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The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

This week’s recording of the BBC and Open University’s The Bottom Line is concerned with the impact on business in an apparent age of hyper-mobility and feedback in organisations. The three guests are drawn from: the Engine Group, an international communications company; the leading global electronic stock exchange NASDAQ (the National Association of Security Dealers Automated Quotation system); and the worldwide corporate travel services company Hogg Robinson. The title of this blog is taken from the name of the 1975 book, Faith in Fakes: Travels in hyper-reality by the Italian writer Umberto Eco, and the book serves as an introduction to semiotics: the study of the interpretation of symbols.

It seems that discussion of the socio-economic impact of globalisation is frequently symbolic and the claims to the hyper-mobility of society are in fact hyper-real, that is to say the inability to distinguish what is real and what is not. In more prosaic terms, it is the tendency to confuse form and function. The form is the growth of the World Wide Web, the Internet and other related electronic media, which appear to break down national barriers to business and social mobility, while the function relates to the purpose of ICT (Information and Communications Technology). ‘Form follows function’ is a long established principle in architectural and industrial design, but the reification of virtual media leads to the conflating of the two. It is a bit like modern economics in which technique has triumphed over thought, as the financial crisis and global recession has shown to all our costs.

The City of London skyline.
photo © copyright Jupiter Images

For any idea or concept, one should apply a simple test: “Where’s the theory?”, “Where’s the evidence?” and “Where’s the data?” And, like globalisation, hyper-mobility is strong on theory, weak on evidence, and the data almost non-existent. If one looks at telephone, internet and airline traffic, there is a distinct supranational regional clustering which in turn reflects the economic strength of the world’s three dominant regions: North America; the European Union and East Asia. Also, if one looks at the digital divide, there are strong intra- as well as inter-national differences. If one adds in the locational decisions of firms, we can see that access to market still remains a prime consideration.

For example, Rolls-Royce Engines have a joint venture to produce engine parts in China – rather than exporting them from its UK manufacturing base in Derby – thereby reducing transport costs and environmental impact. NASDAQ had first mover advantage in being the global electronic stock exchange, yet it owns several stock exchanges in Europe, including NASDAQ OMX, the Nordic electronic financial trading platform, and a joint venture in the Gulf, NASDAQ Dubai. Although global in scale, the scope is distinctly regional. Furthermore, in an apparent age of digital determination, advanced business activities still crowd together in the world’s dominant cities, suggesting that agglomeration of these activities is an important source of competitive advantage. It is thus less about managing the impact of imagined hyper-mobility, but rather how to manage the real regional distribution of international activities for firms with global reach.

This brings us to our second possible fake, feedback to customers and employees. The comparative advantage of the Japanese economy and the competitive advantage of its firms have for many years been based on the process of kaizen (continuous improvement): incremental change with ideas coming from employees. However, for Japanese firms, customer feedback is also crucial in order to sustain the quality of the goods and services they provide and thus also their market share. Similarly, Motorola introduced the Six Sigma methodology to iron out defects and maintain quality of output. The caricatured British firm of the past, characterised in the Peter Sellers film, I’m All Right Jack, used the suggestion box, which often included appeals to the management of a physiological nature, but, by and large, feedback to employees was a didactic call to work harder.

Many contemporary firms cite their employees as their major asset and institute customer relationship management systems, but these are frequently mere rhetoric rather than an engagement with the internal and external reality they face. Feedback needs to be systematic and personal, whether it is to a customer or an employee. If firms don’t respond to the market, they go out of business. If employees are treated as liabilities rather than as assets, an organisation’s reputation will ultimately suffer.

Our faith in fakes is commonplace but if there is a prospect of a hyper-mobile society with all it entails, the dominance of white men of an uncertain age in the board rooms and executive committees will have to come to an end. This is one important feedback from the contemporary business environment, if whose existence is not to become counterfeit then travels in hyper-reality will have to be constrained, otherwise any future mobility, hyper- or not, will be limited.

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About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

HM Revenue and Customs (the new name for the Inland Revenue) has been levying income tax for more than 200 years and knows a thing or two about it!

It’s more or less true that tax avoidance is for the rich. It costs money to arrange your affairs to reduce taxation, so tax avoidance is only interesting in regimes where income tax is steeply progressive and you earn enough to be paying tax at the highest rates. This is one reason for the popularity of so-called flat tax rates in Central Europe – high earners have little incentive to avoid tax when it’s not progressive.

If your income comes from employment, there is very little scope for avoidance. HM Revenue has it pretty well pinned down. Even if your employer might be prepared to go along with a complex scheme, they might find themselves having to pay your tax themselves, and this discourages them!

However, some avoidance is available because the government encourages it. One of the simplest ways of reducing the tax burden is through paying extra into a pension scheme. You reduce your tax (within limits), but also lose access to the money paid into the pension scheme until you retire, so you need enough income for this not to be a problem. Another way is to invest in small businesses: government has promoted schemes to encourage this in the past.

Assuming you have income other than from a single full time employment (which rules out most people), you could look for more complex schemes, but then the next obstacle is knowledge. You have to find out about schemes, and this means paying fees to tax advisers, and being confident that they know what they’re talking about.

The nature of tax avoidance is such that an adviser may come up with a complex scheme but you cannot be certain that it is fireproof until it has been tested in court – which is not an experience you would enjoy. How do you know what adviser to talk to? KPMG, one of the world’s biggest networks of accountants, paid $500m in 2005 after selling illegal tax shelters.

As you move up the scale of complexity, avoidance schemes take advantage of the issues of territoriality and legal personality. Although there are bi-lateral tax agreements between many countries, taxation is essentially limited to activities in a particular territory, and subject to national statutes. If you have international transactions, you can try to organise things so that you do not fall into any tax net. This is a particularly interesting issue in electronic trading on the internet: whose territory does the transaction fall in?

"National tax authorities have an armoury of weapons"

However, you need to have either investment capital or income which comes from outside the UK, or you need to be resident in a tax haven such as Jersey. And of course, national tax authorities have an armoury of weapons to try to limit your opportunities. Equally the European Union has started to introduce tax cooperation arrangements between member states that provide for exchanges of information, and for tax to be deducted from investment income at source.

Taxation falls on individuals, but legal personality extends to companies: if you form a company and that company receives income, the company becomes a taxable person separate from you. Personal service companies were very popular in the UK, until HM Revenue started taking an interest. The company receives fees from selling the services of an individual, that individual then receives a salary from the company. The company can retain a proportion of the income and might use it to supply facilities and goods to the individual. The company will also pay a lower rate of corporate income tax than the marginal rate of 50% (40% tax and 10% national insurance) that the individual would pay on extra earnings.

"Can you be certain the Revenue is not going to come knocking on your door?"

There are generally some limited opportunities for tax avoidance (legal diminution of tax as opposed to evasion which is simply illegal) even in a mature tax system like that of the UK. However, even the simplest forms require you to have money available that you do not need right now. The more complex forms mean that you will have to pay potentially substantial fees to advisers, so up to a certain level of income the tax saving will be less than the professional expenses. Finally there is always the question of knowledge and uncertainty. Finding out about schemes could have a high initial cost, and then can you be certain the Revenue is not going to come knocking on your door years later?

Further reading

• Tax shelters – nobody likes paying tax – but how far would you go to avoid it?

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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