minimisation and avoidance issues was quite clear. The B20 message was simply that it’s not our issue to deal with and they then moved on.
The chosen omission by the B20 leadership group on multinational tax avoidance can only be put down to a clear conflict in interest with the community the B20 is designed to speak for. The appearance the B20 Summit now leaves a reasonable person with is that the group self-justify themselves on what will be debated, and that stakeholders outside of shareholders and their own company interests are simply not their concern.
However the B20 by its stature sends out clear signals and moral support for whatever positions and recommendations it adopts. The missed opportunity was for that forum to come out with clear moral leadership on the issue and to signal to markets, shareholders and offending companies that this type of practice places at risk the future wealth of countries and their citizens.
The idea of a thought leader summit is that the attendees must lead and venture into topics and areas that might not be popular but which must be confronted. The stance taken by the B20 group represents a form of avoidance about hard issues that corporate social responsibility must address.
After the B20 Summit Goyder did announce that “The B20 supported the G20’s efforts to combat profit shifting undertaken by international companies such as Amazon”. He said that “there was clear support for the idea of tax being paid in the jurisdictions in which it was earned”.
However the B20 Summit is variously portrayed in the press as “B20 Reforms a Vision for Global Prosperity”, yet until the growing tax avoidance issue is tackled we are clearly headed in the opposite direction for the many and only toward that vision for the few.
Few appreciate the dynamics at play and the Australian press tends to report piecemeal on the issue so the bigger picture of the tax avoidance trend is often not understood by the average citizen.
The Aims of This Article
This article will illustrate why the international political community has been forced to take the first steps in addressing this global tax avoidance issue. It will highlight the dangerous trend that this growing and increasingly complex issue demonstrates.
The article brings to light a lack of clear values and moral compass in big business and their indifference to the effects of their policies on others. This article will hopefully explain why this tax avoidance issue should be on the agenda of any international business leadership group such as the B20.
The argument here will strip away any pretence that Goyder employed in the B20 when he tried to spin away the issue of multinational tax avoidance as “a highly emotive, country specific issue better left to governments to sort out”.
The issue would be an emotional one when the implications of the practice of tax evasion by the wealthy and by multinational companies are laid out for the average taxpayer to digest. The practice is chief in creating a widening gap in wealth and pay between the richest and poorest in our communities and the business elite are part of the richest end of this setting.
We will see how some economists predict that if left as, we may create a totally new form of society within 50 years that will consign many to seeing out their lives as the working poor. The time to act is now before the problem spirals out of control and the wealth redistribution shift becomes an unstoppable force for the detriment of many and to the benefit of the few.
The practice is one that no specific country can deal with in isolation, which is at odds with Goyder’s assertion that it is a country specific issue. The issue will take the global will and legislative framework of all countries to create a level playing field which then negates the ability of multinationals to manipulate or “cut deals” with any one country to its own benefit.
It may be unrealistic to ask a group such as the B20 who benefits principally from such practices to have an objective and determined approach to confront the issue. If this is their blind spot or avoidance then who will confront and call the issue as sustainable change must come from within the corporate elite and be embraced from a clear internalised set of values and beliefs.
What instead we see here is “let’s avoid this issue as it’s too close to home and we are unwilling to give up its benefits to us”. This is simply leadership for the few and abandonment of the common good and of the many in our community who will be affected by the greed driving these tax avoidance behaviours at the wealthy individual and at the multinational corporate levels.
There has been a lot of debate lately about the documented trend of a growing inequality between the wealth of the average person and that of the top 10% of the wealthiest individuals. By extension the argument also applies to the larger multi-national companies and their corporate wealth positions.
What we know is that there are some brilliant companies who have a great business model but who display little ethical or moral concern for their actions. Such companies or brands know what they are doing but are consciously deceitful or hide behind legal camouflage and PR spin to mask practices that they hide from the public.
Their orientation is only to the needs and demands of a few, whether that be the leaders, the Board, shareholders, or a subset of these. History shows us that consciousness without empathy and clear morals and values is a potentially dangerous state of being for all concerned.
Individuals and organisations that constellate this way or being and doing have no moral compass to guide actions and tend to be indifferent to the impact of their actions on others. Corporate governance is many things in the business world. In its modern setting it is more about legal compliance than about moral imperatives or company values.
Company Public Relations and marketing will often proclaim a tie-in between company decisions and core company values. The evidence is that many companies operate less from values and more from a results focus that ignores moral and ethical questions about processes and execution of the business model.
A company who operates from an ethical base will be willing to pay its taxes, duties and debts as they fall due, and will price their goods and services in an equitable way for the fairness and good of the community in which it sells as well as for satisfactory returns to shareholders.
An increasing international trend by multinationals is the practice of shadowy transfer pricing policies that transfer local earnings out of countries like Australia. Instead of paying tax in Australia or the country of origin, the earnings are funnelled either into its nominated tax haven, or as some evidence shows, they may not account for the transferred money through any jurisdiction at all.
In the past few years we find that some major multinationals such as Apple, Starbucks, Microsoft and Google have all come under scrutiny for international tax practices such as this. Investigations reveal a determination to minimise tax beyond what is conscionable or fair to the host country concerned.
There is also a related line of inquiry that the “tech” multi-national companies are also raising their prices in countries like Australia for no good reason. They make far higher profits which are then transferred offshore and so Australian citizens then get hit twice by this strategy.
Under this win-lose scenario the tech company exploits Australians at two levels. Firstly we pay more as many are unaware of this higher pricing strategy or put up with it in any event. Secondly we receive no or little tax on the higher profits which are transferred offshore and so effectively are not treated by Australian tax laws.
There is even evidence of some high net worth individuals and multi-national companies who even avoid their tax obligations altogether in all countries where they operate. The Australian treasurer Joe Hockey came out in December 2014 and declared that Australia was estimated to be losing somewhere between $1 to 3 billion dollars annually from multinational tax minimisation and avoidance practices.
If ever there was a poster boy for this terrible behaviour then all fingers point to Apple so let us use Apple to demonstrate this overall situation. Apple is an American tech company but has shifted its global headquarters and now nominates its taxation home country as Ireland.
This is because Ireland has an effective corporate tax rate of 12.5% as against higher rates of corporate tax of say 30% in Australia and the USA. This tax rate is lower than Australia’s so on face value one can quickly see how if you shift profits out of Australia and then declare them in Ireland instead you are already streets ahead in terms of what tax you need to pay on income generated around the world.
One of the reason that the Irish Celtic Tiger economy came into being was the generous tax incentives offered to major computer manufacturers such as Apple and Dell, and technology companies such as Google. Ireland used to issue “letters of Comfort” to multinational companies who lobbied the Irish government that they would relocate to the emerald isle if they were offered tax breaks and government concessions or grants to do so.
The EU is now investigating Apple for how they setup in Ireland in 1991 as the EU position is that if any inducements were made to setup in Ireland then that may constitute as illegal state aid. The EU Commission has released an opinion that through contentious Irish tax rulings that the Irish authorities conferred an advantage on Apple.
Apple deny this position exists and there may need to be a retrospective tax bill of up to possibly 10 billion dollars paid by Apple for this tactic. Under European competition law if a government is found to have subsidised a company with illegal state aid then it must recover the funds owed from the company concerned.
The situation will be uncomfortable for Ireland if it is found to be the case and the EU then demand the money gets paid. The problem for Apple is that they have channelled so much money through Ireland that all money handled this way now falls foul of the penalty of the full recovery of taxes owed.
In the case of Ireland we have a situation where the multinationals such as Apple now pay 12.5% tax and yet the average Irish citizen pays up to 52% tax. We already have the start of a morally suspect issue as the burden in supporting this arrangement then falls on the average Irish citizen.
Ireland has got itself into a bind with this whole arrangement. It could lose Apple as a corporate tenant if it has to act on behalf of the EU in enforcing any legal judgement. Likewise these multi-nationals have never paid anything near the nominal 12.5% tax rate so Ireland who became dependent on the arrangement also got short changed by it.
The U.S. Senate tabled a report in 2014 that found that Ireland based Apple Sales International paid only $10 million on staggering profits of $13.5 billion!!. Ireland has been ripped off as the amount of tax paid would represent less than what it would cost Ireland in infrastructure support to host Apple as an entity on its shores.
Corporate taxes are the primary source of government revenue to pay for the community resources such as roads, water, electricity, and services like rubbish collection, law and order etc. Multinationals consume these resources in the countries they operate in and so have a moral responsibility to pay fair tax to contribute to this type of infrastructure.
Apple are estimated to hold 138 billion dollars in subsidiary bank accounts so they have the capacity to pay the taxes owed. However they are likely to litigate for years to delay or defeat such a need to do so. They defend their effective 2% tax rate in Ireland as lawful.
The European Commission(EC) is so concerned with the actions of Apple that it has commenced an investigation of taxation paid by Apple in Ireland. This mirrors the concern regarding Apple in Australia who are now being investigated by the Australian Federal government and the Australian Taxation Office(ATO).
Apple in Australia is being investigated for the practice of what is termed transfer pricing, and the inability of the Australian government to have Apple pay adequate taxation on its Australian operations. The issue for countries outside Ireland is that there is evidence that a number of large transnational countries such as Apple and Google, who each earn significant revenues in Australia, appear to have setup a global revenue shifting exercise to transfer revenues out of Australia and into Ireland before tax treatment occurs.
This practice involves revenues alleged to have been earned in a country such as Australia where it might attract a corporate tax rate of say 30%. The company pays Australia effectively nothing, and domiciles the money in Ireland where it may then pay just 12.5% or even less as the effective 2% tax rate of Apple demonstrates.
The strategy is a win-lose outcome. It robs the Australian economy and taxpayer and benefits the company and the foreign tax destination via whatever lower tax is paid. The practice also relies on the company to declare the true total of the transferred money in Ireland or in whichever destination tax haven they use.
The Australian government has finally woken up to the issue as it confronts a massive deficit and seeks to find ways of raising its corporate tax receipts to turn around the economy. The Australian Treasurer Joe Hockey has unleashed an aggressive ATO on the Apple tech company operations in Australia.
