Private sector can be a driver of development – but only if developed countries address global tax laws
Developing countries fully realise the importance of the private sector in creating jobs, a theme that dominates all national consultations conducted by the UN on any future set of development goals.
Harnessing the power of business for development has long been a subject of discussion. “Productive capacity”, another term for business, featured prominently in the conference of the least developed countries in Istanbul in 2011.
So it is in Bali, where a UN high-level panel appointed by Ban Ki-moon, the UN secretary general, is holding its third substantive meeting on the development agenda after 2015, focusing on global partnerships. In recognition of the role of the private sector, the UN panel includes Paul Polman, the boss of consumer goods giant Unilever.
The private sector is certainly being trumpeted by Justine Greening, the UK’s international development secretary, who is deputising for David Cameron because the prime minister could not make it to Bali due to a diary clash.
In a recent speech at the London Stock Exchange, Greening said she wanted to see “far more businesses joining the development push with the Department for International Development” (DfID). Her enthusiasm for the private sector is not shared by many civil society groups. In a communique released on Sunday, civil society organisations struck a sceptical – if not hostile – note to business.
“The private sector is increasingly emphasised by governments as an important development actor, but it is one that lacks appropriate regulation and accountability: the conditions for private sector engagement risk undermining development gains rather than supporting them, through sharply escalating human inequalities,” said the communique.
The NGO Save the Children has adopted a more nuanced position, acknowledging the private sector as an important driver of development – creating jobs, innovating, providing products that meet development needs and through paying taxes.
Citing the $648bn of inward foreign investment to developing countries in 2011, Save the Children said in a new policy brief (pdf) that the engagement of the private sector in the conception and implementation of the post-2015 development framework is critical to its success.
Businesses, however, should adopt a “do no harm” approach, argued the brief authors. This means analysing the potential harm that products, practices and suppliers and their day-to-day business may do.
“It means they must adhere to legislation, but much more than that, it includes adhering to international human rights standards, respecting international labour and safety conventions, paying taxes appropriately, and addressing environmental impact,” said the report.
That multinationals should pay their fair share of taxes may be one of the concrete results from this high-level panel process, said Claire Melamed, head of the growth, poverty and inequality programme at the Overseas Development Institute thinktank.
“If there is momentum on sorting out tax rules, then it is a big step,” she said. “If developed countries sort out global tax laws, this could be one of the things people will remember from this process.”
The debate on jobs and taxes reflects the Jekyll and Hyde approach of the private sector. Greening neatly – if inadvertently – encapsulated this in her London speech, when she praised SAB Miller, the brewing giant, for working with 1,200 farmers in South Sudan to supply its brewery in the capital, Juba; according to ActionAid, governments in Africa may have lost as much as £20m through SAB Miller’s non-payment of tax.
“You do see companies with a strong corporate social responsibility (CSR) that do everything to avoid taxes,” said one business representative who did not want to be named. “They will say it is within the law but, if they have aggressive tax avoidance, how does that sit with their CSR declaration?”
How indeed. Save the Children is urging the high-level panel to recommend in its report to the UN general secretary in May that all parties to the post-2015 goals ensure greater transparency and accountability by all companies. A potential indicator would be a legislative requirement that all large companies report on their non-financial performance – a commitment that would cover environmental, social and governance impacts.
Such legislation, said Save the Children, could be accompanied by a robust set of guidelines that could take the global reporting initiative – a framework for gauging sustainable businesses – as a starting point.
There are various other instruments on accountability, such the UN’s global compact, which sets out guidelines for corporate behaviour, the EU’s accounting directive and the extractive industries transparency initiative, to name but a few. In fact, part of the problem is the proliferation of transparency mechanisms – hence Save the Children’s favouring of the GRI, which it considers the most sophisticated existing framework.
The commitments to transparency and accountability could be the condition for businesses that want to be “partners” in development, said Melamed. The incentive for businesses would be the chance to tap new markets and make profits, but the quid pro quo would be for them to abide by such principles as the GRI.
“Governments,” said Melamed, “can say to companies that want to be partners, for example, in nutrition goals: ‘You can’t be be in the partnership unless you meet transparency on reporting and labour standards’.”
Head of new regulator says customer activism and changing boardroom culture will improve behaviour in financial sector
Increasing the level of fines on highly profitable financial institutions will not alter their behaviour, the head of the Financial Conduct Authority said on Thursday as he set out his vision for the new regulator.
Martin Wheatley, chief executive of the FCA, also admitted that there was a concern that the situation in Cyprus, where banks have been closed since Friday while the country hammers out details of a €17bn (£14.4bn) bailout, could cause problems elsewhere.
Wheatley said higher fines on firms would have no impact unless top management also took responsibility and customers were ready to move their accounts if they were fed up with the behaviour of the firm. “To be honest, to the banks that make billions of pounds in profits, whatever the level of fine it will get passed on to shareholders.”
