The New York Review of Books

Jason Lee/Reuters

A newly opened Tesco supermarket in Beijing, January 2007

Among all the postmortems that will inevitably follow the dramatic implosion of the global financial system, there will doubtless be one on how it was covered in the press. Was there sufficient information in the public domain about the dangers of financial derivatives and subprime mortgages? Did news organizations, facing their own crises of liquidity, have sufficient resources to monitor and analyze the available data? In view of the intricate financial engineering involved, did newsrooms employ journalists with the expertise to understand and explain what was going on? Did the ones who could comprehend it project the issue powerfully, repeatedly, and noisily enough? Did anyone pay attention?

These and related questions touch on the essence of the relationship between governors and governed. Some of the most critical developments concerning economics, security, the environment, and social policy are immensely complex and worthy of careful explanation. But they do not necessarily sell newspapers. News organizations in the Western world, struggling with declining audiences and revenue, are shedding journalists, closing down foreign operations, and cutting costs. But they are also increasingly inhibited by efforts—of government officials and of private corporations—to prevent them from protecting sources or from carrying out difficult investigations. Many minds are rightly focused on the regulatory, economic, technological, and legal issues that news organizations committed to serious journalism should be addressing. A starting point would be to reform one of the potential obstacles to their doing so—the British laws of libel. Do not be lulled into a false security by the word “British”: in the Internet age the British laws can bite you, no matter where you live.

As editor of The Guardian, I have been at the thick end of these laws more than is strictly good for anyone. The paper’s most recent serious brush with the British defamation laws came on April 4, 2008, when it was sued for libel by Tesco, one of the largest public companies in Britain and the fourth-largest retailer in the world. According to its latest accounts, the company has a gross income of over $85 billion (£50 billion), with profits before tax of nearly $5 billion. Its share of the UK grocery market is around 30 percent, and the company is now expanding globally, especially in the Far East and, more recently, in the US with its Fresh & Easy chain. In Britain Tesco occupies a position similar to that occupied by Wal-Mart in America. It is, by any measure, a giant international corporation—successful and controversial in equal measure.

Never in recent history had The Guardian faced a libel suit from a major corporation, let alone in the manner in which Tesco chose to fight—effectively four actions in one: two for libel and two for malicious falsehood, directed both against the newspaper and against the editor personally. The claim of malicious falsehood effectively stated that we had deliberately printed a story we knew to be untrue—or, as one letter from Tesco’s lawyers charmingly put it: “You have been caught out publishing lies…and you don’t like it.”

It is important to say right away that the Guardian piece that occasioned the legal action by Tesco was, in important respects, quite wrong. By misunderstanding the limited amount of information in the public domain and misconstruing the company’s circumscribed written responses to our inquiries, we had concluded that Tesco was planning to avoid paying up to $1.7 billion of corporation tax on a number of complex deals involving the sale of property through companies registered in the Cayman Islands, the Isle of Jersey, and the UK.

It is increasingly common for large companies to arrange their corporate structures, intellectual property, and accountancy so as to incur the minimum amount of tax. This can often involve the use of tax havens, many of them former British dependencies. It turned out that Tesco’s deals were structured to avoid a different tax—the Stamp Duty Land Tax (SDLT) assessed on UK real estate transfers—and that the sums avoided were much less than we had supposed. The satirical British magazine Private Eye subsequently produced evidence that Tesco had, in fact, established at least two offshore strategies to reduce or avoid UK corporation taxes on some of its profits—a claim that was not challenged by Tesco.

But there is no question that we were mistaken in our original assertion: we have twice corrected it and have twice apologized for the mistake. We made other errors in the article, including not including Tesco’s full responses to our questions and not publishing a letter from Tesco’s tax advisers contradicting our report (though we did offer the company space to state its case). There’s no escaping the fact that this was a flawed piece of journalism. As we said in our second apology: “The article was wrong and should not have been published.” Tesco’s extreme irritation can well be imagined.

But newspapers have always made mistakes, not invariably, or even mostly, from malign motives. Supreme Court Justice William Brennan Jr.’s landmark opinion for the majority in New York Times v. Sullivan in 1964 coined the phrase “erroneous statements honestly made.” This remarkable judgment recognized the chilling effect—”the pall of fear and timidity”—that the routine prospect of costly legal battles inevitably causes the press, and sought a way of offering protection to newspapers writing about matters of high public importance.

Tesco may not have set out to chill debate about its affairs through the use of legal actions in Britain and elsewhere, but there is little doubt that the effect of major corporations resorting to highly aggressive and expensive lawsuits will be to discourage investigations of complex financial affairs at the very moment when most readers might expect more and better coverage of them.