Hockey has authorised the ATO setting up internal review teams within multi-national Australian operations and from there conducting extensive audits, chasing key customers for sales data, and demanding more detailed sales reporting data both local and international in nature. Apple has complained to the U.S. Treasury that Australia is using aggressive and unprecedented tactics to persecute them.
Another flagged concern is that the nominated discounted tax base such as Ireland may be merely a pass through on the way to another tax haven and that the necessary tax payable is either lower again or never gets paid at all. This is known as the “Double Irish” strategy.
Evidence shows that countries like Ireland may not be aware at all of the offshore profits and earnings that are also supposed to be taxed within that jurisdiction. The multinational may then effectively pay nothing at all on this shifted revenue via a lack of disclosure on their part of the income it imports into Ireland from offshore operations.
This practice is hard for any one country to counter and relies on the existence of a global taxation treaty framework such as what the G20 is now devising to counter these predatory behaviours where they exist. It is hard for anyone to know how any of the transnationals are complying with their taxation obligations and this is partly why the avoidance works.
In the instances of investigative journalism around this issue there has been a common answer by the accused companies concerned. These replies tend to be along the line that “company X has the legal right and moral obligation to minimise its tax obligations for shareholders and arranges itself to do so”.
For instance, Apple claims it has no preferential tax treatment in Ireland which is technically true as Irish Tax law is 12.5% for all companies, but that is not the central issue at hand. This issue is about where that tax morally should have been paid in the first place.
Let us not underestimate this issue. The amounts that appear to be involved in this form of tax avoidance are staggering and the relevant tax rate in the nominated tax base appears to be ignored in any event by these companies.
For example an American Senate investigation found that Apple operates two subsidiaries in Europe and Ireland. One is Apple Sales International and the other is Apple Operations Europe.
In the 4 year period from 2009 till 2012, Apple Sales International had income of about $74 billion dollars. A significant portion of that income was passed to Apple Operations Europe as dividends.
However Apple Sales International was found to have no declared tax residence anywhere and had paid little or no taxes anywhere to any national government on the $74 billion dollar income. The position within the EU is interesting as the European Commission has as part of its charter the role of creating a level playing field within EU member states.
The EU is now investigating Apple around its behaviour and tax practices within the EU.
Off With the Fairies
Another form of tax avoidance is the selling operations and how these operations are valued in the books for tax purposes. A case in point is Walt Disney Co who we have all grown up with in Disneyland products and experiences.
In a slight deft of hand the Australian operations were subject to a restructure which was summarised in the Australian Financial Review(AFR) in December 2014 from a wider investigation by the International Consortium of Investigative Journalism(ICIJ). The Australian business which held $150 million in cash was sold for $582,000 to Disney Luxembourg and Luxembourg is a noted tax haven.
The Australian business made a dividend and other accounting entry payments to Disney Luxembourg that totalled $89 million. This reduced the potential tax bill from a $89 million point back down to a miserly $582,000.
The real point though is that Luxembourg was just a convenient pass through on the way to a final sale of the Australian entity to Disney UK for $1.22 billion!!. Tinker bell managed to shape shift the Australian business assets and income offshore to a point that $582,000 was the only tax treatable amount in Australia.
Australian taxpayers were magically denied whatever tax treatment occurs on the $1.22 billion that somehow represents the true realised value of the Australian operation. The net effect for Australia is that in 2008 Disney paid 18% tax in Australia but in 2013 it now only paid 5%.
The Australian Financial Review used claimed that Disney used Luxembourg entities to strip dividends and profits and then loaded them up with debts before on-selling them to Disney UK which in turn is owned by Hammersmith Enterprises Ltd of the Cayman Islands, which is in turn owned by the Disney Luxembourg entities. Meanwhile in Australia Disney now pays about half of all its revenue in royalties directly to Luxembourg and so avoids tax as royalties do not get taxed in Australia.
Disney put out a corporate statement that the AFR quoted as being “we manage our tax affairs responsibly and aim to fully comply with all applicable codes. Your(ICIJ) assertions are not based on an accurate understanding of our global tax position”.
Ernst and Young Accounting who are well represented in this area of corporate advice on a global scale. They advised ICIJ that “EY professionals provide independent tax advice to clients in accordance with national and international law”.
International Tax Manoeuvres
The ideal or principle that the EU subscribes to is that one member country cannot distort the EU market and unfairly attract investment away from other member states through illegal inducements. The European Commission is now investigating Ireland, the Netherlands and Luxembourg, for the way that taxation inducements have been structured to lure Apple, Fiat and Starbucks to their respective shores.
The concern of the European Commission is not restricted to possible skewing of investment decisions by individual member states within the EU. Reuter’s news agency reported that The European Commission also is concerned that the practice is facilitating beneficiary companies of avoiding potential tax bills elsewhere as well.
The EU tax commissioner Algirdas Semetas has come out and stated that “Member states tax incentives should never be used to lure profits away from where they should rightfully be taxed”. The EU has stressed that global taxation avoidance is a major issue that no one country or bloc can overcome but which must be dealt with at a global level.
Luxembourg now presents itself as an interesting case in this argument as the EU has in 2014 elected the former Prime Minister(from 1995 – 2013) of Luxembourg, Jean-Claude Juncker, to be the president of the European Commission. The British had run a campaign against Juncker being elected to this role.
The British Prime Minister, David Cameron, has stated that the British objection partly centres on the fact that Juncker is accused of being a tax haven deal maker who induced multinationals such as Amazon to their shores through unfair tax arrangements. As such he suffers from a conflict in interest and objectivity in being charged with creating and enforcing an equal playing field within the EU zone.
This may become a point of embarrassment for the newly elected UE president as the EU has already separately ordered a tax investigation into Amazon tax arrangements with Luxembourg. The EU has cited all relevant documentation around the alleged sweetheart deal behind the arrangement and it is likely that Juncker’s personal signature may feature on key documents.
If the deal is found to be detrimental to the so-called level playing field within the EU it will embolden critics that Juncker is not a suitable or ethical candidate to play an even hand within the EU political environment. This will upset member states such as the UK which fear a winner-loser period under his tenure within the EU.
It is worthy to note that Amazon shifted its billing arrangements away from the UK and into Luxembourg in 2006 so that its profits became taxable under the low tax rate in the Luxembourg state. According to an investigation by the Times newspaper the practice is widespread within European multinationals.
The Times reported that tax advisers estimate that Luxembourg has used its friendly tax regime to lure more than 40,000 holding or subsidiary companies to its shores. The key reason to do so was that their parent bodies can pay less tax than in other EU or foreign countries.
Microsoft and McDonalds have also been named in press reports to have come under question from competition regulators who are interested in the nature of their tax regimes in Luxembourg. They are not under any formal investigation at this stage but the EU Commission is reviewing the tax practices in Ireland, Luxembourg and the Netherlands at this stage.
A study by the Australian School of Business promotes the idea that forcing public disclosure of taxation payments by the major brands or companies will uncover any tax minimisation measures they have in place. This will bring a greater pressure of transparency, accountability and enable the community to challenge companies seen to be indifferent to their host nations.
Multi-national brands and companies are sensitive to their brand image and reputation. They are aware that social media can create a viral response that can unseat CEO’s and Boards and which can lead to investigations and lawsuits.
Australia now has taxation disclosure laws introduced by the Labour Gillard government which can allow for companies who earn $100 million or more to have their tax position published by the Tax Commissioner. The ATO has not used this power in any meaningful way at this stage.
In any instance where it did, the details will be available on the ATO website and would detail the total company income, the taxable income, and the income tax payable. This measure would expose large companies such as Apple who would show large income revenue but lesser taxable income, and little income tax payable.
Large companies are now lobbying the Australian Liberal, Abbot led government to repeal these laws. The reason is simple. Public exposure and resulting activism does shame large companies and force behavioural change that usually results in monetary shifts back into the host community to redress perceived wrongs.
For instance, in 2012 some UK social activists mounted a campaign against the Starbucks UK subsidiary for taxation avoidance. This resulted in Starbucks conceding that it would then pay an additional $35.9 million in corporate income tax to the UK tax office over the next 2 years.
The brand and reputational damage for Starbucks was significant in the eyes of the public. The campaign also created a backlash from stakeholders who demanded more socially responsible behaviour from the Starbucks Board and leadership team.
A joint report by Macquarie University and the University of New South Wales, concluded in part that “large companies that operate in an industry that is sensitive to public perception and where stakeholders demand socially responsible behaviour are more likely to take a more conservative (tax) approach ….. than companies that do not operate in a market with those characteristics or with their own social values”.
What has been embarrassing for Apple in Australia has been the May 2013 disclosure that indeed Apple paid only tens of millions of dollars in taxes in Australia as a result of earning many billions of dollars in the same period. The Australian Financial Review reported in March 2014 that Apple was estimated to have shifted an estimated $8.9 billion in untaxed profits from their Australian operations to Ireland over the last decade.
The Financial Review also estimated that Apple had earned about $26.7 billion in sales in Australia in that same period. The revelation came as a surprise to many average citizens who gave negative feedback on social media, newspaper letters to the editor, and via business and social commentators.
This set of revelations was for many average Australian taxpayers the first inkling they had about the multinational strategy of shifting income offshore to other entities and avoiding paying local taxes. The strategy is and appears unfair in the mind of a reasonable person and the Apple brand was tarnished by these revelations.
There is another form of taxation disclosure that many multinationals also want to avoid. Under US tax laws and elsewhere there are typically tax laws that state that companies with operations overseas pay no taxes on earnings generated there as long as the money stays offshore in that country.
When it is repatriated and brought home then that money must be accounted for, disclosed and tax paid on it. Accounting laws require that monies earned in foreign destinations are to be reinvested in those localities and taxed in those localities.
These laws state that disclosure of those offshore earnings should occur even when the company will not bring those monies back to the home country where principal taxes are normally paid. This means that the results of a multi-national should disclose the sum of all its earnings across the globe.
