May 02 2011

The curious Dave Hartnett and Goldman’s sweetheart tax deal

Posted by: Nick Shaxson in: Thoughts

On pages 273-4 of the UK edition of Treasure Islands I meet an insider at HMRC, (UK tax authorities) who explained how Dave Hartnett, HMRC’s boss, would routinely reach right down into multinational tax cases my informant was dealing with, and would settle them over my informant’s head, and without consulting lawyers. No explanation would be given for the sweetheart deals – although Private Eye has diligently exposed some of these, such as Hartnett’s notorious deal with Vodafone.

Now the Eye has a new story, this time about Hartnett’s special arrangement with that great “Vampire Squid of Capitalism,” Goldman Sachs.

“Papers seen by the Eye reveal that Hartnett personally “shook hands” on a deal over a long-running dispute concerning a tax avoidance scheme going back to 2002, without consulting HMRC lawyers. . . . The scheme concerned an offshore “employee benefit trust” used to pay bonuses to Goldman’s London bankers, who for secrecy reasons are employed by a British Virgin Islands company called Goldman Sachs Services Ltd.

And the deal seems to be just the way my informant described it:

“Enter the amenable Mr Hartnett on a job way below his pay grade. Minus awkward legal brief, he quickly met Goldman Sachs and agreed the interest-free deal.”

Treasure Islands, in the section involving the HMRC informant, summarised the problems nicely:

“The whole culture in HMRC changed. Taxpayers became ‘customers’. HMRC used to assign a ‘case director’ to investigate multinationals; this is now a ‘customer relationship manager’ charged with building a happy connection.

“We used to have a priority to collect tax,” my informatn said, “now we have a priority to have a good relationship. We have got into a situation of persuading outselves that it is a win-win for us to have businesses pay their taxes voluntarily, rather than have us take them to litigation.”

It’s saddening for the ordinary taxpayers of the UK.

Oh, and the Private Eye story comes with a nice little P.S.

“The cushy settlement may or may not be related to a simple entry on Dave Hartnett’s hospitality register for May 2009 which shows that, as the dispute raged, he took “supper” at “Goldman Sachs office”.”

The corruption of capitalism rolls on. More from Private Eye here.

19 comments so far

AlienEdouard 5nd May, 2011 11.00 am

Nick – you can console yourself by thinking that Goldman Sachs is an American company, and that the vast majority of its senior employees (certainly those eligible for the type of offshore compensation arrangements you describe) are US citizens or other non-UK nationals.

Far from being a burden on the UK, Goldman Sachs and its shareholders do the UK the favor of having a substantial presence in London, creating a large number of support or administrative jobs for locals. The idea that the UK tax authorities should try to maintain anything other than “friendly” relationships with Goldman Sachs is simply contrary to the best interests of the UK.

Regarding the arrangements themselves, I fail to understand your or Deep Throat’s problem. The beneficiaries are foreign nationals working in London, who in all likelyhood already make a significant net contribution to the UK treasury: they have cost the UK nothing to educate, put their kids in (mostly American) private schools, rent homes from British landlords, fly home for healthcare and would not even drop dead in a NHS ER, and only cause public disorder through an occasional parking ticket.

These are desirable immigrants who could as easily live in Dubai or Geneva (you know a few things about Switzerland yourself!), and the UK is correct to have very soft approach in their taxation.

Jimmy Robinson 5nd May, 2011 1.59 pm

Hi

It is sad to read that Folks who should know better are resorting it is alleged to wrong doing.
They must know that they will never be given a post where ‘safe hands’ are essential.
Is it that they don’t care?

Regards

Jimmy

Jon Frate 5nd May, 2011 10.15 pm

Amigo, it’s pretty irresponsible to write only part of the story.

I can understand why someone would want to get a case off their desk if it was litigating since 2002. It’s called ‘sunk cost’.

Your informant probably doesn’t have full P+L responsibility. What’s the point of spending 50 dollars if you’re chasing 5 dollars? Your informant must be thinking, ‘oh my god, by settling for $1, we left $4 on the table’, he probably has no financial visibility of the bottom line.

Until you know the whole picture, you shouldn’t reach conclusions like the one that a gossip rag like Private Eye is reaching.

