Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Business ethics in the former Socialist Republics of ‘Eastern Europe’ have evolved, by and large positively, over the last 25 years, but from a deplorably low base. Oligarchs, corrupt civil servants, politicians, judges and policemen, you can find them all on the beaches of the Riviera, even if nowadays you might also find a few honest businessmen.

luxury

In two previous posts I’ve written about the moral vacuum of the early ‘Wild East’ days that followed the collapse of a socialist utopia where all were equal losers, and I’ve outlined the opportunities that sadly still exist for the exploitation of business partners, competitors, and employees. These misdemeanours, though practiced with an easier conscience in Eastern Europe, aren’t at uncommon in the rest of the world either, especially those related to tax.

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

There are many other kinds of victim. Let’s continue….

Suppliers.

Unfortunately suppliers, too, like to be paid for what they supply you with or do for you. They, too, have designs on your money. What can you do to avoid this?

  • One option is simply not to pay them.
  • Another is to screw them in terms of the demands you make, and the prices you force them to accept.
  • But best of all, is to be them, so that when you do pay them you’re actually paying yourself.

When large state companies were broken up in the early 1990s one common trick was to set yourself up as the owner of an essential supplier of the larger company you worked for. You might even arrange to buy a spun-off supplier at a knockdown price. You could then arrange for attractive deals to be done with the company that you own.

I believe you must treat suppliers fairly. One of our earliest multinational customers was Johnson & Johnson. They make consumer goods, medical devices and medicines. They’re generally a delight to work for, reasonable in their demands, and prompt in their payments. In each of their offices they place their Credo on the wall where staff, customers and suppliers can see it. Amongst the usual blah-blah about customer care and quality (which, of course, they do take extremely seriously) was something that I was pleased but surprised to see – a sentence that goes something like this: ‘We will treat our suppliers reasonably and we understand that they must make a fair profit.’ This is not an understanding common to all businesses. For most, the game is one of ‘screw the supplier’ as if the contract is a zero-sum game. A supplier’s profit is the customer’s loss. We’ve recently seen Tesco in the UK criticised for this approach.

My company, LLP Group, is fortunate in dealing with international companies, who are, by and large reasonable (we haven’t yet worked for Tesco) but I know that Eastern European companies abuse their suppliers with relish. In one instance, one of Russia’s oil majors abandoned their efforts to implement the software we’d sold them for their subsidiary in Romania, and simply chose not to pay us the 50,000 EUR they owed us, with complete impunity. There was nothing we could do about it. Lawyers are too expensive and, anyway, it would have taken at least three years for the case to come to court.

In running LLP Group I take the view that one must pay one’s suppliers promptly according to agreed terms, unless there are very good reasons not to. It is a moral duty as well as a legal duty.

Tax Authorities.

No one pays their taxes eagerly, but in most countries there’s at least a modicum of trust between the taxing and the taxed. We recognise, reluctantly, that the taxman and woman represent the country’s real interests, and whether we quibble or not about refugees and benefits, there are roads to be built, armies to sustain, and hospitals to run. In Eastern Europe there is no such consensus that Governments tax justly and spend sensibly.

Just the other day, I was offered the opportunity to wriggle out of the 15% withholding tax that I must pay on dividends I pay myself from the company.

‘I think 15% is reasonable,’ I said. ‘I’d pay much more tax if I lived in the UK.’

‘You wouldn’t think it reasonable if you knew how much the Government steals, or wastes,’ was the reply.

There are always two ways of reducing your tax bill. There’s the legal way, which is called avoidance, and the illegal way, called evasion. The practice isn’t peculiar to Eastern Europe, and I’ll refer to some Western businesses to illustrate some of the most common tricks.

Now, avoidance is fun. It’s a creative art. There are probably as many ways of avoiding tax as there are tax laws multiplied by the tax consultants who can help you circumvent them.

These are some of the obvious scams. They’re immoral even if they’re not illegal and they’re used by some of the largest and most successful companies in the world, such as Google and Starbucks.

  • You can ‘Google’ (a new meaning for the word) your intellectual property to a tax-efficient location and siphon your profits away from higher-tax locations (we were once advised to register the ‘LLP’ brand in Luxembourg and then bill all our subsidiaries for its use)
  • You can ‘Google’ your invoices from a tax-efficient location and claim that that’s where the sales took place

The fact is that Google and Starbucks aren’t actually breaking the law. If they were, prosecutions would have been brought. If they’re making deals with the tax office and paying a little more into the public coffers, it’s only for PR purposes (for the benefit of both parties) rather than any admission that they’ve filed their tax returns incorrectly.

Google defiantly claim to make its sales, and therefore, its profits, in Ireland. But what makes a sale? What establishes the physical location and the tax jurisdiction of a sale? Is it a matter of where goods and services are received? Or the location of the company that’s paying? Or where the bill is printed and booked? Or the location from which the goods and services are delivered? These are difficult questions.

Should taxes be levied on sales value at the customer’s location (as Lord Lawson has recently suggested) or on ‘profit’, something that international companies, especially in the service sector, find it easy to manipulate. Place some intellectual property (such as the Starbucks logo and methods) in a low-tax jurisdiction such as Luxembourg and you can get away with charging around 7.5% of revenue to your subsidiaries for their ‘use’ of the corporation’s branding. That takes care of most of a company’s taxable profit (who makes much more profit than 10% of revenue?).

I don’t see an easy solution to this problem. Taxing sales, on the basis of the location of the recipient of goods or services, would be very cumbersome to administer and an impediment to economic activity. My company, for example, would find itself paying taxes in more than fifty countries each year? How could those states audit the correctness of our calculations?

So, there’s the ‘sales location’ scam that suits companies, such as Google that deliver intangible items and there’s the intellectual property licensing scam that suits companies such as Starbucks where operations are delivered by a subsidiary but ‘designed’ elsewhere.

And there are countless other scams, such as the insurance scam. A large international company can set up an insurance agency in a low-tax jurisdiction and charge large premiums to subsidiaries elsewhere. Profits are thereby transferred. All of these acts of tax avoidance are immoral, but they’re not usually illegal.

But is tax actually a moral issue? In their defence, managers of these large international companies cite their duty to shareholders to maximise distributable profit, as if ethics are irrelevant. But ethics are important, and it is left to the owners of small companies such as mine, answerable only to a small group of shareholders, to make moral choices when it comes to tax avoidance. In my view it is wrong to avoid tax through clever, energetic, distorting manoeuvres. Somehow tax law needs to build on our sense of what is ‘appropriate’ and ‘natural’ when it comes to tax. We all know when people are being evasive, and we all know when companies are being evasive. But how to capture that in definitions that will ensure a level playing-field, as the law does?

Tax harmonisation, of course, would solve some of these problems, since one country couldn’t outmanoeuvre the others by offering the incentive of lower taxes, but even so, a large international company could still obtain economies of scale by placing all of its administration and tax affairs in one place rather than in many.

Next time, we’ll look at evasion.

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2 thoughts on “Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

  1. Business Ethics in ‘Eastern Europe’ – Tax Evasion and Other Ills – Adam Bager

  2. Business Ethics in ‘Eastern Europe’ – Concluding Thoughts – Adam Bager

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