The act of disclosure of the offshore earnings is a set of figures that would help make companies accountable to paying their fair share of tax. The act of declaring how much tax they would have to pay if and when they bring that money back to the home country is of interest to both investors and for public scrutiny.
It is not surprising that companies are declaring they have no tax liabilities in offshore earnings as this affects their financial position but it also means that they must show their hand as to how they will treat income revenues at all. The current practice courtesy of an accounting loophole is that a company can forego this disclosure if they decide that it is “not practical” to determine a potential tax bill.
It is wrong that companies are able to avoid declaring all their income sources and the specific tax treatments they will use, and avoid writing these into their accounts for each income stream in offshore settings. Until there is change then an opaque situation will continue where a lack of disclosure aids and abets potential tax avoidance.
The numbers in 2014 are huge with General Electric having $110 billion in offshore revenues that have non-disclosure on tax liabilities, whilst Pfizer has $69 billion, and IBM has $52 billion. This practice has become increasingly common and calls for change have met with resistance from corporates across the globe.
US legislators believe that the lack of disclosure is largely due to tax avoidance in the offshore countries. Their argument is that any published tax liability could be contrasted to what little they pay in that foreign country and attract unwanted attention from tax authorities in that domain.
The second idea is the money is simply held offshore to avoid paying those taxes in the home country at all, ever. The contention is that the money is not reinvested in those foreign countries or operations but simply parked and kept at arms-length from being taxed at all.
The Bigger Picture of Taxpayer Poverty
There is a wider issue emerging in all this where taxation minimisation robs communities and governments of the key tax revenue to maintain and sustain environments, economies and their populations. The way in which the global economy is trending has set some alarm bells ringing due to the latest research which proposes that the rich are getting richer and the poor are getting more numerous and poorer in a way that may undermine the stability of the world economy and the way of life that we take for granted.
A very popular book in 2014 has been Thomas Piketty’s well researched investigation entitled, “Capital in The 21st Century”. The book looks intently at inequality of incomes and wealth and challenges many of the prevailing assumptions around how capitalism can and does lift the income and lifestyles of all levels of a community as economic wealth creation occurs.
His thesis and conclusions are that the wealth in market economies becomes more unequal and ever more concentrated over time in the absence of disruptive events such as wars, economic collapses and hyper-inflation. Wealth basically increases faster than economic growth so the rich get richer and more powerful and concentrated over time.
This in turn has economic and social consequences. The increasing wealth outcome is associated with negative practices which include corporate greed and the normalisation of practices such as tax minimisation that enrich the few at the expense of the community and the great masses of poorer individuals.
Picketty believes we are about to enter a period where the gap between the rich and the poor will amplify and widen to levels not previously seen in modern times. He and others such as the Conscious Business movement see the normalisation of tax minimisation as a form of corporate soullessness or indifference that is enabled in small government free market economies.
Picketty argues that there must be an intervention to force equitable tax payments by wealthy individuals and companies. The key reasons are there are negative consequences if they do not pay that income. These include:
• The widening wealth gap shows that wealth creation still leaves an individual richer once you subtract adequately the monies surrendered on taxes and charges owed to the state by an individual or company.
• The tax avoidance strategies amplify the enrichment of the few who are the only ones who can afford to setup and protect themselves using lawyers and avoidance mechanisms.
• The community suffers income loss and so the poorer get poorer as governments become unable to maintain a basic social security safety net over the community as tax revenue shrinks. This is occurring now in Australia.
• Governments respond by introducing cost cutting budgets and higher taxes on ordinary citizens to offset the loss of wealthy or corporate taxation revenues.
• Community members struggle with poorer infrastructure, resources, and services such as education and health, which suppresses their ability to rise out of poverty and may instead put them deeper into poverty and suffering.
• Social ills and disturbances increase but the wealthy can live and secure themselves in artificial environments such as gated enclaves in affluent suburbs where the plight of the poor is out of sight and out of mind as well as not being a primary concern to them.
• The environment degrades as the social fabric falls apart and the populations increasingly despair, give up or revolt.
• Economic and psychological stress at the individual level undermines quality and duration of life with an increasing state of hopelessness and victimisation resulting. Social issues such as abuse, alcohol and drug addictions increase as symptoms to this outcome.
• National economies decline over time and predatory wealthy individuals and companies then return to grab assets at bargain prices or on their terms.
Billionaires or the top ten per cent of the planet currently own 1.5 per cent of the world’s wealth. Piketty predicts that if unchecked they will likely control or own 60 per cent of global wealth by the year 2050 and could exercise negative power dynamics over whole populations or countries as a result.
He recommends in part that tax should be centred on net wealth rather than gross value as the wealthy often have excessive net wealth due to small or non-existent mortgages or debt. The poorer get taxed proportionally more now as against the wealthy due to the gross value model that ignores debt or borrowings that affect net wealth.
There is evidence that the poor are getting poorer in the world. A 2014 OECD report has found that since the 2008 GFC crisis that more people are becoming poor than ever before. This undermines the capitalist myth that “all boats rise together” as more wealth is generated in society.
The OECD report found that the top 10% of wealthiest people now have 9.6 times the income of the poorest and this had increased from 9.3 times since 2008. The other worrying trend was that for the first time the youngest workers in society are now increasingly becoming working poor and that despair and giving up was increasing across this age demographic.
In Ireland economists can now determine the wage level that represents a living wage or that wage that pays all your bills and let you exist day to day with an acceptable minimum standard of living. The figure is 23,000 euro per year and equates to an hourly wage rate of 11.45 euro per hour.
The problem is that the minimum wage rate in Ireland is 8.65 euro per hour and is behind why 1 in 6 Irish adults in poverty are so despite having a job. Big business claims that the Irish economy and business cannot afford to pay such a “living wage” minimum hourly rate and will oppose any attempt to bring in any such living wage principle.
The evidence of a widening gap is backed up by the American research of Amir Sufi and Atif Mian who found society is already on the upward exponential curve of the wealth creation gap between the wealthy and the average person in society. In 1992 they found that the top 20 percent of the wealthy owned 15 times as much as the next 20 percent of the middle class wealthy.
They also found that by 2010 the top 20 per cent had more than 25 times the wealth of the same next 20 per cent of the middle class wealthy. In fact Picketty shows us that the whole notion of the middle class is under assault in society in general.
In Australia the great tax and budget debates revolve around the notion of “middle class welfare” or the entitlement of the middle class. Joe Hockey boasts that “the age of entitlement is over” but he is quiet around the fact that the current economic policies in Australia are targeting the poor and middle class and are not perceived to be seriously affecting the top ten per cent of the wealthy.
The politicians are however silent on the alarming statistics which show that it is the wealthy who pay very little tax whilst the middle class carry the tax burden along with the average and the poor taxpayer or citizen. Australia has a collapsing manufacturing base compounded by a global collapse in commodity prices for its minerals and this is showing up in upward trending unemployment figures for lower and middle class wage earners.
The overall assessment is that western society politics has been corrupted by big business who corrupt or at least compromise governments and political parties with funding for elections and operational sustainability. In return these governments and the targeted leaders are “big business” friendly and run some sort of theme that we need big business to thrive so that “all our boats can rise together” as the overall level of economic wealth increases in society.
We see the corrupt underbelly of this dynamic continually in the NSW ICAC investigations where property developers and business identities are being found to have corruptly passed donations to both liberal and labour politicians and their parties in return for favours. Corrupt politics breeds wealth creation opportunities via payment for approvals for favoured schemes and only a few are enriched by such greed and corruption.
Aside from this business corruption aspect of parts of the construction and mining economies we also see a key problem in the way corporate wealth flows out of the general community and into the hands of the privileged and the multi-national who then takes that wealth offshore. This means that “more boats are falling than rising” as the local community misses out on local tax treatment and reinvestment into those local communities.
When there is no political will for change then its business as usual which is just the way the wealthy expect things to remain as they benefit the most from business as usual. This is why the B20 silence on tax avoidance exists as a common mindset and reveals the distorted corporate sense of entitlement and special treatment as against the average taxpayer.
In Australia we find the head of the Corporate Tax Association(CTA), Michelle de Niese being quoted in the Australian Financial Review in December 2014 as saying that undertaking tax reform “just to show that you’re doing something about something that nobody’s proved is a problem”. The CTA who represent corporate Australia are not convinced that existing tax rules are not working.
Another form of alleged tax minimisation or evasion is that practice known as “tax inversion”. USA legislators have documented the trend of at least 50 US domiciled multi-nationals shifting their tax base out of the USA by buying out a firm in a tax minimisation country like Ireland or Luxembourg in the last 10 years.
The tax inversion practice involves the firm who relocates actually spending little money in relocating to the new home low tax base country. This practice is known as “brass plating” and involves the company simply changing their postal and nominated address and phone numbers and not practically spending any investment monies on new jobs or infrastructure in that new country.
The cost of tax inversion may be that cost of purchasing a rival firm in that tax friendly country. The U.S. investigation showed that the multinationals were able in many cases to position tax losses against the purchase of the rival firm such that the carried forward loss tax treatment often reduced what they paid to less than a quarter of the purchase value.
The taxpayer is effectively paying for the purchase of these rivals by multinationals that then reap huge benefits in the minimised tax regime which again is a loss borne by the taxpayer. The view of the U.S. legislators is that multi-nationals feel entitled to exploit individual countries for self-gain and show no concern for the communities and countries to whom they deny paying adequate and fair tax.
The U.S. Legislators report found that tax inequality had now reached the stage where some multi-nationals were paying little or no tax at all anywhere in the world and had made a deliberate and conscious decision to arrange their affairs in this way. They concluded that the whole global tax system was now unsustainable and that individual countries were running deficits because of how far their tax base had shrunk due to such practices.
The Irish Case Study
Ireland is a useful case study at this point. Ireland was a vibrant economic middle power up until the GFC in 2008. The Celtic Tiger had a sizeable middle class but also a lot of concentrated wealth tied up in “old money” families as well as a new breed of entrepreneur who as property developers and hedge and investment funds, had access to extensive lines of credit by the “big” banks in Ireland.