Nicholas Shaxson 5th May, 2011 11.21 am

AlienEdouard, Jon Frate
These are exactly the things they always say. Give these companies what are, effectively, subsidies through the tax system, and grovel enough at their feet – and they will stay. But ask yourself this: for all the trillions of dollars sucked into the City of London – is Britain better off than, say, France, Germany, Sweden? Clearly no: there is clear evidence that the bias towards finance has made it a worse place to be – higher inequality, more drugs problems, more infant mortality, more debt, and so on. I learned this while reporting on oil-producing nations in Africa: on available metrics, their citizens weren’t any better off for all the tens of billions pouring in from the oil. These companies are extracting rents from the UK – that is, rents in the economic sense of the term – and every economic analysis of any sense argues strongly: tax rents highly. (see here, for example http://treasureislands.org/adair-turner-answer-to-financial-failure-tax-banks/ ) Doing some profit and loss analyis, on a highly narrow view, is missing the point here.

AlienEdouard 5th May, 2011 3.47 pm

Nick – a couple of observations if I may:

First, I would not be surprised that someone can twist and turn the data enough to produce “clear evidence” that the bias towards finance has made Britain worse than France, Germany or Sweden. However, I am absolutely confident that nobody can make the case that the massive presence of international institutions in London is not a net positive for the UK economy. There is compelling evidence that other countries with similarly important international financial presence, such as Hong Kong, Singapore or (look out the window) Switzerland are doing spectacularly well out of their finance sector (in fact, none of these countries even had a recession). The UK’s poor performance in comparison is definitely not the work of Goldman Sachs, but the result of other factors, primarily abominably poor government.

Second, your assertion that the international financial sector in London is somehow subsidized is absurd. Its contribution is in fact massively positive: for instance, the 2009-10 bonus super-tax has shown that most bonuses in London are paid by Wall Street firms, followed by European investment banks. The lucky receipients are the mostly non-UK nationals in senior ranks at these firms, who will pay the top marginal tax rate in the UK on their bonuses. Far from receiving a tax subsidy from the UK, the London international finance sector makes a massive contribution out of the income tax paid by its foreign-born and educated workforce. If you add the amounts collected in VAT and other taxes, the scale of the net contribution becomes truly colossal.

I would agree that the likes of RBS (including employees, shareholders, etc.) have benefitted handsomely from the UK taxpayers’ generosity. But the same definitely does not apply to Goldman Sachs.

AlienEdouard 5th May, 2011 4.00 pm

Nick – final side comment.

The analogy with oil in Africa is, imho, poor, but gave me something to think about.

For every African nation that suffered development setbacks possibly related to the discovery and exploitation of oil resources, one can point another nation that did extremely well. Norway, the UK or Canada have thrived on the back of oil discoveries on their territory (even pre-Chavez Venezuela, to a point). There is a lot of excitement about recent energy finds in Brazil and Israel, but nobody is raising any reasonable concer that those will be mis-appropriated.

This should give you a clue that the TJN-inspired tendency to blame “offshore” is absurdly simplistic. There are a very large number of very complex factors at work here, the majority of which are indigneous.

Nicholas Shaxson 5th May, 2011 9.05 am

AlienEdouard – thanks.

You might feel that the City has done Britain a great service, but you are absolutely, fundamentally, wrong about its overall benefits for the nation. The only thing you can show is that it brings in a lot of money. You cannot show that the money has benefited the nation. It is far, far easier to demonstrate the opposite. See here, just for example. http://taxjustice.blogspot.com/2009/04/inequality-in-shocking-pictures.html Those graphs are killers. This data does not prove the link between the City and inequality – other data does that, and few but the most bloody minded of people would doubt it in any case – but it does demonstrate how badly the country is doing in comparison to its peers.

And on the oil thing, I’m sorry to pull rank here, but I’m as well qualified as anyone in the world to make the comparison between oil / Resource Curse and the Finance Curse. You see, my previous book, Poisoned Wells, was the culmination of 13 years’ on-the-ground research in the oil-producing countries in Africa, including two years as the Reuters war correspondent in Angola. I know this subject inside out. And my research into the City of London rang so many bells that I’d never expected, and I began to see so many parallels all over the place. This stuff is real, and it’s harming Britain.

And as it happens, there is little or no evidence that the UK has done well out of its oil – even if the UK has greater ability to redistribute through the tax and spending system than an African country has. In fact, the Dutch Disease and other aspects of the resource curse have been additional factors contributing to those graphs I point to.

