Now the Tories are allowing big business to design their own tax loopholes

 Illustration by Matt Kenyon

Aditya Chakrabortty in The GuardianShare on Pinterest

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Last Monday, as the prime minister rehearsed his Manchester conference speech, a story appeared in this newspaper that showed you who really runs this country – and how. It revealed that one of Britain’s largest companies, AstraZeneca, paid absolutely no corporation tax here in both 2013 and 2014, despite racking up global profits in those years of £2.9bn.

Revealed: how AstraZeneca avoids paying UK corporation tax


At first glance this sounded like an everyday tale of Mega-Business Making a Mockery of Our Tax Laws, to be filed alongside Google, Starbucks – or this weekend’s disclosure that Facebook paid less to the exchequer last year than you probably did. But this story is bigger. It’s less about accountancy than where power lies in 21st-century Britain.

Astra’s tax maestro is called Ian Brimicombe, and he is more than well-known at the Treasury: he is a trusted adviser. Shortly after George Osborne took over as chancellor in 2010, his team began rewriting the rules on how big businesses are taxed. To help, the government appointed senior executives from some of Britain’s giant companies to a “liaison committee”, comprising Astra’s Brimicombe, representatives from Tesco, Santander, BP and others.

Although the group was not widely reported, there was no disguising its purpose. In the Treasury’s own blunt words, the businesspeople were providing “strategic oversight of the development of corporate tax policy”.

Corporation tax alone is one of the biggest earners for the government, worth over £50bn a year – and now companies with millions, even billions of pounds at stake were to be given direct say on how they should be taxed.

The Treasury set up working groups specifically to advise on taxing multinational business – fitted out with directors from 40 multinationals, all with extensive networks of offshore subsidiaries. In his book The Great Tax Robbery, the former tax inspector Richard Brooks records that a Vodafone representative was put on the group “deciding how to tax offshore financing of exactly the sort his company was running through Luxembourg and Switzerland for hundreds of millions of pounds in tax saving every year”.

The new regime for multinationals began in 2013. Within five months,AstraZeneca had set up an unusual and intricate Dutch tax avoidance structure that would enable it to take full advantage of the new loopholes it had so helpfully advised on. To call this a conflict of interests is to miss the point – it’s far too brazen for that. Osborne’s Treasury blithely invited in some of the country’s biggest businesses and asked them to help design their own tax regimes. It’s like trawlermen asking fish to design their nets, or the Highways Agency allowing Jeremy Clarkson to set his own speed limit.

It might even be funny – if all these giveaways didn’t cost hundreds of millions amid a decade of belt-tightening. In their original assessment, Treasury officials calculated that the relaxation of the controlled foreign company rules would cost the public around £840m by this tax year. That’s getting on for the equivalent of three brand-new, fully staffed hospitals. The year 2013 also marked the start of the most severe cuts to social security, including the introduction of the bedroom tax. That particular cut has inflicted panic and upheaval on some of the poorest households in Britain, yet going by academic research it raises less half the amount given away to multinationals by the new controlled foreign company rules.

I write this – but we’re not even allowed to know how much money we’re giving away to Astra, Tesco and the rest. The Treasury’s initial assessment of the new rules came with a vital postscript: “The government would welcome evidence from business to help it refine the estimates of the elements of cost of the CFC reform.” Or, translated from the mandarin: this is guesswork.

When the tax-justice campaigner George Turner submitted a freedom of information request last month to find out how much the new system was costing taxpayers, Osborne’s department told him it would take too much time to find out. Turner persisted: what about the new patent box tax break, originally set to cost the public £900m? No luck there either. So ordinary taxpayers may have kissed goodbye to £1.8bn in school places and Sure Start schemes – or they may have lost a lot more. We won’t be told what’s happened to our own money.

These tax breaks aren’t in aid of struggling small businesses or innovative new tech firms: they are going into the coffers of the biggest companies in Britain, with their platoons of lobbyists and tax advisers and their web of connections into Whitehall.

The year before the government brought in these new tax breaks, AstraZeneca was granted £5m to encourage it to expand its research site at Alderley Park in Cheshire – money that the local MP (one G Osborne of Tatton) played a key role in securing. Just five months later, the drugs giant announced it was closing the centre, with the immediate loss of 550 jobs. From 2007-14, calculates York University’s Kevin Farnsworth, AstraZeneca took £91.3m in joint public funding from the government’s Innovate UK research group.

Britain is in the middle of a cold, austere decade. Ordinary taxpayers are having to tighten their belts – even while multinationals are being lavished with public cash. Osborne and Cameron tell tax-avoiding companies to “wake up and smell the coffee”, yet undercut the rest of Europe on taxes so as to lure Starbucks to put their offices in the UK. Tax avoidance is normally painted as big businesses finding and exploiting loopholes; but the Conservatives are now allowing those same outfits to design their own loopholes.

“Upwards redistribution” is how the Berkeley academic Gabriel Zucman describes it: taking from ordinary taxpayers and giving to the very richest. Zucman is a sometime co-author with Thomas Piketty and his new book The Hidden Wealth of Nations is set to do for tax havens what his colleague’s did for wealth inequality: define and popularise the problem.

“Britain is now engaged in the most extreme form of tax competition anywhere in Europe,” he told me this weekend. “It’s trying to become a tax haven.” This is what economic competence now looks like in the UK: an officially driven attempt to turn a developed country into a competitor to the Cayman Islands, with lavish handouts for those who can afford it, and cuts for those who can’t.