The wealth creation game was the only game in town and largesse was a measure of the man. When the house of cards came down in 2008, Ireland as a nation got caught with 440 billion in guarantees pledged against debt, plus Ireland as a nation had to borrow about 70 billion from the IMF under duress to refinance “bad banks”.
Ireland went from a powerhouse to a basket case overnight and the wealthy either fled, did a deal to pay out creditors at a small percentage of what was owed, or bunkered down to see what happened next. This led to the government commencing a series of austerity budgets up to 2014 and only in 2015 are the signs of a sustainable economic recovery starting to emerge.
The ordinary and the poor got hammered more so than the rich between 2008 and 2014. Ireland has had 6 austerity budgets since 2008. The ordinary taxpayer has been lumbered with new and increased taxes, a reduction in government services, has seen state assets sold off for a pittance, and has seen their housing assets decimated by over 50% in value as a result.
The wealthy typically had free money or borrowed money that got shifted around and kept away from creditors. Irish economic commentators note that the wealthy lost but are now buying back into Ireland at bargain prices and creating the basis to reach and surpass old wealth levels within the next 5 years.
Meanwhile the ordinary taxpayer pays more tax, and has their only symbol of wealth in the form of their home, devalued such that many have negative equity in their homes, and large legacy mortgages from the boom years. At the start of 2014 Ireland’s household debt to disposable income ratio was196% which is one of the highest in the world.
Even if a person wanted to borrow money against their home there is often no equity or even negative equity so they have no basis to lend from banks. The Irish taxpayer has ended up 6 years down the track after the GFC with the result that many find they have lost their jobs and some have lost their health, homes, and relationships.
The banks are not lending to the average Irish taxpayer so they are locked out of buying distressed assets like their rich counterparts who are now buying back with vigour. So the average person will struggle to rebuild their wealth anytime soon.
Like Picketty notes, the rich get much richer and the poor struggle on. The boats are not all rising together but instead the small boats are still or sinking slowly over time.
The institution known as the” Irish Trust for the Homeless” notes that we have now started a cycle where we now have those who work but are not paid well and who are now preoccupied day to day with how to make ends meet. There is an increasing trend of renters finding they cannot afford rising rents and are becoming homeless even when they work.
A 2014 OECD study has shown that Irish disposable income has slipped below the international average and also that the number of Irish people in paid jobs had slipped below the international average. The top 20% of the Irish population earn 8.2 times that of the bottom 20% of the population.
The OECD report noted that this structural change in the economy was becoming entrenched. A related report on the Irish economy and its effect on health noted the statistics from GP practice visits show that there has also been a rise in the reported stress levels of the average taxpayer in Ireland since the GFC in 2008.
The OECD Health Statistics Report for 2014 reveals the health effects from a major economic shock on the average person in Ireland. For instance Ireland was ranking higher out of the 34 OECD member nations in heart/cardiovascular disease and cancer rates since the GFC, and had slipped down the ladder when compared to other member states in positive health ratios.
Ireland is also one of the worst countries for addictions such as drinking or smoking, and obesity rates which have risen higher than many other OECD nations. Psychological studies directly linked stress to self-soothing or self-medicating addictions such as drinking, eating, smoking and spending.
OECD analysts note that the GFC has been a driver in this statistical rise especially given they are trending higher than other OECD countries. The OECD report also noted that the Irish government sharply cut spending on health in 2010 and 2011 as part of its austerity budgets and this had affected outcomes in the health of Irish citizens.
The report noted that the wealthiest were not represented in these statistics in the same way as the average wage earner in Ireland. It has been noted that the wealthy had access to support both by the Irish state and via their own means to cope with financial stress.
Support For The Wealthy
It is interesting to note the stress relief options available to the wealthy in the community. The rise of corporate wealth has partly increased due to favourable tax treatment and active strategies to minimise obligations to shareholders, who again are over-represented by the top 10% of the wealthiest persons.
For instance we find that the Irish based GE Capital Aviation Services Funding only paid 1% taxation on a $866.5 million profit in Ireland instead of the nominated 12.5% Irish corporate tax rate. At the same time the 14 GE directors found time to pay themselves $15.27 million in that year for their achievements.
The Irish state becomes poorer whilst the company through tax minimisation and its individual directors via bonuses increase their wealth significantly. This is a trend that allows the privileged to increase wealth in exponential numbers to what the general economy and general wage outcomes deliver to the wider taxpayer population.
The problem becomes that large corporations threaten to shift operations if the host governments put pressure on the company to pay more tax, or if it introduces new measures which the company deems is now less attractive to them. Governments fear big business and have no spine to force accountability upon them as the complaining company simply go off-shore to some other compliant country instead.
In many instances we find that companies enjoy the high standards of education that countries like Australia and Ireland instil at great cost into its domestic workforce. However they contribute very little back into the public purse to support the education of that labour pool. In this sense they are parasitic.
The other problem is that even if there can be a process whereby an international G20 derived tax policy evolves to the point of consensus then there are the real obstacles of translating that into both transnational and domestic legal agreements and legislation. The process of changing international tax agreements and treaties is normally measured in years whilst domestic political stakeholders usually come under pressure and lobbying by big business to derail any measures which might affect their entrenched entitlements.
Despite the noises from the G20 there is an international trend towards a lack of commitment or will to tackle complex transnational issues. This is shown in how the B20 was totally out of step to the G20 when it came to taking a leadership position on tax minimisation and avoidance as part of the G20 agenda.
As we now see with international conflicts such as Iraq, the Ukraine and elsewhere, there is no “policeman” anymore enforcing discipline in the world community. The same rudderless and leadership vacuum also exists in the international political and business context.
International consensus has fragmented along many lines and the ability to reform international tax rules faces an uphill battle to find an advocate and a leader to push the reform through at the global level. One may argue that the G20 has shown the resolve to do so but intent is a long way from effective implementation and enforcement by all concerned.
Just look at the B20 Summit and notice the lack of leadership on this key issue. It is no wonder that the global business community finds itself the architect of such disasters as the GFC, for it refuses to toe any political line, but is quick to shift and delegate the blame and the responsibility to the political spectrum for issues that it would not like to face questions about.
While the corporate mindset is not the focus of pressure and challenge by the shareholder and wider stakeholder base in society then all we are likely to see is an attempt to find new mechanisms of minimisation and avoidance when old measures are outlawed and loopholes shutdown.
Narcissistic Businesses and CEOs
The type of individuals and companies that have a sense of entitlement and the right to exploit others for self-gain, without having any accountability or responsibility to their behaviour, is a common business archetype in our era. For example this might play out as the right to partake of a host countries resources, facilities, grants and concessions, and access to their skilled workforce and yet contribute back little to that community or society.
Such corporates and their leaders are parasitic in the sense that they take what they can and yet give back little in return to pay the government and the taxpayers for this privilege. This is also a trait of both individual and corporate narcissism which operates from a mindset that “it’s all about me” and involves a complete lack of concern for the effects of their behaviour on others.
A December 2014 published piece of research by Alex Frino, the Dean of the Macquarie Graduate School of Management, found that the more narcissistic a CEO was, the more that their share price would lag the market. These CEO’s were more likely to indulge in “earnings management” which equates to inflating profit figures via manipulation of accounting rules to create a positive image in their accounting books.
Business thought leadership via authors such as Paul Babiak argue that businesses are becoming increasingly narcissistic. I agree with this summation as I specialise in and work extensively with victims of, and also individuals who suffer from Narcissistic Personality Disorder(NPD), or from traits associated with this disorder.
I also undertake business and executive coaching with business entities whose corporate culture could only be described as toxic, and toxic in a way that equates to a parasitic or narcissistic mindset or outcome. Narcissistic leaders will often morph a business through its practices and culture into a narcissistic organisation that mirrors that leader.
This is often described in organisational psychology models as a psychopathic organisation. There are multiple crossovers between the terms psychopathic and narcissistic which are beyond the scope of this article but it is safe to constellate the two together under the same heading.
Alex Frino noted that the narcissistic CEO will be driven to achieve external validation they crave and will engage in unethical behaviour to achieve the desired accounting goals. Shifting income from one source to another where taxation is minimised but creates a great company outcome is but one such mechanism that fits under this sort of behaviour.
By the use of the term narcissistic or psychopathic organisation or business we mean that the traits that one finds in a narcissistic individual can also be extrapolated across the corporate behaviours of companies, the leadership team, CEO and/or their Board. These traits and behaviours include:
• The tendency to be self-serving vs serving the wider stakeholders and community,
• To use others for self-gain,
• To insatiably covet more and more power and wealth,
• To be indifferent to their behaviour and impact or practices on others,
• To bully, lie and intimidate to achieve their agenda,
• To “cook the books” and use creative accounting to look good as the CEO or Board,
• To be more concerned with image than substance,
• To be concerned with being right rather than being in truth with others,
• Have Win-lose mindsets,
• See fair-go, empathy, values as weakness and that to be exploited in others who possess it,
• To be aggressive and litigatious when challenged,
• To self-justify their behaviours and will not admit wrong doing or say sorry,
• Are remorseless against competitors or those who threaten them,
• That greed is good,
• Uses half-truths, spin, loopholes and camouflage to disguise self-serving behaviours,
• Have no real values, moral compass, or inner sense that limits behaviours,
• Avoids accountability, transparency and disclosure as forms of control,
• Run a command and control operation with pressure on employees to perform,
• Leaders may operate with double standards in contradiction to the way others are expected to operate,
• Leaders feel entitled, are grandiose, boastful, aggressive, and materialistic,
• Salaries and bonuses for themselves are excessive and not tied to any meaningful metrics,
• Promote the idea that they are “worth it”, “special”, “heroes”, “elite”.
• Seek approval and association with other powerful narcissistic types,
• May not learn from mistakes and so possess blind spots and negative or destructive patterns of behaviour.