And finally, when you say “nobody is raising any reasonable concern” I would urge you to read the FT about Brazil’s energy finds – that’s exactly what everyone’s worried about. But as usual, the fears get lost in all the licking of lips that happen when there’s an oil windfall coming.

So in conclusion, you are wrong, I’m afraid, on every point, and I can demonstrate that you’re wrong.

AlienEdouard 5th May, 2011 11.33 am

Nick –

Some of the things you are coming up with are truly unbelievable, such as “you might feel that the City has done Britain a great service, but you are absolutely, fundamentally, wrong about its overall benefits for the nation. The only thing you can show is that it brings in a lot of money. You cannot show that the money has benefited the nation.” Well, to start with my argument was not about the City generally, but about Wall Street’s significant outpost here (after all the original post was about a special tax arrangement with Goldman Sachs). Let’s imagine for a second that the UK treasury would NOT collect in excess of £5 billion in tax from all these foreign companies and their foreign-born and trained employees. At £25k a civil servant, that is about 200,000 public jobs that would have to go.

And if Wall Street’s investment in London causes such hardhip, how come similar investments in Hong Kong, Tokyo, Singapore, or Zurich did not?

Or “… as it happens, there is little or no evidence that the UK has done well out of its oil”. Let’s add approximately £25 billion to the current account deficit and see what ahappen to the value of Sterling and the local standards of living.

More generally, if one follows your logic, no country in the world should even bother exploring for resources, since any discovery ends up causing this terrible hardship to the local population.
The conclusion of your argument is that we should all go back to live in the stone age, wonderfully equal and happy.

The fact remains that energy, mineral or renewable resources are a wonderful asset to any nation. Norway, Chile and many others (depsite your objections) have demonstrated that it is possible to succesfully exploit them. The constant blame of “offshore” (whatever that means) is a smokescreen to hide local government failings.

As for Brazil’s energy finds, the only concern at the moment is whether they can actually be technologically and economically exploited. Any other worries are really only shared by some very marginal commentators.

Interesting stuff, but your arguments are too easy to contradict.

Nick Shaxson 5th May, 2011 4.42 pm

AlienEdouard. You would do well to receive the literature on the ‘resource curse.’ it’s not some made-up game by academics. I’ve seen it up close, in my face, and researched it on the ground for over a decade. You will then understand the sentence “bringing in a bunch of free money (economists call them rents) does not necessarily make a country’s citizens better off.” You simply have to do a little reading, and then you will understand. And as for your comment about Brazil – again, I suggest you simply read up a little on the subject. You will discover that your statements are factually, demonstrably, untrue.

AlienEdouard 5th May, 2011 7.12 pm

Nick – I am aware of the “resource curse” stream of development economics. As you well know, it is very controversial. In particular it fails to explain why some countries have done exceptionally well out of their resources, whilst others have not. If you had spent in Chile (I have extensive family in the Southern cone) instead of Africa you would have understood that.

Regarding Brazil, we will have to agree to disagree.

My dayjob is calling me so we will have to continue this tomorrow.

Nick Shaxson 5th May, 2011 7.55 am

In response to you assertion that nobody is raising concerns re brazil, well have you taken a look at Google these days? Remarkably useful, it is. A cursory search brings up

Brazil’s oil windfall raises risk of Dutch disease
http://blogs.reuters.com/columns/2010/09/14/brazils-oil-windfall-raises-risk-of-dutch-disease/

http://www.ft.com/cms/s/0/fa11320c-4f48-11e0-9038-00144feab49a.html
Brazil could suffer a more severe form of the disease, the “oil curse”

QED. And on the “done exceptionally well” that simply isn’t true – you confuse anecdotal correlation with causation. These places (you might have mentioned Botswana too) have done quite well in spite of their resources. Look at correlation with a large sample, and it looks very ugly indeed. And what this is about, ultimately, is the City of London and Big Finance. And few people would doubt that the City has made Britain a more unequal place, and one where outcomes for ordinary people are worse than for other simliar countries.

AlienEdouard 5th May, 2011 6.53 am

You are mixing things up here. The “Dutch disease” is an economic phenomenon caused by the reallocation of capital (domestic and international) towards the natural resources sector. The “resource curse” is a social and political phenomenon whereby the income from the exploitation of natural resources is wasted on socially destructive activities (civil war, as is the case with blood diamonds, being the most extreme).