Pfizer's bid for AstraZeneca shows that big pharma is as rotten as the banks

Global pharmaceutical companies are dodging the risks by loading R&D costs on to taxpayers

• Mariana Mazzucato
• The Observer, Sunday 11 May 2014

Every one of Pfizer’s patented drugs benefited from decades of taxpayer funds. Photograph: Canadian Press/Rex

Countries around the world are seeking long-run, innovation-led growth in the "real economy". This is born of a wish to move away from speculative growth led by short-term financial markets. For this reason, industrial policy is back on the agenda after years of being a near blasphemy.

The life-sciences industry is top of the list, for both Barack Obama and David Cameron, of "real" industries to nurture through such policy. But this month they have been reminded of an uncomfortable truth: big pharma is just as sick as the banks. And, like speculative finance, it is hurting taxpayers in the process.

Pfizer wants to buy AstroZeneca, a British firm, to cuts its high overheads and especially to pay the lower UK tax rate (20%) – the cheap way the UK attracts "capital"– rather than the 40% US tax rate. This is nothing new as Google and Apple have been shifting profits around the world to avoid tax. Even within the US, Apple moved one of its subsidiaries to Reno, Nevada to avoid paying higher tax in Cupertino, California. Let's call it a race to the bottom.

What makes this dynamic particularly problematic for the taxpayer is that the knowledge behind Apple and Pfizer products – the key to their long-run profits – has been virtually bankrolled by that same taxpayer. As I discuss in my book The Entrepreneurial State: Debunking Private vs Public Sector Myths, every technology behind the iPhone was publicly funded (internet, GPS, touch-screen, Siri) and every one of Pfizer's patented drugs benefited from decades of taxpayer funds through the US National Institutes of Health, which in 2012 alone spent £32bn (£19bn).

Indeed, Pfizer's recent shift of one of its largest R&D laboratories from Sandwich in Kent to Boston was not due to the lower taxes or regulation in Boston but to be closer to this pot of gold. Coming back to the UK only to suck more blood out of the system should warn the government of the kind of image it wants to present of itself. Is it happy to be played front and back?

And what is happening to big pharma's research and development? In the name of "open innovation" – the admission that most of their knowledge comes from small biotech and large public labs – big pharma have been closing down their own R&D (reducing total numbers of researchers), as well as moving the remaining ones to be close to those labs.

Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas, most of which will fail. It has become more risk-averse and prefers to focus on the D of R&D and please shareholders. Mergers and acquisition strategies reduce expensive overheads and costs (of which research infrastructure is the highest).

Things become even clearer when we look at the numbers behind one of their biggest expenditures: share buybacks. These are geared to boost stock prices, stock options and executive pay. Indeed it is this type of dynamic that has been driving the extreme inequality described by Thomas Piketty. The calculations of Professor William Lazonick suggest that in 2011, along with $6.2bn paid in dividends, Pfizer repurchased $9bn in stock, equivalent to 90% of its net income and 99% of its R&D expenditures.

While the justification for such buybacks is often that there are no "opportunities for investment", the increased public funds in pharma research shows who is funding the opportunities and who is free-riding. Though in the end both lose since without an engaged private partner, innovation suffers.

To make matters worse, these "innovative" companies advising governments on their "life-sciences" strategies are constantly seeking handouts through R&D tax credits, or more recently through the UK  Patent Box tax scheme introduced in 2013 (as well as in the Netherlands, Belgium and Spain, and soon in the US), with a 10% tax for income earned on patented drugs.

Patents are already monopolies with 17 years' protection. There is no reason to increase profits even more during that time. Especially as what drives the research that leads to patents is not the "cost" of the research, but the opportunities that are perceived—historically driven by large amounts of risk-loving public funds.

Experts from the Institute for Fiscal Studies have argued that this policy will diminish government revenue by about £2bn a year, and have no effect on business investment in research – which was meant to be the point. Indeed, private investment tends to follow well-funded public investments, that are of course undermined by the constant bashing away at the ability of government to collect tax revenue. This not an innovation strategy but a City-like speculation strategy.

The parallel goes even further: just like the banks, big pharma socialises the risk, but privatises rewards. The few drugs that are coming out would not have emerged without taxpayer-funded research. Yet the taxpayer then pays twice: first for the research then for the high prices, justified by the supposedly high risk that big pharma is taking on. This is almost surreal: what risk? And what about taxpayer risk?

Rather than empty words on a life-sciences strategy, what is needed is for policymakers to become more confident in their negotiations with business. The 1980 Bayh-Dole act that allowed publicly funded research to be patented says that government should have a say on the prices of the drugs. The fact government has never exercised this right shows who has the upper hand.

But things can change. Innovation policy should be linked to corporate governance – why should companies that spend more on share buybacks than R&D benefit from public research funds? Then "intelligent" R&D tax credits could be created, linked not to the income generated from R&D but the research labour hired to conduct it (as introduced in the Netherlands).

Government could also retain a golden share of the intellectual property rights (patents) which public research produces, and/or make sure that the prices of the new drugs reflect how the taxpayer paid for the most high-risk research. And, finally, given the high dependence of the industry on publicly -funded R&D, do not allow acquisitions that undermine the underlying research base the companies themselves should commit to - and for which they constantly request handouts.

In short, we need to start fostering a more symbiotic innovation eco-system. It's time to put an end to the current, increasingly parasitic one. We could start by realising that government does have power to actively shape and create markets, and not just fix broken ones.