The GFC has been largely attributed to a combination of powerful narcissistic individuals and companies, in collusion or aided by the compliance of weak governments, oversight agencies and regulatory bodies. The results of the US and EU based regulator cases commonly found greed and criminal fraud fuelled the increasingly unsustainable nature of lending and reckless corporate behaviours in “banks that could not fail”, Hedge Funds, Wall Street, and private wealth creation vehicles controlling billions in funds.
The key players from Wall Street, major banks, hedge funds, and investment vehicles have largely gotten away without punishment other than to have lost much of their fortunes along with the rest of us. The recent fines paid out to key guilty players have been noted by commentators as representing sums that they will earn back in months to a year.
The summation is that no real lessons have been learnt from the GFC and that the systemic risk in business and financial markets is somehow greater now than before as there is complacency and also an emboldened attitude by the narcissistic corporate players that the world community has no resolve to punish wrong doers on the world financial stage.
In Ireland the narcissistic property developers, business tycoons and company owners simply snubbed their noses at the law and fled to the USA and places like Portugal, where many have recommenced rebuilding wealth with whatever part of ten to hundreds of million dollar loans or assets they still possess or control.
Others put assets in spouse’s names and trusts, then declared bankruptcy in England which has weak bankruptcy provisions, sat out of the game for just a few years, and are now able to reinvent themselves with monies kept at arms-length from creditors. Still others have again “cut deals” and paid out creditors a few token cents in the dollar, and are now free and unencumbered to roam as wolves through the distressed economies that they are partly responsible in creating.
An Unequal Struggle To Recover
Meanwhile the Irish domestic population and economy has undergone the start of the long term trauma of cutbacks to pensions and services, increased government charges and fees, and billion dollar write-offs in bank portfolios. Ireland now has a damaged economic reputation and faces internal and external ongoing mistrust that its leaders do not have the will or the laws to disclose its past errors and reform the weak governance of its financial systems.
A key 2014 financial report on Ireland found that while the bulk of the Irish population will take a generation to rebuild its confidence and its personal finances, the top 10% are increasing their wealth at an accelerating rate such that they will be at pre-GFC levels within another 5 years. The poor struggle to get rich at all but the rich have wealth as an amplifier to produce increasing returns that offset temporary setbacks such as the GFC.
In Australia the average citizen has been encouraged to borrow money from banks at levels for housing and lifestyle consumption. At the start of 2015 Australian home owners were recorded by APRA as owing a record $712.6 billion in owner occupied housing loans to banks, whilst there was also $385.5 billion out on loan to investors for investment housing stocks.
These loans have to be serviced through wages and at present while we are in record low interest rate conditions for loans there is a false reality prevailing that debt serviceability is not an issue in the Australian economy. History shows that interest rates can shift quickly when economic events are unstable and most economic commentators now rate the global economic state as high risk and uncertain due to economic factors being in in extreme or untested positions on numerous fronts.
The Australian Fair Work Commission noted in 2014 that there is an increasing inequality in minimum wage decisions for Australian award-reliant workers. It noted that the rate of growth in average earnings versus corporate salaries was extreme. It noted that the corporate salary outcomes were at odds with what award bound workers were able to garner in the current system, creating a two tier society.
The Commission added that “this has reduced the relative living standards of award-reliant workers and reduced the capacity of the low paid to meet their needs”. At the same time the Abbot Liberal government has started to slash “middle class welfare” but commentator’s note that the lowest paid will bear the burdens of planned cutbacks and that a new class of working poor will result.
At the same time the Abbot Liberal government has not been seen to tackle the ability of the wealthy to minimise their tax, shift earnings offshore, or to effectively not pay the same proportion of tax that the lower earning workers must pay. As mentioned the Abbot government is considering repealing laws which would name and shame big business through the ATO website for transferring earnings offshore to places like Ireland where they end up paying little(12.5%) or possibly no tax.
Interestingly at the B20 Summit the GE mining executive, Steve Sargent, stated a belief that wage parity will increase across countries in the next 5 to 10 years, due to the demand for skills. However he has not said if wages will have to drop bringing the wealthier nations like Australia back towards the cheaper labour pool countries which will create a downward parity.
In other words parity may not come from small boats rising to draw equal with wealthier boats floating higher. Instead parity may mean that many boats drop lower to meet their poorer cousins float at the bottom of the pecking order in a cesspool of working poor.
The business community commonly calls for cheap labour via 457 and related work visas to be brought in to replace existing expensive labour or where it is perceived that local labour is not skilled or in numbers to meet demand. However there is evidence that in such industries such as housing and mining construction that lower paid labour is filling jobs that local unemployed labour could theoretically fill.
In December 2014 we find that Australia, which largely escaped the GFC economic tsunami, finds that it has woken up to an unemployment rate of 6.4%, which is the highest rate in 12 years and not been seen since 2002. The result has seen a widespread call for the 457 visa programme to be wound back.
The simple argument is that the 457 migrant is taking the jobs of locals who end up unemployed instead when a 457 migrant takes their job. However big business is resisting either restricting the flow of migrant labour into the economy and also remain mute on their obligation to fund apprenticeships and training of the local labour pool for the betterment of society.
Big business, as was demonstrated in the B20 summit, defends the 457 visa practices and instead wants to see wages decreased across the board as this will please shareholders and make their business more internationally competitive. However they do not want to enter into the debate as to what sort of society we will end up in if we as some of our mining magnates say, pay our workforce “a dollar a day”.
The will and intent of big business via their practices and demands is for cheap labour to exist in the community. Big business does not concern itself with the aspirations of workers to an equitable standard of living via an upward parity scenario where cheap labour becomes higher earning and narrows the gap across the OECD or other pooled groups of countries.
Corporate CEO’s do not get reported speaking about what sort of quality of life issues result from their corporate practices. They instead do window dressing via a marketing inspired “corporate social responsibility” strategy that throws a few coins at the poor and of course attracts a tax deduction for doing so.
Australia has traditionally had an industrial relations system that resulted in rises in income for its labour pool. However the real issue is will that income support the ability of that person to grow wealth or just tread water and survive as one of the working poor?
We are now in an era where wealth creation is a buzz word and yet the percentage of citizens struggling with finances and find their share of disposable income is decreasing each year. We are also in an era where each one of us must make our own informed choices with less and less support but paradoxically more and more internet supplied comment and information.
Economic commentators call this an era of “financialisation” which means an increasing hype in society for the average citizen to invest, and the spawning of new financial service industries which are simply digital business services who “clip the ticket” or shave off a percentage of money as commission for any new investment. We now have up to 10 percent of the Australian economy geared around the ways and means commissions are generated as money itself is generated or as it flows through the digital economy in the manner of financialisation.
The average citizen does not fully understand how this digital haircut works on their money in this system and as we have seen from superannuation and financial advisors, many are not properly financially educated to offer advice. Government enquiries in 2014 reveal that they generate nice incomes by regularly clipping the ticket of client superannuation and investment monies put into their care which experience shows is normally not subject to any real growth strategies by advisors other than simply parking them in risky investments or re-investing them into the large industry funds.
The average person is not likely to grow their wealth anytime soon under such schemes but will instead enrich their advisors instead. The path to financial freedom is often linked to skilling and education of the individual but even this path is becoming harder to find and travel.
Given businesses are effectively no longer employing apprenticeships as part of their moral obligation to society, and given governments are struggling to fund free education at any level, then individuals will in the future be left the task of educating and upskilling themselves to raise their own wage earning capabilities.
As disposable incomes shrink in our economy then the road to a higher skilled labour pool will be a path more for the few than the many unless the average person takes on considerable debt to fund their education expenses. The era of free education is over as it is a casualty of Joe Hockey’s end to the “age of entitlement” and so effectively closes another door out of the poverty trap in our society.
Tools of The Wealthy
The use of Trusts and the ability for the wealthy to offset some of their wealth and income to their children to reduce their overall tax bills is a well-documented tax avoidance policy in Australia. Research shows that if the wealthy and business all paid the taxation they truly owed then there would not be a GDP deficit crisis in Australia, and that welfare funding could be built on a sustainable tax system.
A well-publicised example in Ireland of how the wealthy can advantage themselves was that of former Anglo Irish Bank chairman Sean Fitzpatrick. He was a leading banker but also investor whom after the GFC crunch was found to owe $110 million to the now nationalised Anglo Irish bank.
According to the Irish Independent newspaper, Fitzpatrick was adjudicated a bankrupt almost 4 years ago with debts of $145 million and assets of no more than $47 million. He offered his creditors an $8 million dollar settlement of all debts which his rich friends and supporters promoted and tried to get approved.
However the IRBC turned down the offer and forced him into bankruptcy. His situation is that after 4 years he is now free again from bankruptcy, and able to now borrow money again, become a company director, and continue life in the corporate world.
Despite the fact that the liquidators were only able to find and reclaim $2 million in assets during his 4 year term as a bankrupt, Fitzpatrick is now free to acquire new assets free from the reach of banks and other creditors. This is how the rich get richer even after a stint in hard times.
Meanwhile the taxpayer theoretically foots the other $98 million dollar loss that could not be recovered. The interesting fact in all this is that Mr Fitzpatrick faced a costly series of court actions in the last few years which are estimated to have cost him up to 1 million euro to provide barristers and legal counsel to fight his defence.
He was found to be criminally not guilty of have provided illegal loans to the family of another controversial high flyer Sean Quinn, as well as the Maple 10 group of wealthy investors who are among the well heeled of Dublin. Mr Fitzpatrick was a bankrupt pleading no income or any significant assets yet was able to arrange his affairs to be able to pay his legal counsel and legal bills of approximately 1 million euro without state assistance or recourse through directors insurance.
Another case is that of Cheryl Cole who is based in the UK yet bases her business in Ireland for tax purposes. She uses an Irish tax accountant who is described as the tax agent to the wealthy given his use and promotion of tax minimisation strategies.