Raising the level of fines is not going to make firms change “unless individuals are held to account… and the consumers make a decision themselves that we’d rather bank elsewhere,” said Wheatley.
This week the Financial Services Authority (FSA) said it was taking a tougher approach to fines by basing them on stock market value rather than assessments made by the enforcement division.
On Cyprus, Wheatley said an initial plan to skim €5.8bn from savers’ bank accounts as part of the bailout could hit confidence in the banking system as it may undermine the €100,000 guarantee on deposits across the EU. Cyprus has now backtracked from the idea of putting a levy of 6.75% on deposits between €20,000 and €100,000 and a 9.99% levy on any deposits larger than that.
“From our point of view the confidence in the banking system was very strongly underpinned” by the guarantee put in place after the 2008 crisis, he said. He saw it as a “very important principle”.
“It does undermine confidence in the banking system when what people previously thought were insured deposits [appear not to be],” Wheatley said.
The FCA is being spun out of the FSA, which is being disbanded at the end of this month, and will take on the existing investigations into Libor rigging. It will also take care of consumer issues and the conduct of firms, and be responsible for promoting competition. A new divisional head is being recruited. Banking regulation is moving a new body – the Prudential Regulation Authority – inside the Bank of England.
Wheatley attempted to set out a different tone to Hector Sants – the former chief executive of the FSA who now works for Barclays – who had previously warned the City to “be afraid” of the FSA.
“You won’t hear from us the ‘be afraid’ tone,” Wheatley said. “We want to get back to us having a discussion with the CEOs of firms.”
Wheatley had previously said that he would “shoot first, ask questions later” in dealing with financial products that may not be appropriate for consumers, as the FCA will have the powers to stop banks and financial firms selling products that it has concerns about.
Wheatley said that the current payment protection insurance scandal – estimated to have cost the industry £12bn – was a reminder that it was “better to deal” with problems early. “We will be on the front foot when we see things we don’t like,” Wheatley said.
Wheatley refused to comment on the near-£40m of bonuses that had been released to nine Barclays staff on Wednesday, shortly after the budget. But said he “understood the point” after a year in which Barclays was fined £290m for rigging Libor. Speaking generally, he said: “It is a problem if rewards are taken that don’t bear any relation to the risk that was taken by the institution.”
He said the FCA had demanded that bonuses be clawed back from bankers at some institutions.
In addition to the potential for contagion in the eurozone, Wheatley said the regulator was also concerned that customers would start to seek out riskier products because interest rates were so low, and that once rates started to rise customers might start to have difficulty repaying loans.
John Griffith-Jones, who will be the non-executive chairman of the FCA, said the regulator could make “a fresh start.”
“Prevention in this industry is much cheaper than a cure,” he said.
About this time last year, Bob Diamond’s pay package seemed to have triggered a new anger in investors. Looking back now, it seems the headlines were better than the reality
The anniversary of the start of the so-called shareholder spring happens about now. A year ago, it was the publication of Barclays’ annual report that gave the first hint that something might be up: the revelation that the bank had paid the £5.7m tax bill of then chief executive Bob Diamond astonished even those hardened to bankers’ self-serving definitions of fair rewards. A showdown of some sort seemed to be on the cards.
A year on, the shareholder spring feels less exciting than it did at the time. Diamond has gone – not for any pay outrages but because of the Libor scandal that broke a few months later – and the amazement now lies in the fact that only 27% of Barclays’ shareholders voted against the pay report.
Antony Jenkins, the new chief executive, and Sir David Walker, the new chairman, have virtually acknowledged that pay practices at Barclays must be reformed more quickly. All that has really happened is that something closer to common sense has prevailed. And there’s still a long way to go: Barclays’s song is less shrill than in the past, but the £1m-plus bonuses are still flowing even as its performance, measured by return on shareholders’ equity, remains sub-par.
Or look at the direct casualties of the spring, like Andrew Moss at Aviva. How on earth, we now wonder, did he survive so long? The new boss of the giant insurer cut the dividend by 44% last week, admitting in effect that Aviva had been paying out sums it could not afford. And then remember that Moss received a 90% vote in favour of his re-election as a director, as pusillanimous investors instead registered unhappiness by voting against the pay report. Calling that a rebellion was an exaggeration. It was more an embarrassed cough on the part of City investors at Aviva’s plunging share price.
Indeed, various studies of what happened last spring make the entire show appear stronger on headlines than on substance. Out of a sample of just over 300 annual meetings, the average vote against pay reports was 7.64% in the first six months of 2012, compared to 6.1% in the same period a year earlier, according to a study by Pirc, the independent investment consultancy. Pirc also compared 234
Patrick Degorce promises to appeal after HMRC persuades court to throw out film investment scheme
One of London’s most successful hedge fund managers, Patrick Degorce, has been forced to part with millions of pounds in tax after Revenue and Customs persuaded the courts to throw out a complex film financing investment which sought to shelter earnings of almost £19m.
