Courtesy of the European parliament, and much against the will of the world’s investment banks, every bank in Europe now has to declare how much tax it pays in which country. And courtesy of Reuters, which bothered to read the results, we now know that seven of the world’s largest investment banks paid Britain £21m tax on £3.6bn of profits they made in the UK in 2014. Five of them, including Deutsche Bank and JP Morgan, paid no UK corporation tax at all.
It takes some chutzpah to organise one’s affairs to pay zero tax – and a cavalier attitude to integrity. But investment banking, the world of high-velocity trading in trillions of pounds of financial assets and mega-deals, wins few prizes in the integrity stakes. In US Senate hearings after the financial crash, Goldman Sachs’s then CFO, David Viniar, when questioned about employees saying in email exchanges that a deal involving clients was “shitty” and at the clients’ expense, declined any condemnation. All he could say was: “I think that is very unfortunate to have on email.” This was but one in a swath of incidents that has made Goldman Sachs a little more alert than its peers to civic criticism: it paid £18m of corporation tax on £1.35bn of UK profits. Not much, but Britain should be grateful for small mercies. Goldman Sachs could have done what Morgan Stanley did, half of whose non-US revenues came from London generating £1.2bn profits, but which paid no tax because of £450m of “inter-group” charges. Morgan Stanley declined to tell Reuters to which jurisdiction these charges were paid. We can f*** off.
Or it could have followed Deutsche Bank, which employs 8,000 people in London, declaring a £1.5bn loss, but in Luxembourg, where it employs 610 people and which has zero corporate income tax, it made a profit of £367m. Britain’s tax regime is nearly as generous: not only is corporation tax extraordinarily low, but banks can use historical losses limitlessly to offset against any profits they choose to allocate to London. Share give-aways as individual bonuses can also be charged against tax; only the US approaches such indulgence. And as organisations with global reach, they can book profits to whatever low-tax or no-tax jurisdiction they like – Dublin, Luxembourg, wherever.
This is an industry devoted to cream-skimming other people’s money while ensuring as little payment of tax as possible
It is a scam, but then so is much of the industry. In a debate about which parts of today’s capitalism create value and which extract it, investment banking falls firmly in the latter category. This is an industry devoted to cream-skimming other people’s money while ensuring as little payment of tax as possible.
In Other People’s Money: The Real Business of Finance, economist John Kay describes investment bankers’ capacity to build a mountain of cash on a molehill of the shareholders’ own money to place enormous bets on the price of myriad tradeable financial assets in markets organised to deliver results that will favour them. Indeed, sometimes they go further, actually rigging markets. Deutsche Bank last year paid the largest Libor fine in history – £1.7bn – for its role in rigging the market in interbank interest rates in New York and London.
Investment banks, according to Kay, have three other main routes to make profits, all deploying the innocent word “arbitrage”. In plain English, fiscal arbitrage is playing games avoiding tax; regulatory arbitrage is about doing in one country what is forbidden in others; and accounting arbitrage is about hiding what you are up to.
If this world of arbitrage, one-way bets, market rigging and global tax avoidance were hermetically sealed, what goes on would be unlovely, but with no wider consequences. But it’s not. It’s a house of cards that governments will have to rebuild when it next collapses. But it also creates a business culture in which to operate with integrity is to play the fool. The entire body starts to be infected.
Top economists have become interested in the integrity and the economic value of corporate culture. In one recent paper, the Chicago professor Luigi Zingales and others argue that integrity is a form of capital – like land or labour – and find that the more integrity a company is perceived to have, the greater its profitability, better industrial relations and attractiveness to new recruits. Yet the temptation to boost short-term profits always undermines integrity by encouraging broken promises to your workforce, allowing consumer service standards to slip – or just avoiding tax.
Tax is a litmus test of integrity. British retailers, which have to pay VAT, are being undermined by offshore retailers operating online which can offer imported goods, notably from China, VAT-free. The open question is: what responsibility do all those who supply, finance and provide a delivery vehicle, such as Amazon and eBay, have for hosting frauds by sellers? In a world in which integrity was more highly valued, there would be no issue. In reality, most businesses dodge the question: it is for the tax authorities to investigate.
In 2016, the lack of integrity in business across the west, and in Britain in particular, will become more politically salient. Whether it is food companies openly selling food that makes buyers unhealthy, car companies that dodge emission tests or investment banks being too clever about avoiding tax, consumers and citizens are going to ask ever harder questions about why today’s capitalism behaves with so little integrity. They want their companies to create value – not extract it. Fair dealing, keeping promises and accepting civic responsibilities should not be regarded as obstacles to the operation of a business model – they should be the norm.
Yet there is no powerful voice anywhere in the political spectrum to make such a point. For example, last week the Financial Conduct Authority (FCA) dropped its investigation into banking culture, knowing that the government will offer little support. After all, George Osborne sacked its previous tough-minded boss, Martin Wheatley, precisely because he was prone to asking such inconvenient questions. The FCA’s new role is to be City- and investment bank-friendly.
And while the new Labour leadership is calling for the investigation to be reinstated, it is too invested in destroying or undermining capitalism to be a plausible voice in constructive reform. The government can do what it wants. Without a feasible, intellectually coherent plan for a different approach – or the political heft to back it – expect nothing to change.
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