Beyond Reproach

The patrician, well-dressed manner of many top lawyers and accountants often belies the dirty work they do. The leak of more than 11 million documents from Panamanian law firm firm Mossack Fonseca reveals the staggering extent to which professional lawyers and accountants will collude with their clients, many of them sanctioned or with blood on their hands, to help them avoid and evade tax.

mossack fonseca

Give me Rumpole of the Bailey, John Mortimer’s fictional Old Bailey Hack, anyday, in preference to the suave cohorts of clever, unscrupulous, criminal accountants and lawyers. Dishevelled, but principled, Rumpole’s work barely kept him in claret and cheroots.


The leaked documents show that Mossack Fonseca conspired to conceal the true beneficial owners of companies, enabled criminals to conceal the source of their wealth, and assisted prime ministers, presidents and dictators, their families and friends, to benefit from dodgy business transactions that take money from the pockets of their own people.

And yet Mossack Fonseca, with breath-taking chutzpah, have claimed that their operations over the last forty years have been entirely ‘beyond reproach’.

HSBC Private Banking did it. The big accounting firms do it. They all do it. If you have a little more money than most people you’ll attract swarms of professional advisers offering you ways of keeping your money from the taxman. I know. And as long as detection is unlikely, and as long as the cost of such advice is lower than the tax that you’d otherwise pay, these suave cohorts will go on doing it.

It’s time to end the tax evasion game. How?

  • Make tax reasonable
  • Harmonise taxes where possible
  • Abolish tax havens
  • Abolish anonymous ownership
  • Publish beneficial ownership on the internet
  • Apply sanctions when the rules are broken

And yes, it would effectively deny a country the sovereign right to set its own rules on tax, disclosure and incorporation. But ours is a connected world. A country is welcome to go its own way if it chooses, but in economic and political isolation.

Tax is a zero-sum game. What the rich man retains, the poor man loses. Tax evasion and aggressive tax avoidance are immoral and should be both illegal and very difficult.

I am optimistic. These revelations are the start of the end of tax evasion. It’s interesting that so far there’s been nothing about how these 11 million documents have been obtained. Who was the leaker or the hacker? Was it an insider? Or might there have been state involvement?

Business Ethics in ‘Eastern Europe’ – Tax Evasion and Other Ills

There are all sorts of ways you can cheat your customers, your employees, your competitors, your partners and the taxman. Whilst you can find such mischief all over the world, in former socialist ‘Eastern Europe’ these tricks were especially common in the early years of democracy and capitalism in the 1990s, even if they’re a little less common now.

See my three previous posts on the background to and the development of business ethics in the region:

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Ethics and legality are necessarily different issues, even if ethics is the foundation on which law is built, but the law can only attempt to sanction the most egregiously immoral acts of business mischief, not the lesser, everyday kind. Even so, what is not illegal is nevertheless sometimes wrong, and almost always inexcusable and avoidable. It is no excuse to protest that many kinds of mischief are and always will be perfectly legal. In all aspects of life, there are more ways of doing wrong than of breaking the law – there is no law, for example, to prevent you cheating on your partner (in most of the developed world, at least).


Sadly, though, it’s often possible even to break the law without sanction. Tax evasion, for example, the deliberate flouting of the law, is often very hard to detect. What are the usual tricks?

Number 1: Many business owners put their personal expenses through the company.

This is an easy option if the sums aren’t too large. Who’s to say that those air tickets to New York aren’t a legitimate business expense? It might be hard to justify tickets to the Met (client entertainment perhaps?), but for auditors it would be difficult to establish that a visit to New York was pleasure, and not work. You can also use this trick as a tax-efficient way of rewarding your employees.

Number 2: Many companies bill phantom ‘services’ from tax-efficient jurisdictions

Unless you’re operating in a flat-tax jurisdiction (Slovakia was briefly one), it’s usually better to get money out of your company before the taxman levies corporation tax on the profit that remains. For example, you can siphon cash anonymously through tax-havens by invoicing spurious (but plausible) services from, say, Cyprus, thereby reducing the tax base. The company in the tax-haven, if it’s not actually entirely yours, takes a cut and passes the rest on to an offshore account.

In the early 1990s the Governments of Eastern Europe lacked the investigative powers and the devious imaginations required to chase this errant profit to its low-tax haven. Civil servants are often less talented than tax advisers and are paid a lot less. This also makes them more amenable to corruption.

A friend of mine worked as an accountant for a small British firm that set up shop in Prague in the 1990s precisely to perform this clever kind of service for expats like me who were running small businesses.

