International

Why do multinationals reap the benefits of our country’s infrastructure and services yet contribute almost nothing to the cost of them? Why do workers and the self-employed duly pay up, while major corporations don’t? Is my money in the bank truly secure? Why the financial world must be transformed and how a start could be made on this.

By Rob Janssen

The sums of money lost by countries as a result of tax avoidance are breathtaking. Take Google. In December it was revealed that the Internet giant, with the aid of a fiscal construction via, it should be noted, the Netherlands, had managed to re-route €15 billion in royalties to the tax haven Bermuda. This tax construction, which uses a mailbox firm registered as Google Netherlands Holding in the Amsterdam business district of Zuidas, has had other successes in the recent past. In 2014 the income from royalties amounted to €10.7 billion. A year later it had grown to €15 billion.

The European Commission estimates that countries in Europe lose, as a result of such constructions, a grand total of €1000 billion per annum. Imagine what you could do with that money if you spent it, for example, on health care or education.

The world of tax avoidance is not a shady, screened-off world in which there operate shadowy figures in fedoras and sunglasses. This may be the most bewildering aspect. Tax avoidance is not in itself illegal, and half of it is done openly and nakedly, made possible by governments who play the lapdog to multinationals and the super-rich, approved by their supposedly controlling and framework-setting parliaments. (In English a distinction is made between tax avoidance, which is paying as little tax as possible by legal constructions, and tax evasion, which is by definition done in transgression of the law. Former Labour Chancellor of the Exchequer Dennis Healey said the difference between them was ‘the width of a prison wall’ – translator’s note.) According to German Left MEP Fabio de Masi, the Netherlands plays a crucial role in international tax avoidance. “The Netherlands is a sort of international airport that relays money to tax havens, money on which no tax has been paid,” he says. “It’s a turntable for mailbox companies.” On Oxfam’s list of tax havens the Netherlands stands at number 3. Only Bermuda and the Cayman Islands score ‘better’.

Given that so much tax avoidance is done within the law, clearly the laws need changing. SP Member of Parliament Arnold Merkies has been trying to do this for many years, and step by step he is making progress. Last year, after the revelations emerging from the Panama Papers, Merkies took the initiative to introduce a new instrument into parliamentary procedure, the “parliamentary examination” or “interrogation”. Something between a parliamentary enquiry and a hearing, it enabled summonses to be issued to tax avoiding multinationals, obliging their representatives to testify under oath, which amongst other things enabled Parliament to get a handle on the often extremely complicated constructions being used. Are multinationals so very clever then? The highly paid lawyers and mathematicians who hatch their constructions certainly are. Merkies’s initiative found majority support in Parliament and the parliamentary examination went ahead.

The SP has also successfully demanded obligatory public transparency for multinationals in relation to what taxes they do pay in the countries in which they are active. And in order to bring an end to practices by which multinationals use the regulations designed to prevent double taxation end up paying none anywhere, another initiative from Merkies which gained the backing of a majority in Parliament led to the drawing up of a blacklist of tax havens and the imposition of a tax on moneys flowing into those countries from the Netherlands.

“We didn’t know!”

Tax avoidance, often described as ‘legalised theft’, is one thing; but what to think of banks and other financial institutions which to say the least have acted irresponsibly and later had to be propped up with taxpayers’ money?

The credit crisis of 2008 brought to light a great deal of information relevant to this. There were unbelievable, often sensational stories about banks and other institutions which had gambled en masse on anything and everything . There were those who had ‘invested’ countless billions in projects which turned out not to exist at all. Those who had not a clue just what their rapid traders in London and New York were up to. And who went under after it turned out that many of those traders hadn’t, for all this time, known precisely what they were doing either.

Why, moreover, should they have known about it? State surveillance of banks had been stripped bare since the 1990s and the compulsory financial buffers which had to be maintained were a joke. The doors stood so wide open to irresponsible risks, you could have driven a bus through them. Worse still, the higher the risk, the higher the profit and the higher the bonuses paid to those who had made that profit. In addition to which the risks were in reality not being run by the banks, but by the national authorities in the states where the banks were based. Big banks were, after all, ‘too big to fail’. So they had to be rescued with those states’ money, via injections of billions in capital or via nationalisations, money which came from the taxpaying citizen.

This must not happen again, politicians across the world said. Banks and financial institutions must be reined in, surveillance tightened and the financial buffers raised. Yet when it comes to such surveillance, there has in the view of Arnold Merkies, been little improvement, almost nine years after the financial crisis. And the buffers which the banks must maintain? “Whilst it’s true that the rules have been adjusted, it’s been done in such a way that they’re easily dodged.”

