Barclays has won one battle, but it looks as if the war is going against it. The UK bank prevailed in its legal effort to keep internal documents describing complex tax wheezes off the Guardian website. Public interest was trumped by the principle that some business documents can be kept confidential.
The bank was aggressive in calling on the law (it got a preliminary injunction at 2am) but has been more defensive about the issues. Actually, it is defending some past aggressions – against the not-so-potent fortifications erected by tax authorities around the world. The bank was widely considered a master at shuffling money across borders and through different legal structures in ways that reduced its own and its clients' tax bills. Taxes, tax loopholes and tax avoidance have gone together for longer than anyone can remember. Politicians like using taxes to promote particular policies. Lobbyists seek favours for their clients, and each nation has its own variations on the theme of complexity. The tax world is like a cloth marred by thousands of loopholes. Governments have moaned about such fiscal engineering for years. Poor countries often find that many residents who are rich enough to pay taxes are all crafty enough to avoid them – quite legally. The authorities can end up desperately short of funds. In developed economies, the problem isn't the total tax take. Higher tax rates can make up for revenues lost by from the clever practices of Barclays, its imitators and its rivals. But the game is expensive, and the results unfair to those without the resources to hire the best experts. Normally, cracking a problem this intricate would be close to impossible. But the financial crisis has cast a new and unflattering light on much of what goes on behind bank doors. It looks like the zeitgeist has changed. Could close-to-the-wind tax strategies fall prey to the anti-finance mood? The economic crisis seems to be emboldening politicians. In the runup to the G20 summit next month, there has already been significant progress cracking down on tax evasion. Frightened by the new resolve, jurisdictions including Switzerland and Liechtenstein have agreed to give up on some of their formerly fiercely defended bank confidentiality.
Tax "avoidance", which is legal, could be the next frontier. It no longer sounds quite right to say that advisors such as Barclays have a "fiduciary obligation to our shareholders …. to manage tax in an efficient way", as the bank's chief executive explained to a House of Lords committee on Tuesday. The new mood dictates a new sentiment: deliberate and exotic tax avoidance is a betrayal of the public trust. Of course, one person's unacceptable manipulation of the complex tax law is another's fair use. The best way to crack down on avoidance is to have fewer loopholes, which would make lower tax rates possible and tax avoidance less remunerative. The zeitgeist may not have changed enough for that. But while waiting to find out, there are several things that can be done. The existing doctrine of "economic substance", under which transactions need to have some genuine purpose beyond avoiding tax to be viewed as valid, should be enforced more vigorously. The UK is moving in that direction with a proposal of a code of practice for banks that calls on them to follow the spirit, as well as the letter, of the law. Another route is to focus on the international dimension. Many avoidance schemes involve offshore tax havens. Perhaps the G20 can persuade them to pay closer attention to the operations of any fiscal migrants. Alternatively, if the tax havens refuse, they could be blackballed, so that all transactions routed through them would automatically face greater scrutiny from the tax authorities. Finally, those authorities should be more appreciated. Barclays' tax bosses are thought to be paid millions of pounds and, in some cases, tens of millions of pounds a year. The populace would be up in arms if civil servants on the other side of these cases received anything more than a small fraction of that. Some of the smart guys will always prefer to be rich poachers rather than relatively poor gamekeepers. Still, there should be ways – more pay, honours and perhaps some bounty payments – to make tax battles more evenly balanced.
The authors are editor in chief and assistant editor of Breakingviews.com. An earlier version of this article appeared on the Breakingviews website
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