Very different things, and I am sure you know this but choose to ignore it in your argument.

There is some concern that Brazil may go Dutch (in most observers’ opinion the risk is not particulary significant) which justifies a certain level of intervention in capital inflows. Nobody serious is suggesting that Brazil will go the African way with respect to social and political issues.

I also had a chance to look at the graphs you have linked above.
They are only killers for the reputation of whoever put them together.

It is ripe with data mining, and one would be justified to ask why the sample changes from one graph to the next. The most outrageous is the one about social mobility; what does the labeling “high” and “low” of the vertical axis mean, and has the statistician never heard that extreme outliers (such as the USA on that graph) can have undue “power” on a regression analysis so as to make it spurious. For every single graph, there is at least one other factor, which if included in the regression analysis would render income inquality insignificant (it already is in a number of these graphs anyway). I doubt that the statistician has tested for that.

A college freshman would get a Fail for turning this type of copy during Statistics 101, and yet you, the TJN and Murphy use it as the basis of your argument for ever more progressive taxation and benefits. This is just beyond sloppiness.

Nick Shaxson 5th May, 2011 9.00 am

AlienEdouard, really, it’s useful to be well acquainted with a subject before commenting. The Dutch Disease is a PART of the Resource Curse – not a separate thing.

As for your “most observers” what you mean to say is “most observers who don’t know much about the subject.” The statement you make, I’m afraid, is nonsense. I just pulled those stories off a random google search – there are tonnes more to be found along those lines. Try it yourself. As for data mining – this is indeed something that plagues the entire ‘resource curse’ literature. I agree. Different time or geographical frames do produce different results. Yes. But the problem you face is that this thread is ultimately about the Finance Curse, and you have to work very hard indeed with statistical gymnastics to even attempt to show that the UK and the US aren’t worse off than their peers on all the things that really matter, and that the Finance Curse isn’t a big part of the story. I mean just a couple of days ago this came out – there’s tonnes more along these lines. http://bit.ly/jBdu7p

AlienEdouard 5th May, 2011 9.31 am

Let’s agree to disagree on the issues of “Dutch” and Brazil. For every piece on Google, there is some serious anlysis to demonstrate that the risk is not significant.

Regarding the Finance Curse, even admitting for a minute that th UK (or especially theUS) are underperforming, coud you please explain why others countries with similarly vast finance sectors, such as Switzerland, are doing so exceptionally well. This is another way of asking you the same question as above: why is it that some oil extracting nations(Norway, Canada, the US) have done so well, while others (Mexico, some countries in West Africa) have done more poorly?

This is something that the resource curse theory is unable to answer and therefore remains a very questionable area of research.

Nick Shaxson 5th May, 2011 10.08 am

Switzerland has a very different kind of banking model – a lot more private banking (which I hate, of course, but still, it’s different) and therefore the casino banking side was much more diluted. But the casino banking caused Switzerland great harm. Switzerland is doing well for all sorts of reasons. Again, you cite countries that haven’t been entirely killed by oil – such as Norway – and my answer is that they have done quite well in spite of their oil industries, not because of them. Is Norway better off than Sweden? And to be honest, the key to Norway’s success is that kept that money in a huge savings pot, rather than bringing it into the economy. Perhaps britain should have done the same.

Nick Evans 9nd September, 2011 9.14 am

Mr Edouard seems to be confusing the contribution the companies make, through taxation of their profits (which they don’t appear to be very good at looking at their balance sheets) and the income tax paid by their employees. Furthermore, the original thrust of the article (remember that?) was that HMRC has allowed GS to employ their London based employees via some BVI based company, in order to specifically avoid them paying income tax. Therefore benefit to UK=0 and therefore the assertion “The lucky receipients are the mostly non-UK nationals in senior ranks at these firms, who will pay the top marginal tax rate in the UK on their bonuses.” is bogus.

What is Mr Hartnett doing? Whose side is he really on? I am paying him but is he working for me? I don’t think so.

Alien Edouard 10th October, 2011 6.42 pm

David 10th October, 2011 9.25 pm

Nick,
With you on this one.

Financiers don’t get it or pretend not to get it. The amount of damage the current financial system has caused is almost unbelieveable, with no bondhonders, shareholders or bankers been held to account.

Nationalise, wipe out the bondholders, recapitalise and let’s get responsible non-ponzi lending going. And while we’re at it let’s renegociate those banker contracts

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