It is estimated that Cheryl saved 250k pounds in tax payments based on published income figures as well as the known 12.5% tax rate in Ireland versus the 21% payable in the UK. The average person cannot avail to these strategies as they cost money, require a certain level of income, and employment via company structure type arrangements.
Meanwhile the growing gap in the income between the wealthy and the average taxpayer has become so acute that calls are becoming louder to curb the excesses that accrue to the executive elite” as the “High Pay Centre” NGO refers to. This international body outlines in a 2014 report that there exists an international “executive pay racket” that has seen the earnings of chief executives growing at 180 times that of the average worker.
One blatant recent example of this excess is that of Christopher Bailey, the CEO of Burberry, the luxury fashion house brand. Bailey was given what is termed a “golden hello”, or $7.3 million pounds in shares to come on board as the CEO of Burberry.
This sign on bonus was given despite the fact he already worked at Burberry so it was a simple internal staff promotion, nothing more. He also got an upfront “retention bonus” worth almost $20 million pounds in shares for just showing up as well and not leaving the company.
On top of all that is his 1.1 million pound annual base salary. What galled many was how after 52% of Burberry shareholders voted down this package of sheer largesse, and given it was not tied to any performance or attainment targets, that the Burberry board seemed surprised and disappointed at shareholder reaction to the proposed package.
Commentators noted that the Board horror at the rejection of its remuneration recommendations shows how out of touch the corporate elite have become. Their reaction to the snub was a clear sign of a deep disconnect between them and shareholder and analyst concerns.
The High Pay Centre report notes that the executive pay gap was comparatively lower at 60 times between CEO’s and base level workers in the 1990’s. The High Pay Centre recommends an international standard be set where the boardroom salary cap for a CEO is set to a fixed multiple of that of the lowest paid employee.
A separate report in Britain that examined the wages of CEO’s in the FTSE Top 100 and found that in 1998 that CEO’s earned an average of 47 times that of the lowest base salary worker. In 2014 that gap had widened to CEO’s earning 131 times that of their lowest paid salaried workers.
The High Pay Centre warns of political and economic instability through this practice which they state is damaging public trust in business. Switzerland has proposed a 12 to 1 ratio between CEO to base level wages but this proposal drew fire from CEO thought leadership circles.
Switzerland via public debate has challenged the core argument by business that the global economy dictates such high executive pay. This is the same self-serving argument that Richard Goyder trotted out to defend his 9.3 million dollar salary and benefits.
The High Pay Centre argues that this argument is wrong as it is a bright shining self-serving lie of self- justification and convenience that destroys shareholder value and which undermines community trust in the business sector. The average taxpayer reads these accounts in the media and is enraged but powerless to do anything to remedy the situation.
The perceived injustice is that a two tier level of reality exists in the community. There is the “little guy” reality that sees the average person sanctioned and made accountable as the employee for everything they do in the workplace and with the taxman in their tax return.
There are few avenues of escape from accountability for the little guy that are not criminal in nature. The wealthy and the big business entity finds that there is a form of protection inherent in just being sizeable and wealthy.
This allows some individuals to be seen to be unaccountable for their folly whilst employed in senior roles or as a powerful single entity such as a company director. Wealth brings protection through the engagement of smart lawyers and accountants.
This issue has been highlighted recently in Australia where the ATO has published statistics that show in their most recent 2014 tax amnesty that 1750 of the wealthiest taxpayers had come forward admitting to $240 million in additional income plus they were holding $1.7 billion in offshore assets that they will no repatriate home and declare and pay taxes on.
The ATO estimates that another 800 wealthy individuals are “holdouts” who are probably holding double that amount and who are likely to declare their position before the amnesty ends in late 2014. The whole group of confessors are not doing so of true free will but have effectively been uncovered by new international tax treaty information sharing with Switzerland banks, tax avoidance operation Wickenby, and international hack and disclosures by third parties which have caught up wealthy Australians participating in various schemes.
In one hack leak the ATO obtained details of over 300 companies appearing in a Luxembourg based arrangement which was setup by consultancy firm PwC to negotiate tax deals in that tax domain. The ATO also has a demand before the Swiss tax authorities for the records of up to another 120 wealthy people with undeclared offshore bank accounts containing multimillion dollar deposits.
The little man is not typically able to arrange their tax affairs to avoid or minimise tax, nor to go bankrupt and emerge 4 years later to resume business life or with the foundations to resume wealth creation. The average person who goes personally bankrupt is likely to stay in a debt trap or compromised lifestyle post-bankruptcy due to legacy issues such as a damaged credit history or a lack of startup capital or assets.
Piketty states that there is no clear way moving forward to support the poor as financial dynamics now play out. They cannot finance or emerge from poverty just by having skills and energy alone.
They are dispossessed at every turn by such institutions such as the banking system which discriminates against individuals and small business when compared to their dealings with the wealthy and big business. The risk assessment criteria placed over individuals and small business is simply discriminatory.
The situation in Australia is now so bad that bodies such as the Customer Owned Banking Association(COBA) state that the power vested in the biggest banks through a government guarantee that means that they are “too-big-to fail”, is promoting an unfair and inequality creation outcome for consumers. Taxpayers underwrite these guarantees but do not benefit from them as the same banks refuse to lend to all but the most financially geared customers.
COBA argue that the biggest banks in Australia exploit this position and power of having a government guarantee by having access to lower cost wholesale funding as well as a form of indemnity if they ask with risk and then do fail. They argue that it is creating reduced competition and consumer choice whilst setting the stage for what could one day become a taxpayer bailout of a big bank failure as happened in Ireland in the 2008 GFC financial system collapse.
In Ireland the big banks also have a tax advantage which increases their wealth and which again denies the average taxpayer of the ability to have large corporate losses recovered to their benefit. The Irish government decided in 2013 to boost the value of its damaged big banks and assist the state of their balance sheets by introducing a tax law that allows the banks to offset previous company losses against future tax bills.
The law effectively will cost the Irish taxpayer hundreds of millions of tax revenue dollars that are urgently needed for social welfare measures which remain slashed due to austerity. The measure will save the various banks about $250 million in retained taxation payments over the next five years alone.
The effect of this measure is that even if the Irish economy booms again and recovers then the tax revenues will remain suppressed. This means that the big banks and their shareholders make hay while the sun shines on their economy but the taxpayer sees nothing until all the past losses are written off against these present and future profits.
So again we see the taxpayer carrying the burden for big business and their wealthy shareholders. The Bank of Ireland alone has a massive $1.3 billion in accrued losses and deferred tax assets to use in future years and analysts estimate the banks will not pay a true tax dividend again to the Irish government for about 10 years.
The Bank of Ireland is estimated to be able to earn over $10 billion worth of profits before it will start paying corporate tax again. Down the road the situation is even worse with the now state owned AIB bank.
The AIB is unlikely to have a need to pay any corporate tax on its massive $3.36 billion worth of tax losses for about 20 years as it will take this long to run down this tax offset. Irish taxpayers have every right to be concerned at this preferential treatment of tax affairs as the precedent with the banks is now bleeding into the wider corporate community.
The international tax monitoring group, the “Tax Justice Network”, is ringing alarm bells at the growing global practice of multi-national companies utilising deferred tax assets laws to effectively pay little or no tax across global operations. They cite the evidence of companies shape shifting earnings and losses as some sort of accounting trick to create loopholes in tax obligations in subsidiary operation countries.
The Irish Sunday Independent in 2014 reported that the Irish based multinational Greencore paid an effective tax rate of 1% on the back of a “reassessment” of its deferred tax assets following the purchase of the British food manufacturer Uniq in 2011. They also reported that the giant distribution company DCC, paid just $4 million in corporate tax in Ireland after deferring $2.8 million in losses accumulated in Ireland. DCC earned $12 billion globally in the same tax year.
One bright light in the tax transparency practices of multi-national is Rio Tinto. This multi-national minor now issues an annual Taxes Paid report which details how much it pays in tax, royalties and payroll tax on a country by country basis.
If this was a binding accounting standard then profit shape shifting exercises would be a lot harder to enact. BHP Billiton has signalled it will also start to release a similar type of report annually but this leadership has been met with a loud silence from the corporate sector.
In contrast the little guy in Irish and Australian society is being told that big and small business cannot afford a pay rise for workers via the award system. In both cases the respective heads of business bodies and Chambers of Commerce who represent big business, argue that high labour costs have put the countries at a disadvantage and so more wage restraint is called for.
These same bodies are very silent on the issues of massive pay rates for directors and CEO’s, citing they are internationally comparative, which just means that the largesse is a global phenomenon. They cite transfer pricing and revenue shifting as “vagaries of the accounting systems at the transnational level”.
The use of asset offsetting for tax minimisation is couched in terms of “standard international accounting practice”. The export bodies of both countries instead focus on and highlight the comparative higher cost of labour in Australia and Ireland as against 3rd world competitors.
They are silent when challenged on the type of economy and society that will occur if we all embark on the” race to the bottom” where nations keep discounting labour to a point where the worker simply could not live or pay their way in society. This race has already started across the western world where we find that bodies such as the OECD note the declining real wage of the average wage earner.
In Australia we had a famous iron ore billionaire lament that they would like to be able to hire workers for “a dollar a day”. This Freudian slip may help explain why the concerns of the rich are not with the worker, with the poor, or with the awareness of what sort of society results when the citizen is asked to live in constant economic struggle and survival.
The Irish position as articulated by the President of the Irish Export Association, Colin Lawlor, is that “we can’t pay ourselves more because our export markets are not growing”. The irony is that these intelligent people do not get that if you cut wages and services in an economy then people have less disposable income and so purchase less.
This is exactly why consumption drops in an economy and so both internal markets and export markets will continue to stagnate while employers refuse to pay more for labour. It is one of the reasons why Karl Marx stated a century ago that in the end capitalists will hang themselves by their own rope.
When pressed on the fact that wages and incomes were already affected post GFC, Lawlor went on to explain that workers incomes had been “squeezed to the limits”, by tax increases and new levies and charges. However he had no answer on how to remedy the situation and his concern was limited to stating that wage increases were the wrong way to go for businesses and their export strategies.