The two reporters involved in the original Tesco story are award-winning specialists. One is a qualified accountant; the other a best-selling author of studies of food production and migrant labor. Both had investigated the increasingly widespread strategies used by large international companies to pay less tax. Quite how much tax is avoided through such means is difficult to pin down—even for governments. US Senator Carl Levin—who, together with Senators Norm Coleman and Barack Obama, proposed legislation to stamp out offshore tax havens and tax shelter abuses—claims that the annual loss to the US Treasury from corporations could be around $30 billion. An assessment published in 2005 by the UK tax authority, Her Majesty’s Revenue and Customs (HMRC), estimated that the total “tax gap” in Britain—tax avoided by individuals and corporations—might fall anywhere between $17 billion and $68 billion.¹ HMRC claims it has improved procedures for monitoring the seven hundred–odd largest UK companies. Nevertheless it was recently revealed in Parliament that only 238 of these businesses could be classified as posing a “low risk” of tax avoidance²; and a parliamentary committee found in October that 25 percent of these large companies paid no corporation tax at all in 2005–2006.

Tax avoidance is a growth industry, with global accountancy firms and boutique tax avoidance specialists devising strategies for sheltering companies from tax through ingenious offshore arrangements, tax havens, registration in multiple jurisdictions, complex derivative instruments, restructuring, and charging for intellectual property. One firm advising Tesco on a particular tax avoidance strategy employed no fewer than ninety lawyers on the project. Such plans are frequently put into operation before being disclosed to HMRC, which must then make a judgment on whether they fall within the spirit of the law and/or whether the legislation needs to be tightened. That process can take two years (in 2007 the government closed 350 out of nine hundred schemes it was informed about). The result is that the HMRC is playing a continual and, for many of the companies, lucrative game of catch-up—legislation to close the loopholes is seldom retrospective.

The Tesco property deals examined by The Guardian involved a particular tax-planning device—devised by imaginative tax advisers—called Jersey Property Unit Trusts (JPUT). This is a “vehicle” (to use accountantspeak) through which UK property is held as an investment by trustees resident in Jersey for beneficiaries who live elsewhere. The advantage of such a setup is that Stamp Duty Land Tax—a compulsory 4 percent charge on UK land transactions of more than £500,000—does not apply to transactions conducted in the Isle of Jersey, which has the special status of a “Crown dependency” and is not part of the United Kingdom. This means that the trustees of a JPUT can buy and sell the property of their UK beneficiaries without incurring the tax. From December 2003 there was a boom in JPUTs and their equivalents in Guernsey and the Isle of Man, also Crown dependencies. By 2006 one Jersey lawyer estimated that $51 billion in UK property was being held in JPUTs. Others put the figure nearer $85 billion. Mourant du Feu & Jeune, the Jersey law firm that acted for Tesco on its offshore property deals, estimated that it formed on behalf of its clients two hundred of the four hundred JPUTs created in 2005 alone.

The more complicated tax avoidance measures indulged in by major companies are largely ignored by the British press, with the consequence that there is virtually no public pressure on corporate boards to behave otherwise. In a recent Oxford University study, which included interviews with the tax directors of nine major UK companies, the authors reported that

only three business respondents said that they would be concerned about negative press coverage regarding avoidance of corporation tax. The remaining respondents, including HMRC representatives, believed that corporation tax issues seem to be too complex or obscure for the media and the public to understand. Accordingly, the issues are not covered in the media or they go unnoticed by the public.³

This was the background against which The Guardian‘s reporters began to examine Tesco’s tax affairs. They concentrated on the giant retailer because one of the reporters—the qualified accountant—had spotted a complex structure in the company’s accounts relating to two deals in which Tesco stores were sold and then leased back: one with the British Land Company and the other with the British Airways pension fund. Over a number of weeks the reporters sent Tesco questions and asked for a face-to-face briefing about those deals. Tesco declined to meet them but did give truthful, if circumscribed, written answers to some of the questions, while ignoring others.

This sort of financial journalism is notoriously difficult, expensive, and time-consuming. Few reporters have the training to disentangle and make coherent sense of the information publicly available from company accounts, annual reports, statutory filings, and corporate structures. The vast majority of reporters and editors—even those who specialize in business—would not know how to begin to unravel extremely complex corporate structures, which rely for their success on tax havens, partnerships, and tiers of associated financing and holding companies. A financial expert may understand public accounts, but be weak on corporate accounting. A corporate accounting specialist may know little or nothing about taxes. Effective analysis is complicated by the apparent legal impossibility—recognized by both academics and judges—of defining in a precise way the difference between tax avoidance and tax planning.