Is Scotland being used as a flag of convenience?
The National ran a story yesterday about the South Korean National Oil Company using one of its subsidiaries - Dana Petroleum, based in Aberdeen, to try to illegally extract oil from Palestinian territory under the guise of licences issued by Israel. The deal has already proved too controversial for some of the partner organisations in the plan, including the Italian oil company ENI, which was the main partner until it withdrew.
A couple of years ago, Scotland was also revealed to be the host of multiple opaque companies that were implicated in outright financial fraud in which their complex Limited Liability structures were used to move money from and to various shadowy places, including Russian gangsters.
The root of the problem here is that it is far too easy for companies to set up shell organisations and other webs of complexity that hide or obscure their origins, their shareholders or even their tax records - one only needs to consider the time that coffee company Starbucks was found to be paying very little tax in the UK while claiming that it didn’t make an official profit from the world’s most popular addictive beverage in the country. It did this by buying all of its beans via a Swiss subsidiary, which just so happened to adjust its prices to wipe out all of the UK profits. We have recently found similar issues of shell companies extracting money even from sectors like foster care, where it is illegal in Scotland to make a profit.
Companies are at schemes like this all across the world and benefit from systems where they can essentially set up ‘flags of convenience’ that declares their legal presence in a country that will happily turn a blind eye to unethical or illegal behaviour or who will actively court companies to come to them by cutting taxes or allowing companies to re-write or avoid other laws like workers’ rights or environmental regulations.
Scotland, with the Scottish Government’s ‘all-in’ approach to ‘Foreign Direct Investment’ as a substitute for industrial strategy, appears to be quite happy to become such a flag. This isn’t a problem just that results in the massive amounts of profit extraction we currently see in Scotland, but it also erodes our domestic laws and ability to regulate these companies – especially when corporate lobbying starts to become more important than democratic mandates – and it severely compromises our standing internationally. It becomes hard and certainly hypocritical for the Scottish Government to speak out against corporate misdeeds abroad when they can be traced back to shell companies in our own country.
The issue of multinationals not paying their taxes is comparatively simple to solve. Common Weal has long advocated for “country-by-country” reporting, which allows us to work out what percentage of a company’s global sales originated in the UK. Corporate taxes could then be set based on that percentage of the company’s global profits. If 10% of their global sales are in the UK, then they pay UK corporate tax on 10% of their global profits. They can no longer hide their profits behind shells and flags.
More complex, maybe the issues at the top of the article are that the companies are based in Scotland, but are operating illegally abroad. This is ultimately a political issue and one where the Scottish Government must speak out. Companies that act unethically or illegally have no place in Scotland, and pressure should be exerted on them. Certainly, we need to know if companies like this have received any political or financial support from the public purse.
Scotland must be a beacon for upholding international standards of practice. What we cannot become is merely a lighthouse that attracts the worst companies to set up here and profit at the expense of those they harm.