Meanwhile top international companies are under fire in Ireland for offering at least 16 work placements under the Irish governments Job Bridge internship scheme. The scheme is designed to get Ireland’s unemployed back into work in skilled jobs that lead to a trained workforce.
The skilled roles that caused controversy are being offered at I.T. multinationals PayPal, IBM, and Dell and require the applicant to hold third-level degrees. Applicants who are currently unemployed are expected to work 39 hours per week for a nine month period and receive just 50 euro on top of their social welfare payment.
These multinationals already receive favourable tax treatments as mentioned in this article. They are able to pay more yet they have been accused by Irish politician Paul Murphy of “exploiting the unemployed”.
The multi-nationals defend their use of this scheme which is not guaranteed of leading to continued employment and which is dealt with on a case by case basis. The unemployed make the sacrifice to try and get ahead but are vulnerable to predation by heartless employers.
In Ireland several prominent economic analysts argue that the combined effect of a hike in VAT to 23% at the standard rate, new levies on pensions, new property taxes, water meter charges, and changes to the PRSI have cut household incomes by around one-fifth since 2008.
The suggestion that corporation tax should be raised from 12.5% to 15% as a revenue raiser has also been met with resistance by big business and the Irish Finance Minister. They collectively argue that big business would seek to relocate and so hurt the Irish economy whilst there would be a contraction of 10% in new inward investment into the Irish economy as a result.
What they are saying is that big business has a gun to the head of the state and will bully Ireland with the threat that they will relocate to the Netherlands or elsewhere where similar tax concessions already exist. Ireland refuses to act as it fears such an exodus so the society and the taxpayer bear the burden on behalf of the bullying multi-national.
Australia has already seen its manufacturing base flee offshore to Asia where workers can be picked up for “a dollar a day”. We already have seen scandals in China where suppliers to companies like Coles, Woolworths and Target have been accused of labour exploitation, illegal environmental damage in production or waste disposal techniques, or from unsafe work practices or workplaces.
Australia now faces a quest to redefine itself in the world and find its way to pay its way in the world. Big business believes that we need wage parity where we drop back to Asian economy equivalency. In other words we should have a third world labour pool within a first world company for the wealthy and business to exploit for export competitiveness, to benefit primarily the business and its shareholders.
We need to ask ourselves if this is the vision we want for our future and that of our children. The evidence is that this future will emerge by default unless people wake up and take an active interest in the economic affairs of their nation.
Small Business Loses Access to Credit
At the same time the big banks are simply not lending to small business. This indifference to what has traditionally been the social contract that banks had with the Australian public has shut the door on the main vehicle that a poorer person can aspire to create wealth.
The evidence is that working for yourself is a key path to climbing out of surviving and towards thriving. As any entrepreneur will tell you the possession of an innovation or point of difference in business is vital, but it requires a capital injection to enable most business models to go from startup to a sustainable and growing operational status.
It is smart to go from being a pay-as-you-earn taxpayer to a business owner. In every country the tax system offers lower tax scales for business than the highest personal tax bracket, and there are normally tax benefits and write-offs that a business owner can claim which a taxpayer cannot.
For instance the tax scales in Ireland go up to 52% for the average taxpayer whilst a company owner attracts a 12.5% tax rate. In Australia the corporate tax rate is 30% versus the higher personal tax rates approaching 50% for higher incomes.
However the path from being a taxpayer to being a company owner requires some sort of funding and which has traditionally been obtained via secured lending through banks. The timely and equitable access to business funding for citizens has always been the role and social contract of the big banks.
Their social contract with the taxpayer was to be a reasonable lender who enabled the prosperity of the economy through supporting small business who employ up to 70% of workforces in some economies. When the banks stop lending then the aspirations of the poor die with that decision and the poor will be more likely to remain entrenched in welfare or be part of the working poor.
The evidence since the GFC is that those businesses which do obtain funding may also get a raw deal from banks as compared to wealthy individuals and the large corporate lenders. It is in the national interest that we create a smart economy based on innovations and ideas that turn into commercial realities yet Australia is increasingly closing doors to the enabling of such outcomes.
The situation for small business in Australia in terms of their lending contracts with banks is weighted heavily in the banks favour. There is now a call for the big banks to be included in new laws around unconscionable conduct in lending contracts with small business.
The Australian Financial Review reported that Australian Banks include a raft of cancellation or breach of contract clauses in lending contracts to small business that can promote harsh behaviour and loan default triggers at the banks discretion. The power imbalance between banks and small business has been explored recently in terms of alleged unconscionable conduct by Bankwest and its parent bank(Commonwealth Bank).
The recent examples revolve around customers who were part of the loan book inherited by the Commonwealth bank when it bought out BankWest after the GFC. Allegations and court cases have since occurred which centre on the theme that small businesses were aggressively dealt with, and even bankrupted due to sudden foreclosure on loans by the banks concerned.
The alleged punitive actions on small business by BankWest/Commonwealth have been highlighted as the inequality that exists between business loan holders and large banks and financial institutions. The recent financial system inquiry in Australia that is being chaired by David Murray now has submissions before it which relate to the call for the reinstatement of the imperative for banks to lend to taxpayers and small business on fair and equitable terms.
The Irish situation is no better. An OECD report found that lending to Irish Small to Medium Enterprise(SME) market declined by 77 per cent between 2007 and 2011. The Irish Central Bank released in 2014 key data which showed that the stock of total credit for the (SME) market had continuously declined since 2011 by another 30 %.
This decline in lending is attributed to both the reluctance of banks to lend to SME’s at all, and the lack of equity, positive trading accounts, or assets by SME’s that allow them to take on new or additional credit. The Irish Central Bank summed up the current state of the economy in 2014 by stating that any economic recovery in Ireland will be credit-less.
They found that only the rich and those with cash on hand could avail to the emerging opportunities for purchase or investment of cheap or distressed assets, or to grow and expand operations. Separate research showed that 60% of all outstanding business loans in Ireland were in arrears by 90 days or more as the businesses struggled on and found it hard to pay bills as they became due.
When small business cannot lend or an entrepreneur cannot borrow to start a business then unemployment rises as existing businesses cut costs and new businesses just simply never get started. Ireland’s jobless household rate increased from 13% in 2004 to 22% in 2010 and is estimated at present to have peaked in 2013 at 25%.
Another looming problem is the availability of cheap credit for those who can borrow it. At present interest rates are at an all time low and so there is an unique opportunity to borrow cheaply and buy assets at bargain basement prices.
However this opportunity is not afforded to all due to the reluctance of banks to lend, and so only the wealthy and those with quality assets are able to access the cheap lines of credit that exist. The rich get richer whilst the rest of us look on at the sidelines.
The conservative think tank and international institution, “The Bank for International Settlements”, warns that the presence of effectively low or zero interest rates may lock in a continuing cycle of rich borrowing to largesse, and the average person and national economies taking a hit if and when the wealthy fail in an endeavour.
The think tank warns that the problem of risky lending is now systemised into the way in which banks and governments treat the wealthy and multi-national corporations as against the ordinary citizen. They warn that debt crisis risks may become permanent as the system operates both with an inherent instability and a bias that creates that instability and an outcome of inequity in society.
The EU has found the same behaviour within its own member states banking systems and so has decreed that deposits will attract a negative interest rate. This means banks will be penalised by paying interest rather than earning interest for holding onto money that it has been refusing to lend to consumers and small business.
Home Loans Punish Small Business Owners
All governments are basically having to grasp with the shift in banking culture that not only prices for risk but which would rather lend against security it can simply understand. For instance many small business owners are being forced to get personal loans or housing loans as their form of business finance.
In these situations the personal home becomes security against the loan as banks can price a housing loan asset and then apply a simple loan to valuation ratio(LVR) against the asset to determine how much to lend to that applicant. Banks cannot assess a business in the same way or create a value against which they will lend on some form of LVR.
Banks cannot understand business models and business assets in the same way and so cannot apply their models over this class of asset. So they simply refuse to do so in many instances as they claim the business represents risk rather than an asset.
Banks as a result no longer offer traditional business loans except to mature or cash rich businesses and so do not lend to that sector of the economy in a meaningful way anymore. This strategy is designed to make banks wealthier over time as they reduce risk for shareholders and incur less bad debt and write-offs as a percentage of loaned monies in the market.
However the domestic economy will contract as less businesses can startup or fund growth. Banks are increasingly saying that is no longer their responsibility anymore to fund small business to some form of social contract.
It is a key reason why the wealthy who can continue to borrow and invest get wealthier while the average person struggles to improve their situation as they struggle to build financial independence. Money creates wealth and the poor struggle to access credit to start that journey to become more financially independent.
In Australia the group known as “Industry Super Australia” has published research that shows that in 2014 the amount of commercial lending for every dollar of residential property lending has dropped from $3.84 to $1.62 over the past 25 years.
In their submission to the Murray Banking System enquiry now underway, they argue that this not only represents a lack of long term funding in the economy but that it represents a form of systemic risk to the financial system and a focus of what they term “short termism” within Australian banks.
At the same time the Australian Financial Review published an example of this growing problem for small business in Australia. It cites the case of the PLUM babywear and children’s clothing company.
PLUM was a family business which required a capital injection to grow beyond where their business was at. They approached numerous banks but in each case they either found a refusal to lend for business capital or a refusal for this purpose but a willingness to offer them a home mortgage for the same amount they wanted for their business.
Because the owners of PLUM could not refinance and obtain a larger line of credit they were forced to fund their expansion through increased retained earnings from within the business. This meant they had to struggle and only grow incrementally over a number of years when a line of credit would have allowed them to grow successfully in a faster way.
The shocking fact in all this is the way that the business owners of PLUM were 3rd generation customers of St George bank. They found to their horror that this fact counted for little in their application and that St George bank despite knowing their credit history was unwilling to refinance their business. This situation is a common occurrence in Australia for small business owners now.