Number 3: You can get paid in cash to avoid revenue being booked and declared

Many businesses like to be paid in cash, especially black market cash that doesn’t find its way into the company’s accounts, and which doesn’t therefore get taxed. It’s cash that can be used to pay unofficial bonuses to employees, too, instead of taxable salary. You have to be a cash-based service business such as a hotel, or a restaurant, if you’re going to do this on a big scale.

In the end, companies and private individuals pay their taxes when they’re reasonable, and when they trust their government to collect them fairly and spend the money wisely. In the moral vacuum of post socialist Eastern Europe there was no such trust, and it would be rare for a businessman to feel that denying the Government tax meant that some poor pensioner, or needy child, might suffer.

Businessmen can cheat their partners, their customers, their employees, their competitors and the taxman. But the list doesn’t end there.

The Banking System.

Banks can also be easy prey. Before 1989 state banks in Eastern Europe operated under Government and Party rules. Unleashed, they were free to make unsafe loans at attractive rates of interest to friends of friends who wanted to purchase state assets at knockdown prices from other friends of friends. The limited liability company, especially when operating in a legally loose environment, was the perfect channel for cash to flow from the public domain into the private pocket. Set up a company, borrow from the banks, pay the money to yourself either directly or through another ‘service’ company, and then default on the loan and close the company you started with. I met a lady who had danced her way with this particular quickstep into an enormous fortune. Butter wouldn’t melt in her mouth.

Lending is now more sophisticated, but in Moldova they’re still dancing to this kind of tune. A billion dollars (nearly 10% of GDP) was ‘lent’ by state-controlled banks for unknown purposes to a number of anonymously owned shell companies (one or two of them located, I believe, in Glasgow) that have since defaulted and vanished from view. The former Prime Minister, Vlad Filat, is widely suspected of collusion, and has now been charged, but he’ll probably get away with it. What is possible appears to these perpetrators to be permissible, and it all takes place anonymously and at high altitude, as if there are no desperately poor villagers to pay the price.

The European Union.

The EU has sent billions into Eastern Europe. I won’t go into the detail of how these funds can be diverted, but suffice it to say that there’s a whole industry built around it.

There are also sins of omission:

Good Deeds.

In the West, businesses pride themselves on the good works they do that have little to do with their business, such as supporting charities, sponsoring the arts, and so on. This is good for employee morale, good in itself, and, let’s face it, good PR.

They also take care to pick suppliers who are ethical. High street clothes retailers are expected to make sure that their suppliers are also behaving ethically.

Good businesses also take care of the environment.

Awareness of these obligations is growing in Eastern Europe, but from a very low base.

As a businessman I’m aware of all these tricks, but have avoided them. At my company we refused to pay bribes, and I held firm to this policy despite the occasional entreaties of my sales staff (in the distant past). That meant we couldn’t bid for Government tenders, but the companies we worked for, large multinationals making new investments in new markets, were by and large clean. We were asked for bribes once or twice, but we refused.

Bribery isn’t lawful for most Western firms, but who can discover if bribes are delivered by third-party consultancies. Protection money shouldn’t be paid, either, but I was given to understand that when a large international oil firm set up its petrol stations around Moscow’s ring road, protection money was paid on its behalf by a third-party security firm.

And when is a bribe a bribe rather than, for example, an ‘educational trip’? The large pharmaceutical companies, who, on balance, do a lot of good in the world, send health care professionals on lavish educational or professional conferences, and sponsor their research. Do these benefits encourage them to recommend their products? We would be naïve to suggest not.


Taxing Times -Google and Tax

Google will pay 130 Million GBP in back taxes to the UK Government, in settlement of any potential dispute as to whether it should have paid more in the past. Whether Google has thereby established a new tax rate for the future I’m not sure. But if it has, it amounts to a derisory rate – about 3% on the real profit it obtains from its UK sales, some say.


Large multinationals, especially those providing software or services, take enormous and conscious advantage of the lack of clarity surrounding concepts that we too easily take for granted – such as the concept of a sale.

I am no tax expert, but I would presume that the idea of corporation tax, the tax on a company’s profits, is to tax economic activity in the country where that activity is carried out. This is fair recompense for the physical infrastructure, legal protection, and military protection that the taxing government provides.

But how do you define economic activity and its location?

In determining profit, there is on the one side revenue (usually a company’s sales) and on the other side there is cost. In general a company will want to record its revenue in the most lenient tax jurisdiction it can find.