Once again in this case the Netherlands plays a special role. Our country came under fire towards the end of 2015 in connection with the ‘cocogate’ affair. Cocos (‘contingent convertibles’) are risky financial products created after it was made compulsory for banks to maintain higher buffers. But in reality cocos gave the banks the possibility to have someone else cover their risks. “That’s what you see all the time,” says Merkies. “Banks devise all kinds of ways to create the impression that they have few risks on their balance sheets.” But that’s not the only things that’s dubious, because the affair itself turned on the fact that the Finance Ministry had allowed three Dutch banks, including ING, to contribute to the writing of a law making cocos tax-deductible for banks. Brussels warned that this could be seen as unauthorised state aid, and established an investigation.

Mercedes 200D

It’s certainly not only in the interests of the banks, as both important buttresses of the economy and as employers, that they are financially sound, as banks which are not can present unpredictable risks. It’s principally in the interests of the millions of citizens who in fact stand as guarantors for the banks’ trades, with both their taxes and their savings. So it’s disturbing to see that in Italy too the taxpayer has been forced to rescue the scandal-ridden Montei dei Paschi bank, whose problems came from bad policies, incorrect estimates in relation to derivatives, and bad loans. Last month it became known that the Italian state had spent €20 billion on rescuing the bank, a controversial measure as according to the new European regulation all shareholders and bondholders must pay up before the state can act. So, despite the strict rules – here we go again.

Montei dei Paschi, the world’s oldest bank, established in 1472, was now dying as a result of the huge risks it had taken, until it was rescued by the taxpayer. In the Netherlands Rabobank, from way back the cooperative bank which could be found in every village, traditional partner of small businesses: in 2013 it was found to be implicated in the Libor fraud, which involved meddling with the actuarial rate on loans between banks . This swindle, it should be noted, largely took place after the outbreak of the credit crisis. Then there’s Deutsche Bank, until recently the silent power behind the German economy – boring and grey, but as reliable as the diesel engine of the old Mercedes 200D. Now, and for some years, it’s in the sights of the United States Justice Department because of unsavoury practices in the US involving mortgage packages which, once sold on, turned out to be worthless.

After all of these misbegotten policies and all these instances of fraud, you might expect official supervisory bodies as well as governments to be flexing their muscles. On the contrary. The Italian government, to the exasperation of the European Commission, rejected the ‘bail-in’, under which as explained above share- and bondholders must cough up first. Deutsche Bank last year agreed to pay $7 billion under an arrangement with the US Justice Department for their fraudulent practices in relation to mortgages. The Americans had originally asked for twice that figure, but the Germans refused point blank to pay this. It’s somewhat bizarre that banks can apparently negotiate the level of their fines. You might like to try this, if for example you’re done for speeding.

And the Rabobank? They got, it’s true, a substantial fine for the Libor fraud, but since then the Dutch government has left them in peace. The Public Prosecutor agreed to accept €70 million. Arnold Merkies has repeatedly called for further steps to be taken against the fraudulent bank, but the government has been reluctant to act. “’Arrangements’ aren’t in this case in principle suitable,” says Merkies. “In the context of the building fraud scandals we agreed that no arrangement would be accepted when it concerned such extensive affairs and such large sums . But Ivo Opstelten – then Minister of Security and Justice – told me at the time that it was all too complicated. Can you believe

that? This sort of affair is always complex. So what I would say is we should make sure the Public Prosecutor’s Office has sufficient capacity to unravel such matters.”

Prison sentences for whistleblowers

Does then a culture of total impunity prevail in the financial world? Not exactly. But to find the exceptions we need to move to the other side of the table. In June last year two whistleblowers who revealed aspects of the notorious Luxleaks affair were condemned to suspended sentences of respectively twelve and nine months. Raphael Halet and Antoine Deltour, who were employed by PriceWaterhouseCooper, had made public documents regarding secret tax agreements between governments and multinationals such as Ikea, Pepsi and Walt Disney. The Luxleaks affair also revealed the fiscal deals between the Dutch government and Starbucks. Even French journalist Edouard Perrin, who was the first to speak about these revelations on TV, was arraigned for ‘receiving stolen property’, though he was later acquitted.

You couldn’t make it up. People who revealed large scale tax evasion are condemned, while those who made the deed possible go scot free. But you don’t have to make it up: it’s the reality. Just as is the idea that the average citizen on closer inspection is acting in two ways as guarantor for the lunatic adventures of the financial world. In the first place with his or her savings, with which bankers elsewhere can have adventures; and secondly with his or her taxes, with which governments can drag banks out of the mire should these adventures go horribly wrong. And woe to any citizens who make a single mistake on their own tax returns.

This article first appeared in the original Dutch in the SP monthly Tribune in January 2017.