The growth of new forms of lending such as crowd funding and angel investors is a response to this critical problem. However these new forms of lending are not suited to many traditional business models and are volatile forms of lending that many do not understand or try to access.
State Asset Fire Sales
Thomas Piketty argues that it will take a global consensus to turn around the ability of individual countries to stamp out the income shifting strategies of multinationals. Commentators argue that the current round of negotiations for the Translantic Trade and Investment Partnership between the EU and the United States is a necessary first step in that process.
Commentators argue that this measure would tighten the tax system in both domains whilst sending a clear message to multi-nationals that such tax measures are not condoned. Picketty argues that in the absence of a strong tax revenue base a country will have an effect where it starts to lose control of its economic journey.
Such a country, he argues, will tend to have budget crisis scenarios that resort to one-off sales of key assets, resources and infrastructure. These once-off measures have a long term effect of impoverishing a countries wealth and also its ability to raise recurrent income from those assets annually to prop up annual revenue generation needs in the economy.
Piketty also alerts us to the trend of wealth stripping of taxpayers through bailout demands by wealthy bond holders, institutional investors and even regulatory bodies such as the International Monetary Fund. The evidence in the GFC bailout of Greece and Ireland was that wealthy investors in banks and other exposed entities did not want to wear or realise their risk as bondholders and instead wanted protection.
They demanded a government intervention that would see wealthy and institutional investors protected but at the expense of the poor taxpayer. The bailout demands via IMF loans to Greece and Ireland will take a generation to pay back and suppress the recovery of these economies on the way through over a 20 year period.
The biggest burden is placed on the shoulders of the everyday tax payer who has less disposable income than the wealthy, and who now will have even less disposable income moving forward, and/or a poverty ridden economy as services and welfare monies get sacrificed in the cost cutting that always comes with IMF led bailouts.
Yet we find the wealthy and the big institutions responsible for the crisis bounce back and move on to recover their wealth at a faster pace than the burdened taxpayer and the equally burdened government finances. This assists in creating the widening gap in wealth between the average citizen and the top 10 per cent of the wealthy.
The weakened state can then be vulnerable to predation by the wealthy fund managers, private investment groups, Hedge Funds and billionaires who seek distressed assets at bargain basement prices, or who seek the government to privatise key infrastructure assets again at a significant discount.
The only problem is that these assets are supposed to be held in trust and governed for the people. When they are sold off to foreign ownership or to private enterprise which may have predominately a register of foreign shareholders then the taxpayer and the host country again bleeds wealth away from the citizen and toward these wealthy entities.
Corporate Predators and “Holdouts”
The GFC has seen the purchasers of some discounted distressed assets now moving aggressively to exploit their position and plunder wealth from governments involved in bailout or default situations. This is occurring where in a compromised state there was some form of discounted asset or bundled debt tranches sold off to third parties for a fixed sum.
This model is along the event of some major default such as the 95 billion dollar sovereign debt default of Argentina in 2001. Argentina organised a restructure of its debts and in the process sold off blocks of debt at a fraction of their face value to institutions such as hedge funds like Elliot Management and NML Capita.
The prevailing wisdom is that once the debts have been unlocked and broken down there is a healthy profit margin inherent within the tranche which over time becomes profitable. This can be finalised with the owner of that debt on commercial terms which still makes for a healthy profit for the hedge fund or owner of this tranche.
This type of opportunity is only available to the very wealthy and typically the top 10 per cent that Picketty refers to as the wealthy. The system works to a point because there is a sense of “everyone taking a haircut” on the debt and it enables the default country or institution to move forward whilst the debt purchasers makes a good return on the purchased debt.
There is however a more predatory subgroup of fund managers and billionaires who are termed the “holdouts”. Their business model is to basically bully and intimidate the owners of the debt which they have bought at a discount, to repay them in full and with interest as time passes rather than settle on a “haircut” with everyone else and redeem let’s say 60% of that value rather than 100% of that nominal value.
This group has started to undermine the bond market which relies on the consensus of the shared “haircut” model for the system to work. We now see a situation in 2014 where one such aggressive “holdout” hedge fund has secured a victory in an American supreme court that has resulted in the Argentinian government forced into another sovereign debt default scenario.
Argentina has technically gone into its second bond default in 13 years as this article was being written. The situation is directly tied to the “holdouts” who are blocking cash from being repaid by Argentina to other bond holders until the government settles with creditors from the previous default, who are the “holdouts”.
In this scenario Argentina has paid out or is paying all the other bondholders at some agreed discount to full value of their tranche of debt. This is the agreed “game” and there is a co-operative arrangement that works for all parties involved except the “holdouts”.
The defaulted bondholders led by NML Capita are not reasonable and instead want a full payout on their tranche plus interest. They are ignoring the “rules of the game” and want full redemption despite buying their tranche at heavily discounted prices to the value of the debt locked up in their tranche.
This group of “holdouts” or “vulture funds” can and have forced a default on Argentina repaying $28.7 billion of performing global dollar bonds. The government had a 30 day grace period in which to settle with the “holdouts” but they would not settle and so now Argentina is in default and is predicted to suffer massive economic disruption and market chaos as a result.
Already Argentina has slipped into a recession and it is the average taxpayer and citizen who will suffer from this “gun to the head” demand by the wealthy Hedge Funds. Commentators lament that the global financial system is now descending into a wild west culture that does not respect the need for respect, integrity and stability of the overall system by the individual players and their individual plays.
Commentators are aghast that this situation can exist as it throws the whole bond process into turmoil and undermines the stability of global financial markets. The “holdouts” are unrepentant and indifferent to the pain and suffering they will cause if they continue to enforce their demands. They are unrelenting in wanting a full pay out and are prepared to damage Argentina and the global financial system to get their demands met.
The End Game
There are numerous forecasters, futurists and opinion makers in the media who predict our social, technological and economic futures. In this body of opinion and forecast there are a number of pessimistic scenarios for the global economy and global society moving forward over the next 50 years.
These are not tied directly to other key problems such as global warming, over-population, declining energy resources, and the rising chance of a global pandemic of a rogue virus mutation. However they recognise their potential influence and disruption to trends that are being predicted.
There are separate gloomy predictions about how the inherent greed in human nature will create ungovernable scenarios in the global economy as wealth distribution becomes skewed towards the few and against the many. There is a body of thought that extrapolates the current trends and events as leading toward a future where we exist amongst institutions and individuals with the wealth and power to damage entire country economies and even bankrupt them.
The Argentinian position is a symptom of the how this indifferent and inherently greedy mindset can operate and use the financial system to bully at a level never seen before by individuals and the companies they control. For instance Argentina may end up with another bailout albeit at a smaller level than before.
The systemic issue from this is the whole bond market now faces uncertainty as to the efficacy of the IMF sponsored sovereign debt restructuring arrangements which are now the norm. Governments will no longer be acting from surety when they enter into bailout funding arrangements facilitated by the IMF and so may refuse to co-operate, citing the Argentinian scenario.
The view of analysts are that “holdouts” are indifferent to the pain and suffering that they inflict on markets, countries, institutions and populations by their excessive demands. This is arguably corporate narcissism and will create a precedent that undermines the concept of global financial co-operation.
Argentina now has faced a call on payment for up to $15 billion which can only be offset against its national reserves which are at $28 billion. The spectre of this is already causing an economic contraction, increased inflation, and the flight of capital which again punishes the poorer Argentinian and could wreck their domestic economy, so pushing more citizens into a poverty outcome.
The situation is such that Argentina has been served subpoenas by the “holdouts” targeting their sovereign assets anywhere and everywhere, and has American courts supporting the holdout position. This precedent undermines the whole concept of sovereign wealth and the safety of state assets from seizure.
Commentators are now predicting that the wealthy are now finding ways to harvest state assets which will only amplify their wealth whilst stripping out the economic security of the average taxpayer in those affected countries. The attack on an economy in this way will undermine their economy, their currency, their ability to raise funds in international bond markets, and directly negatively affect the lives of their average taxpayers and citizens.
The end game being talked about is that by the time we reach 2050 and the top 10 per cent own 60 per cent of the global assets and wealth(Picketty prediction), we will arrived at a time when institutions and individuals own entire countries just like a property asset. They will effectively own the inhabitants and their economic fate as they control all the decisions and economic levers of that country, run as if it were a private company.
We may be back to a feudal system where kings and queens lord over their realm and where the lowly serfs toil for an existence but have had the capitalistic dream snuffed out by the vast gulf that exists between their reality and the reality of the wealthy. Picketty warns of the social unrest and revolution this would cause but futurists predict that for the first time in human history governments or companies will by then be able to control everyone through technology surveillance and “compliance” technologies.
Picketty’s thesis is timely as he basically implies we are just at the bottom cusp of the exponential “hockey stick” curve journey upwards that represents the widening gap between the poor and the wealthy. If we act now we will be spared the dangerous dislocation of wealth equity that is inevitable and which is already systemically built in to the way in which are conducting ourselves in the global economy.
It remains to be seen what action if any will be taken by the timely publication of Picketty’s book. Everyone should read this book and form an opinion as it directly concerns each one of us, and is no less a pressing and global issue as global warming and over population of the planet.
It is the position of Conscious Capitalism or Conscious Business as it is sometimes known, that wealth should be an equitable outcome in business as part of a “win-win” ethos of how to do business for the good of all. Society, community, planet and the environment are seen as stakeholders to a business who have a right to fair and equitable treatment.
The Conscious Capitalism or Conscious Business model represents a real opportunity for reforming the way in which business is done and which by its nature inhibits destructive outcomes to stakeholders in society through narrow agendas by the business or by its shareholders. It is a win-win model that humanises business and which self regulates business practice.
If there is not a global reformation in the way in which business is conducted then the ugly situation predicted by Picketty in 2050 will be one that could provoke some form of backlash and breakdown in order. History has ample evidence of inequity being the fuel of revolution or war.
You are recommended to read further on the nature or philosophy of Conscious Business as an alternative way to create wealth and happiness for the benefit of all.
Richard Boyd, CEO Conscious Business Australia