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Monday 17 Dec 2018 | 13:58 | SYDNEY
Monday 17 Dec 2018 | 13:58 | SYDNEY

Conservative governments divorcing big business?



8 March 2013 11:50

Dr Daniel Woker is the former Swiss Ambassador to Australia and now a Senior Lecturer at the University of St Gallen.

Tax may be a dry subject but Mike Callaghan's 25 February piece was anything but. Mike highlighted a recent OECD report to the G20 Finance Ministers' meeting in Moscow on 'addressing base erosion and profit shifting' by multinational companies who show their profits exclusively in the lowest taxing national environment and thus pay far less tax, or none at all in some locations, than is warranted by their profits.

This report is another thunderclap in a rapidly fraying relationship between the public and the private sector. Governments like the one of David Cameron in the UK and Angela Merkel in Germany were traditionally perceived to be in the political camp favorable to the interests of big business. Well, no longer.

Squeezed between shrinking tax income and exploding expenses for social security, and unwilling to impose more austerity on their electorates, they are opting for pressure on those who clearly fall short of their public duty. We are talking of both individuals and companies who 'maximise their international tax environment' or, to put it bluntly, cream off too much of the globalisation dividend.

Mike's example is the well known case of Starbucks UK not paying any tax despite some ten years of healthy profits from an English coffee swilling public. Daniel Binswanger, a Swiss muckraking journalist writing recently for the largest serious Swiss daily, Tages-Anzeiger, has alleged (without written proof, to this point) that the 'English' profits were channeled to a group-owned coffee bean trader situated on the shores of Lake Geneva, where the typical tax burden would be 5-10%, far less than English corporate taxation. David Cameron was among the first to decry such corporate misbehaviour.

Not that corporate taxes in Switzerland are in general that much lower than elsewhere in Europe. Existing OECD guidelines won't permit that. However, in certain parts of federalist Switzerland, the total tax burden on foreign-owned holding companies and so called 'mixed companies' (foreign-based companies which produce and sell both within Switzerland and abroad), combined with generous initial tax holidays upon establishment, is indeed low.

However, the OECD is on the look-out. Without going into intricate international tax legislation, suffice it to say at this juncture: watch out for the upcoming battle over 'license boxes'. This is a legal device, known not only in Switzerland but also other light taxing jurisdictions in Europe, where companies are allowed to take international intellectual property rights payments (eg. for patents) out of overall group consolidation accounts and put them into separate no-tax or low-tax boxes.

The OECD is not some superior moral authority or tax tyrant from nowhere, but simply the sum total of the considered positions of its members. The largest and mightiest, among them the US, Germany, Japan and the UK, wield influence. Thus an OECD guideline, especially since it is commanded and amplified nowadays by the G20, becomes the gold standard for national legislation. An individual country might object, but you don't want to find yourself on an OECD grey or black list, let alone in the sights of a congressional committee in Washington bent on extending US jurisdiction to all those wanting to do business with Uncle Sam.

The battle is not just about corporations but also individuals. The latest example happens to be Swiss, but it found wide international attention. In a referendum, Swiss voters have just approved tough new rules limiting corporate remuneration.

The popular 'aye' was practically assured after what has quickly become known as the 'Vasella incident' broke two weeks ago. Daniel Vasella, outgoing CEO and board president of the pharma giant Novartis, was forced to forgo a 'golden gag' sum of SFr72 million (roughly A$100 million) for agreeing not to counsel or be employed by the competition for six years after his exit from Novartis. The story created a public and political outcry in Switzerland of unprecedented volume. Not that Mr Vasella had been underpaid: during his managerial reign at Novartis through to the end of 2012, he had taken home some SFr400 million (A$500 million) already.

The Vasella story broke the camel's back, as it was the latest in a long series of such incidents. One of the more notable ones, with an Australian connection, is a totally indecent windfall for another Swiss resident, the South African-Australian-Israeli triple citizen Ivan Glasenberg, who reaped billions from Glencore's IPO in 2011 and will now be paid handsomely as CEO of the newly merged 'Glenstrata', having forced out Mick Davis.

The EU parliament has just forced the hand of both the European Commission and EU governments to complement a new law on banking rules with a 'bonus cap' for top bank executives. This provision was opposed by the Cameron Government, fearing for the competitiveness of the City, but approved by the German Government. For good reason: no European public, including very likely the British, will forgive its government for not having done enough to finally curb the blatant excess in executive remuneration over the last 10-20 years, barely dented by the crisis and the subsequent ineffective self-regulation.

This has ceased to be a purely or even predominantly economic problem. At stake is nothing less then democracy itself. At its core is a 'fair go' for everyone, as the Australian saying goes.

Photo by Flickr user ge'shmally.

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