Sucheta Dalal :R16;Tax traitorsR17;: comparisons and contrasts (16 September 2002)
Sucheta Dalal

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‘Tax traitors’: comparisons and contrasts (16 September 2002)  

Although the Bush administration in America continues to be accused of being pro-business, the rest of America seems determined to go the other extreme. If it was the New York State attorney, rather than the powerful Securities Exchange Commission who made Merrill Lynch cough up a $100 million for the fishy stock recommendations by its analysts, then the California State Treasurer is closing the gates on tax dodgers.

The most populous US State has decided that it will no longer do business with, or invest in companies that have moved their headquarters to offshore tax havens such as Bermuda or the Cayman Islands to avoid paying taxes in America. In effect, California, whose State treasurer’s office controls $45 billion in state and local funds has said that its doors are closed to companies that have a post box overseas as its official headquarters. It has gone ahead and listed 23 companies that are no longer acceptable as business partners and has asked two massive California public pension funds to pull out $750 million from them. California’s State Treasurer Philip Angelides has said that companies who hide behind post-boxes are shirking their duty as Americans and undermining confidence in the financial system. He told the press; ‘We will use our clout as investors to let companies know that we will not tolerate this type of irresponsible conduct’. Angelides is more powerful than his official position suggests. He is on the board of the massive California Public Employees Retirement System (CalPERS) and the State Teachers’ Retirement System (CalSTRS) who together have over $250 billion in investible funds.

The companies on Angelides list include: Accenture, APW, Cooper Industries, Everest Re, Foster Wheeler, GlobalSantaFe, Gold Reserve, Ingersoll-Rand, LEucadia National Corp, McDermott International, Noble Corp (Drilling), Transocean Offshore, Tyco International, Veritas DGC and Weatherford International. Of these, Ingersoll-Rand, the controversial Tyco, Accenture (formerly part of Arthur Andersen) and PriceWaterhouseCoopers have reportedly decided to move their corporate headquarters out of California. But if large funds such as Calpers do boycott these companies, or other States follow the California example, where would tax-dodging companies run?

That’s not all. The US Senate in September approved an amendment to the homeland security bill banning government contracts for companies that have reincorporated in offshore tax havens to escape US taxes. Pretty soon, American companies may have no option but to pay higher American taxes if they want to remain headquartered in that country.

Doesn’t this compare with all those Mauritius- based Overseas Corporate Bodies (OCBs) who have not only avoided Indian taxes but also indulged in rampant speculation without fear of disclosure or punishment? Also, doesn’t the California action suggest that we too need some fresh thinking on tax concessions given to foreign institutional investors? In fact, the income-tax department, after a recent court decision is well empowered to force drastic changes in FII tax exemptions. Will the new American thinking that it is ‘unpatriotic’ to avoid taxes and operate out of tax havens make a difference? After all, it would now be hypocritical for FIIs to threaten to pull out of India when some of their home countries have decided to measure patriotism in terms of tax payments. Clearly, the massive movement that is brewing in America against what are called ‘tax traitors’ holds interesting comparisons and contrasts with the Indian situation. In the US, the Brookings Institute, a highly respected Washington based think tank has estimated that the wave of corporate scandals will cost the US economy an estimated $35 billion. This it says is the equivalent of what the US spends on homeland security or equal to a $10 per barrel increase in crude oil prices. The American middle class, who finds its savings and investments gobbled up by corporate scandal, seems determined to force some changes. So much so, that every dubious but accepted market practice is being questioned, re-examined or banned.

Interestingly, some of these practices were always suspicious remained unquestioned until the accounting scandals and the mega bankruptcies began to gobble up the retirement benefits of middle class Americans. In contrast, the Indian market, probably because it is smaller and more prone to a serious downturn, has sometimes reacted to a few shady business practices much faster. Let me cite two examples.

American regulators are outraged at leading industrialists and lawmakers getting ‘special access’ to hot IPOs managed by leading investment bankers. Since these stocks were sure to appreciate on listing, they allowed the likes of WorldCom’s Bernie Ebbers to make millions of dollars on their ‘investments’. Is this practice any different from the promoters’ quota shares that were being freely handed out to influential industrialists, businessmen, bankers, bureaucrats and journalists in the late 1980’s? Sebi chairman G.V. Ramakrishna put an end to the pernicious practice by listing down the privileged allottees and sending it to their parent organisation in 1992. In India, investment bankers had no discretion to decide IPO allotments—they were forced to follow a formula. With the introduction of book building, however, investment bankers (especially those with foreign partners) began to demand and justify such discretion because it was an accepted international practice. But investors’ complaints and the dead IPO market forced Sebi to introduce some minimal restrictions a few years ago.

Financial institutions and banks continued to lend recklessly and create bad loans and the massive UTI steadily ate into its huge reserves until it went bust. But even the first bailout of 1998 (a massive Rs 3,300 crore) failed to ring any alarm bells or shake the Indian middle class out of its complacent stupor. These bad loans or ‘loot’ of the banking system is entirely due to corporate control over government. Even today, when over Rs 20,000 crore of taxpayers’ money has been earmarked to bailout just three institutions —UTI, IFCI and IDBI—there is no public demand to cleanse the system or punish the guilty. Unfortunately, we do not have a Ralph Nader who is campaigning in America to ‘end to corporate control of government’

-- Sucheta Dalal