Monday 21 February 2011

Foolish dictators and clever bankers

On the L. The Channel Islands

I do wonder sometimes about the commonsense of the rich.  I'm not concerned with morality, too much hypocrisy hovers around that concept. But I am surprised at the lack of  foresight that so often brings disaster down upon the heads  of those leaders we are seeing tumbling from power at the moment.

Take Mubarak.  Some people have thrown around ridiculous figures suggesting his wealth is of the order of 70billion pounds. But even if he had only a paltry l or 2 billion pounds, I question the wisdom of how he handled it. Because the way he handled  it  made him very unpopular, and now he's lost the lot.

It seems such an unnecessary disaster to have brought upon himself.  Over the years he has been in power in Egypt,  commonsense should have told him that  if he donated a portion of his large private fortune to his country -  perhaps set up an efficient health service, or revamped the economy so it provided more jobs for more people -  he would still be left with loads of money, plus, in his position,  the endless capacity to make more. And by putting some of his gains back into the public pot he might  have been loved by his countrymen and ended up dying a great and admired leader. 
As it is, he has ended up with nothing, with all his funds frozen by some Swiss bank, and everyone hating his guts.

The same has happened to the Tunisian top man, Zine El Abidine Ben Ali, who has taken refuge in Saudi. The Ivory Coast President, Laurent Gbagbo, (disputed since a controversial election decision) has also had his assets frozen by the Swiss. 

You'd think that when the first fallen dictator had his assets frozen, the others would move pdq to get their money out of the hands of the Swiss banks whilst they were still in power. But they don't seem to learn that they can't rely on the Swiss Banks when trouble hits. A bit slow on the uptake, you could say.

 In a previous post I spoke about the increasing gap between the rich and the rest of the world - and the fact that history shows that gap is dangerous and ultimately ends in trouble, and often in revolution. In many parts of the world, we're now seeing that happen.  Yet, if the rulers in each case had not been so greedy, and had distributed a portion of their great wealth to ensure the wellbeing of their citizens, the end result would be good karma  for them and they'd still be as rich as Croesus anyway. Why is it some of the rich rulers don't see this?

With corporations it's a very different story.  A ruler's first job should be to run his country well, and look after its citizens in a civilised way. A corporation is different. It is a business.  And when it's a bank, its purpose is to make money and safeguard the money of its depositors and its shareholders.

Take Barclays, for instance.  A likely bunch of lads, much in the news this week.

Barclays made £11.6 billion in 2009.  Astonishingly, the total tax it paid on this in the UK was only about £113 million. 
This has obviously outraged a lot of people.  Naturally. Especially as the UK desperately needs all the tax revenue it can get.

Let's try and untangle some of what's going down here with Barclays. This is as I see it.

Of the overall total tax bill Barclays paid of £1.3billion, £200 million or so related to the sale of Barclays Global Investors' (BGI) - (and the large profit involved in that sale is due to the hugely generous rules on capital gains by corporates introduced by Gordon Brown, a great friend of powerful corporations.  Did you think it was only Tony Blair  who liked the rich?  Check again,  Brown cosied up to the rich, too. ) -  and the rest to ordinary activities.

In June 2009, BlackRock agreed to acquire Barclays Global Investors (BGI) from Barclays for about £13.5 billion - this was reported to be one of the largest deals in the money managment industry.
Under the terms of the deal for BGI,  Barclays received $6.6bn in cash and a 19.9pc stake in BlackRock, worth $6.9bn.

The deal was also said to produce a windfall of about £607.5m for 200 of the most senior staff at BGI, including the truly dazzling Bob Diamond, the president of Barclays, who was said to receive approx. $30m,  and joins the Black Rock board. (And who is rumoured to be in line for a £9m bonus from Barclays).

In 2008, if you remember, unlike several other major banks Barclays resisted taking a bail-out from the Government as crisis swept the through the system, so this injection of cash  strengthened Barclays' capital position, and its financial position was given a green light from the Financial Services Authority.

 The current rate of corporation tax in the UK is 28% but Barclays only pays 23%  -  good tax planning, that. Global banks like Barclays, which has hundreds of overseas subsidiaries, including many in tax havens,  do not generate all of their profits in their domestic market.

Barclays biggest commercial loan book is in the US, but its biggest retail operation is in the UK. Around 78% of its profits come from Barclays Capital, believed to be largely located in London and New York.  Yet only 10% of Barclays worldwide corporate tax is paid in the UK.

This seems to be because Barclays,  a UK bank , is able to offset all its head office costs and all its losses on Barclays Corporate (and there may be losses in Europe, too) into the UK to offset what profits it does make here, so paying a astonishingly low amount of tax in its home country, the UK. 

Barclays says:
"The corporate tax affairs of an organisation with the global footprint of Barclays are complex and not reducible to simplistic comparisons.  Any link between Barclays Group profits and the amount of tax paid to the UK government is inappropriate - there is no direct correlation between the two." 
The Cayman Islands

A disingenuous reply, of course. As though having 30 subsidiaries in the Isle of Man, 38 in Jersey and 181 in the Cayman Islands,  is unconnected with tax? It is connected with tax, but nothing of what Barclays has done is illegal.  They are a business operation and their job is to maximise their profits, not to help bail out the UK.

On the other hand, the job of the UK government is to protect the interests of its citizens and get the economy back on track as soon as possible.  So the fact that income tax which might have been paid into the Treasury coffers, thus helping  to ease the present financial climate,  has been diverted to lower-tax territory,  creates an awkward situation.

 I am in favour of tax havens. Often, my hard earned money is taxed and used incompetently, and wasted by the Government, or spent on projects with which I do not agree, and to which I do not willingly contribute.   However, I also strongly believe in the tax system, to fund education, health care, the police for instance, and I would always pay what I am legally bound to pay.  But if I were wealthy and had a lot of money left over, having done my duty by the Inland Revenue I would certainly move that money out of the reach of the Government and put it somewhere safe, in a low taxed territory. And then,  I would have more of my money to devote to causes in which I passionately believed, and where I could see for myself that the money was
being spent efficiently and doing good.

Tax avoidance, in other words intelligent tax planning, is perfectly legal according to the law of the land. Of course, when the rich, and huge corporations like Barclays, do just that, the Government loses much needed tax revenue.  But after all, it's the Government that makes the law of the land and the Government needs to encourage the rich to come to the UK because it's profitable for the country.

It is a balancing act for the politicians and the economists  and in times of prosperity the system works well. It's only in times of trouble, like the present, when the gap between the rich and the rest of the population becomes too obvious and too large, that resentment begins to build up.

And that has the potential to lead to trouble.

No comments:

Post a Comment