When are we going to talk about tax avoidance?

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By:
Helen Avery
Published on:

It won’t be long before banks are going to be answering to the public about their role in advising clients on tax avoidance.

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It is quite remarkable to me that we haven’t seen more fuss over the Paradise Papers. No marches. No sit-ins. No placards scrawled with: “What part of ‘governments are almost broke and public spending is being slashed’ did you miss?” 

Having covered private and corporate banking for 14 years, it wasn’t news to me that high net-worth individuals and companies employ financial advisers who help them legally avoid taxes under the guise of wealth preservation. 

But it had rather been my hope that, with the Paradise Papers following so swiftly on the heels of the Panama Papers, our collective camel’s back may have just broken and the people would have taken to the streets en masse. Apparently, we are not there... yet. 

Thanks to public pressure and a recognition that, if you want to get to the root of a problem, you target the financiers and middle men, there have been some great improvements in ethical business standards that started with changes in the banking sector. 

Some banks have dropped large pipeline projects or coalmines that pose environmental risks from the deal roster; and nearly all developed-economy banks have signed up to various agreements on human rights. 

Forcing a change

It is surely a matter of time before people take tax avoidance matters into their own hands and pressure banks to stop their advice, thereby forcing a change among corporations and high net-worth clients. 

The impact of tax avoidance is sizeable after all. 

The Labour Party in the UK claims tax avoidance has cost the UK economy more than £12.8 billion ($17 billion) in five years – which could have paid for 21 new hospitals. 

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The cost of tax avoidance in the US is mind-boggling. According to a report from Forbes and Statistica earlier this year, the loss to public finances from corporate tax avoidance is $188 billion annually; in China it is $66.8 billion and Japan $46.8 billion. 

While it is hard to establish the impact of tax avoidance among the world’s wealthiest individuals, it is worth noting that, according to Berkeley professor Gabriel Zucman, author of ‘The hidden wealth of nations’, an estimated $8.7 trillion is held offshore by ultra-wealthy households in a handful of tax shelters. 

The discussion of tax avoidance is one I bring up from time to time with private banking heads when they tell me that they helped their wealthy clients become even wealthier. 

“Is it right to advise clients on how to best avoid taxes? Do you feel there should be some collective industry responsibility given that governments are strapped for cash and, in developed countries, the poor are getting poorer?” 

The answers I receive are varied and depend on the ideology of the person being asked. Those at the opposite end of the spectrum to me stress tax evasion as the problem, whereas, they say, tax avoidance is simply good advice. 

Those whose economic and political views are more in line with my own will point out that their bank cannot pressure clients or employees to share their views and that in the end there has to be a global discussion on what is deemed fair. 

I translate that as: ‘Until the playing field is level, my bank can’t refuse to create structures to reduce client tax costs, because those clients will just go to a competitor, and that would make for some very unhappy shareholders.’ 

It is a reasonable point. But then again there is no evidence to show that people do leave countries or companies when tax avoidance clamp downs take place. Four years ago, which bank would have said they would turn away oil and gas clients? Yet some have without losing out to their competitors. 

GABV

I recently had the pleasure of talking to David Korslund at the Global Alliance for Banking on Values (GABV). It has 46 member banks that support social empowerment, economic resiliency and environmental regeneration. 

The GABV was founded in 2009, and Korslund says the biggest surprise over the last eight years is that the banks that focus on delivering value to society deliver better value and less volatility to shareholders. 

Korslund, who has worked in finance for many years, admits he may be being cynical when he says that it often seems like banks are not prepared to make changes that would benefit the real economy and align with social or environmental values because it would require too much work and would raise the prospect of smaller bank bonuses. 

(As an aside, compensation specialists Johnson Associates announced in November that it expects end-of-year US banker bonuses to be 10% to 20% higher than last year.) 

The World Economic Forum is looming and bank chief executives are inevitably polishing their ‘banks for social good’ speeches. I will be looking for the one that is prepared to go out on a limb and discuss how the finance industry expects to benefit the causes it claims to support by helping clients channel money away from public funds.