When British Columbia sets up public private partnerships (P3s) to let the private sector operate hospitals, roads and bridges, one of the considerations is taxes. However, when down the road ownership of the P3 private operator gets moved to a tax haven, it appears there is no subsequent examination of the impact on provincial revenues. In BC several of the province’s private partners in P3s have had their operations sold on to companies resident in tax havens like Guernsey and Luxembourg. See here and here.
In other countries this has become an issue. Here it is ignored by both the media and the provincial government.
If P3 infrastructure is operated by the government or its agencies, then the operator does not pay taxes to the federal or provincial governments. But a private sector operator does pay taxes and these taxes are factored into the equation that decides whether or not to use a P3.
How this is done is described in a document published by BC’s privatization agency, Partnerships BC. Partnerships BC calculates how much the private sector will pay in taxes. It calculates all of the expected tax revenue for BC and half of the expected tax revenue for the federal government. This amount is then added to the predicted cost of doing the project publicly because it is considered revenue lost to the province from taxes. The total predicted cost is then compared to the total predicted cost of doing a P3.
But what happens if the tax revenue predicted from the P3 project doesn’t materialize? That means the province does not get the expected revenue, which is a big deal in cash strapped British Columbia. It also means that the comparison used to decide whether to use a P3 to do the project publicly was biased against public operation because of overly optimistic revenue expectations from the P3.
One of the ways companies cut their taxes is by moving their headquarters to tax havens. Instead of claiming their profits in the country where they actually deliver services profits are claimed in the tax haven and taxes are paid at much lower rates.
The United Kingdom was one of the first countries to use public private partnerships, which in the UK are called Private Finance Initiatives (PFI).
In 2011 a British Broadcasting Corporation investigative report found that HSBC was funneling its payments for running a hospital to the investment firm HICL based in the tax haven of Guernsey in the Channel Islands. The BBC reported:
In six months last year the company – which was set up by HSBC – made more than £38m profit from its 33 PFI schemes and paid £100,000 in UK tax.
That equates to less than half of 1% of the profits.
HICL said the profits did not stay in Guernsey and had been paid to mostly UK shareholders so far.
A study by the European Services Strategy Unit the same year found 91 British PFI projects registered in tax havens. Last August the UK’s Public Accounts Committee looked at the issue and concluded “Tax planning and the use of tax havens as a way of avoiding UK tax are not uncommon.” Britain’s Treasury Department admitted to the Public Accounts Committee that, as in BC, expected tax revenues were part of the equation in deciding whether or not to use a P3. They continued:
tax assumptions at contract letting are, however, not revisited during the operational phase. The Treasury was unable to confirm the extent to which parties involved with PFI contracts were paying UK tax and whether the companies holding PFI contracts were paying UK corporation tax.
The issue of public private partnerships was actually debated in the British House of Commons. A group of Members of Parliament that crosses party lines are demanding that P3 companies voluntarily pay more taxes on their revenues. (Voluntarily paying more taxes. Hilarious.)
Even in P3 friendly Australia some of the media are starting to raise questions. In 2011 the Sydney Morning Herald reported some P3s projects were also having their operations moved to tax havens.
Here in British Columbia there is complete silence on the issue from both the government and the media. The Ministry of Finance in response to a Freedom of Information request asking about the impact of tax havens and P3s said “although a thorough search was conducted, no responsive records were located. Your file is now closed.”
Partnerships BC provided 75 pages of material in response to the same request. None of it dealt with the tax impact to government if a project moved to a tax haven. Examination of changes in ownership was limited to the commercial and financial affect it might have on the projects.
To really understand the affect on government revenues would require the provincial government to investigate the changes – something the response to FOI requests suggests they are unwilling to do. In the meantime, when making choices about whether to use a P3, the province continues to assume one of the benefits of P3s is significant tax revenues. Reports from other jurisdictions where P3s and tax havens have combined suggest these revenues are a fiction.