Enron


6. Tax havens corrupt markets, concealing insider dealing and supporting aggressive tax dodging by multinational companies

For example

… Enron, the Houston-based energy trading company was notorious for its strong political connections, President Bush included.[1] A perfect example of corrupt capitalism at play.

The dirty details

Once hailed as a role model corporation for the twenty-first century,[2] Enron filed for bankruptcy in late 2001 following the collapse of its stock price. The company subsequently became synonymous with corporate scandal.

It emerged that Enron had created a staggering 881 offshore subsidiaries[3],far more than most American companies, although the practice of using tax havens was – and is – widespread. 692 of these subsidiaries were uncovered in the Cayman Islands alone.[4] Aggressive tax avoidance practices enabled the company to get away with paying absolutely no income tax in four of the five years prior to its collapse[5]… indeed, some might therefore say it still is the role model corporation.

Between 1996-2000, Enron generated pre-tax profits of almost US$1.8 billion.[6] If paying no federal taxes on that figure’s not enough to get you fuming, try this one for size: the company was in fact a net recipient of tax rebates to the tune of US$381 million over that time.[7] In other words, they were given money by the state, as much as US$278 million in 2000 alone.[8]

Let’s not forget, you need big money to get away with not paying tax. Enron spent US$3.5 million in 1999-2000 alone lobbying for exemptions from taxes and from oversight by regulatory authorities.[9]

Likewise, the company paid its financial and legal advisers US$88 million to avoid paying US$2 billion in taxes.[10] A 2,700 page US Senate committee report estimated it would take ten years to unravel Enron’s tax dodging schemes in detail.[11] Not surprisingly, these same tax minimisation schemes were precisely what made Enron so popular with investors.

Solutions

The key thing to take on board is that the deep problems associated with tax havens have arisen as finance has gone global. As a result, the only effective measures to counteract aggressive tax avoidance must likewise be global in nature.

A multilateral framework is required that allows sovereign states to protect themselves from aggressive tax avoidance. International transparency and co-operation are central to this. The UN is the only global agency with the authority and democratic credibility to implement this.[12]

Country-by-country reporting on tax payments and other financial information would add to this transparency and give a clear indication of multinational’s contribution to individual economies.

Guidelines are needed to overcome the culture of tax minimisation. Adopting a GAAR (General Anti-Avoidance Rules) would be a good first step to achieving this.

Key statistic

Over half of all world trade passes through tax havens,[13] even though these jurisdictions account for only about 2.3 percent of global GDP.[14]

The final word

From John Christensen and Richard Murphy[15]:

Compelled by the profit logic, and by a legal principle that asserts that tax payers may organise their affairs in such a way as to pay the least tax possible under the law, the majority of large businesses have been structured so as to enable tax avoidance in every jurisdiction in which they operate.

References

[1] http://www.nytimes.com/2003/02/13/business/13ENRO.html?pagewanted=all [accessed 4/11/11]
[2] http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf [accessed 4/11/11]
[3] http://www.nytimes.com/2003/02/13/business/13ENRO.html?pagewanted=all [accessed 4/11/11]
[4] http://www.nytimes.com/2002/01/17/business/enron-s-collapse-the-havens-enron-avoided-income-taxes-in-4-of-5-years.html?pagewanted=all&src=pm [accessed 4/11/11]
[5] http://www.nytimes.com/2002/01/17/business/enron-s-collapse-the-havens-enron-avoided-income-taxes-in-4-of-5-years.html?pagewanted=all&src=pm [accessed 4/11/11]
[6] http://www.ctj.org/html/enron.htm [accessed 4/11/11]
[7] http://www.ctj.org/html/enron.htm [accessed 4/11/11]
[8] http://www.ctj.org/html/enron.htm [accessed 4/11/11]
[9] http://www.nytimes.com/2002/01/17/business/enron-s-collapse-the-havens-enron-avoided-income-taxes-in-4-of-5-years.html?pagewanted=all&src=pm [accessed 4/11/11]
[10] Sikka, P. (2004), Nobody is Called to Account’, The Guardian, 6 February. http://www.guardian.co.uk/business/2004/feb/06/consumernews.money [accessed 4/11/11]
[11] http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf [accessed 4/11/11]
[12] http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf [accessed 4/11/11]
[13] http://www.taxjustice.net/cms/front_content.php?idcatart=2&lang=1 [accessed 4/11/11]
[14] http://www.nber.org/chapters/c0165.pdf [accessed 4/11/11]
[15] http://www.taxjustice.net/cms/upload/pdf/Development_Journal_-_CSR_to_the_Bottom_Line_-_SEP-04.pdf [accessed 4/11/11]