So that’s why, if you’re a British entity you may well find that when you buy services from Google, you are actually buying them from Ireland. You will receive an invoice from an Irish company, and you will pay to an Irish company (let’s put aside the issue of whether an Irish company can run a bank account in the UK – that’s probably another complex matter, but we won’t go into it here). Your contract for the provision of services (an agreement that services will be supplied in return for money) is with an Irish company. This means that revenue is booked in Ireland. Google will then subtract costs and pay tax at a relatively lenient corporation tax rate on the difference.

In some circumstances you can imagine that Google needn’t even run a company in the UK. It might operate entirely in Ireland, and its forays into the UK might be confined to the occasional salesman’s visit. Indeed some companies operate in this way. They simply provide goods or services from another country. If you buy contact lenses, for example, from a Czech company and receive them in the UK, the Czech company’s costs will amount only to delivery costs, but even these would be contracted with a logistics firm in the Czech Republic. Fair enough? Possibly.

But of course Google does incur costs in the UK, and some of these, one might argue, are related to the services it ‘sells’ from Ireland. There may be a marketing, or sales department based in the UK, whose job is to cajole British companies into using Google’s services. And I would imagine that Google does indeed offset these costs against Irish revenue, by subcontracting ‘marketing and sales’ services from the Irish entity to the UK one, with a mark up on costs for the UK company. Thus a small profit is made in the UK on services provided by the UK entity to the Irish one. But the main profit is made in Ireland where customer revenues are booked, and where tax is lower.

But I also know for a fact that Google does incur other costs, such as marketing costs, in Ireland. I regularly receive calls from Czech (and also English) speakers based in Ireland who explain to me that by spending more on Google’s Adwords services I will sell more of my own company’s software and services.

The conceptual difficulty lies in the definition of a sale and where it takes place.

The Shorter Oxford English Dictionary (the 8,000 page version) defines a sale as:

  1. the action or an act of giving or agreeing to give something to a person in exchange for money

Putting aside ‘agreeing to give’, a stage in the process (signing a contract) which doesn’t allow a company to book revenue, this definition is woefully inadequate for our purposes. Whilst it does cover the giving of goods (as in a shop), services (‘giving’ consulting, whether at a client’s offices or remotely) and the granting of a right to use software, it doesn’t help us to clarify where the ‘act’ takes place.

Many companies regard the ‘act’ as simply that of printing a bill (an invoice). Even if vast costs are incurred in the UK by sales representatives, in marketing, and so on, the ‘act of sale’ happens in another country because that is where the bills are created (and you could even imagine that these bills might be created by accounting clerks in the UK using software running on UK-based servers). In the end what it comes down to is that the ‘act’ is often generously defined solely in terms of the legal location of the company into whose accounts the bill will be booked.

If you broaden the concept of the ‘act’ to include all the surrounding precursor activities, such as marketing, business management, warehousing, even manufacture, then you might go a long way, with some kinds of company, towards capturing a larger taxable profit.

But take Amazon. Amazon does, indeed, do many of these things in the UK, but it’s one of those large international companies currently under scrutiny for its low taxable profit.

In any case, this approach doesn’t work well with software companies such as Google or Microsoft, or any of those whose marketing, products and delivery mechanisms are all digital. It isn’t easy to say where the ‘acts’ of sale occur. Underlying software (including its development), databases, support teams, even marketing teams, may be located outside the jurisdiction of the companies that are buying the company’s services. So, where should profit be taxed?

It’s not easy. If you go so far as to say that a company should be taxed in the country where its customers are you open up a Pandora’s box of complexity. My companies, LLP Group and systems@work, sell software and consulting services in seventy or so countries around the world. How would we go about declaring profits in each of these?

Some of these countries, it is true, charge a withholding tax on invoices we send to our customers. So, if we bill 100 to Albania, we might receive only 80. This mechanism, I suppose, is designed to prevent the movement of profit from Albania to the Czech Republic, and if we furnish proof of this payment to the Czech tax authorities, we can reduce the profits we pay here. But this mechanism is generally and rightly regarded as obstructive and most countries abandon it when they are fully integrated into the global economy. It is a huge disincentive to business, and more often than not simply results in fees being uplifted by the selling company to compensate for the frequent failure to make all the paperwork work.

It isn’t easy to set policy, but certainly something needs to be done. It seems obvious to the man in the street that Google ‘acts out’ its invoices in Ireland to reduce its tax bill in the UK.

But does the solution lie in the harmonisation of tax policy, or in taxing sales activity using a broader definition, one that reaches as far as the location of the customer?

Sorry, it is a dull topic, but it’s a hugely important and difficult one, and it concerns billions in taxes.