The discredited scheme was marketed to the Kensington-based fund manager, best known for co-founding the Children’s Investment Fund with Chris Hohn, by financiers from Goldcrest Pictures. Goldcrest was behind films such as Gandhi, The Killing Fields, Chariots of Fire and A Room with a View.
The treasury minister David Gauke said the Goldcrest structure was a “dubious avoidance scheme” and that HMRC was getting increased powers and resources to clamp down on such activities. “The government has made it clear that we will not allow marketed avoidance schemes to deprive the UK of vital tax revenues.”
It is the latest in a long line of film investment schemes to be challenged by the taxman. Desperate to get on top of the backlog of such cases, in December Revenue and Customs wrote to investors in certain film financing structures – many of them among the UK’s wealthiest bankers, financiers and celebrities – urging them strongly to settle. Settling was “the best opportunity to resolve these disputes in a way which was cost-effective and consistent with the law”, investors were told.
HMRC said its victory over Degorce underlined how weak the credibility of many tax avoidance structures were that involved, or purported to involve, film investments. “Sadly, many people have been tempted by similar schemes which we also believe don’t work, and we have opened a settlement opportunity to get them back on the straight and narrow,” said Jim Harra, HMRC director general. “I would urge anyone in this position to sign up for this facility quickly.”
Goldcrest is owned by the veteran film financier John Quested, 77, who lives in Switzerland. Its outlawed scheme had been sold to 11 other wealthy investors in addition to Degorce who had sought to reduce income taxes by incurring combined losses of £47.6m. If successful, they would have benefited by £17.7m.
Artificial “losses” of £18.8m created for Degorce by the Goldcrest-devised investment structure would have benefited the fund manager by £7.5m. In a statement, a spokesperson for Degorce – who set up a $700m (£466m) hedge fund called Theleme Partners, based in Mayfair, three years ago – said he was disappointed that the tax tribunal had thrown out his appeal against HMRC’s decision and would appeal against the judgment at the earliest opportunity. “HMRC’s public statement … is riddled with errors,” the spokesman said.
“Mr Degorce believes his film business has been conducted in full accordance with UK tax rules. He devoted substantial resources and time to create this successful business, which will pay several millions in tax in the coming years. As soon as HMRC first questioned the business arrangements in 2009, Mr Degorce suspended his film activity pending clarity on the taxation issue.”
During the dispute, it emerged that Degorce, a former Merrill Lynch banker and one-time French naval officer, had also participated in separate film financing schemes devised by Ingenious Media which were also under investigation by tax inspectors, though the tribunal was not asked to consider their merits. Further investments by him in other Goldcrest schemes were also being examined. The tribunal only considered investments in 2006-2007, involving the purchase and assignment of rights in two Hollywood comedies – Mike Myers’s The Love Guru and Ben Stiller’s Tropic Thunder.
Tax avoidance schemes involving film finance have attracted the ire of MPs on the public accounts committee, with the chair, Margaret Hodge, describing some as “immoral” when representatives from the industry appeared before parlliament in December.
The Ingenious Media founder and chief executive, Patrick McKenna, told MPs: “I can tell you categorically that we are not involved in the business of tax avoidance or the marketing of tax avoidance schemes. We are in the business of creating much-needed commercial investment for the creative industries.”
Hodge responded: “For heaven’s sake, Mr McKenna, have a little bit of common sense. I was involved, as culture minister, in that film tax. I was involved in trying to encourage a lot of film production here in the UK, and it was the most disappointing thing, particularly from a company such as yours that pretended to be at the heart of supporting the creative industry … Actually you were exploiting a well-intentioned tax relief to try to get individuals, and God knows who else, to mitigate their taxes.”
McKenna said this was not correct.
Brewer SABMiller is just one of the consumer goods giants accused of using tax treaties in the Netherlands to shift profits around the world and avoid millions in tax
In the centre of Rotterdam lies the Cool district, well known for its bars, cafes and cinemas. Less well known, though, is a small office used by 10
There is nothing illegal about deferring bonuses to the next tax year. But there is quite a lot of shame in having to announce the fact publicly to one’s struggling customer base
Lloyd Blankfein, the boss of Goldman Sachs, is unrepentant about plans – now dropped – to help the bank’s already highly paid traders avoid paying the top rate of income tax. To recap, Goldman had been thinking about deferring part-payment of bonuses from 2009, 2010 and 2011 into the new tax year to help recipients benefit from a fall in the top rate of tax from 50% to 45%.
The firm surrendered only after Sir Mervyn King, governor of the Bank of England, said he found the idea “depressing” and Treasury minister Sajid Javid quietly intervened.
There is, of course, nothing illegal about moving payments beyond 6