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Our Insights 10 Jan 2011

Fair Tax: The New Fair Trade?

By Geoff Lye

The recent attacks by UK Uncut on companies they see as avoiding tax payments – which should, in their view, be helping to avoid the swinging cuts in public spending – may vindicate a report we published in 2006. The central finding was that corporate tax planning should come out of the shadows and be subject to the same standards of transparency and accountability as corporate environmental and social performance.

Our report compiled evidence that pressure is mounting for more transparency over tax in business. However, the report also found that most companies are resistant to greater scrutiny of their tax planning, and that there is dramatic polarisation between those who see tax as simply a cost to be avoided versus those who acknowledge stakeholder interest in the issue and recognise tax as part of their social contract with significant ethical issues. As the report’s lead author, Seb Beloe, said at the time: “Aggressive tax avoidance increasingly falls short of society’s expectations of a responsible company. Instead of focusing on stretching the boundary between legal and illegal approaches to tax avoidance, business must pay attention to whether its practice is responsible or not.”

Richard Murphy, who was a co-author of our report, recently asserted in The Guardian that up to £120bn of taxes are lost to the UK Treasury due to corporate tax avoidance strategies; he believes that ‘at least £20bn could be relatively easily collected if the government set about it in a determined way’.

Surprisingly, a respected CSR practitioner, Mallen Baker, claims in one report that “it is too easy to demonise big companies for minimising their tax liabilities.” “In most developed societies,” he argues, “companies have the right – as do individuals – to arrange their affairs in such a manner as to minimise the amount of tax they pay. It is legal, even honourable. After all, a company that goes bankrupt because it paid more in tax than it needed to would be neither responsible nor competent.”

But surely this is overly simplistic, ignoring as it does the difference between tax mitigation which is perfectly proper (i.e. as intended by the law) and aggressive tax avoidance, which quite simply breaches the intent of the law by searching out and exploiting loopholes in tax regulation. How can that be ‘honourable’?

The real question, then, is when does tax minimisation cross the line between responsible and irresponsible? In reality, recent years have seen examples of tax planning strategies which grossly exploit legal loopholes and abandon any sense of social responsibility. Their deliberate secrecy also fails the tests of accountability – namely giving stakeholders the information they need to be able to judge the responsibility or otherwise of a company’s policies and practices. Professional services firms have colluded with their clients in these schemes and been handsomely rewarded for their ‘creative’ accounting and tax planning. But at what point does creative become deceptive? Indeed, is it not the case that many of the schemes adopted had a primary purpose of keeping capital transfers and liabilities beyond regulatory disclosure requirements and off balance sheets so as to be invisible to investors and regulators alike?

One of UK Uncut’s primary targets is Vodafone, whom they attack for alleged tax avoidance of £6 billion. My understanding is that the Vodafone tax ‘avoided’ is likely to have been nowhere near as high as £6 billion, but nonetheless significant. Given the lack of a response beyond a general denial by Vodafone and the tax authorities, it is reasonable to assume that the campaigners will continue to make the multi-billion-£ claim until either a WikiLeak confirms the real position or Vodafone adopts a more transparent approach.

Increasingly, we expect – under growing pressure from stakeholders and unwelcome leaks – that businesses will choose or be forced to make a step change to ‘radical disclosure’. Radical disclosure takes the boundaries of stakeholders’ ‘right to know’ way beyond current norms. It assumes that private documents are likely to become public in due course and therefore discloses information voluntarily – releasing information in a controlled way rather than at the mercy of campaigners, WikiLeaks and/or the media. Vodafone could, in this spirit, lead the way by releasing correspondence with the tax authorities. The current collusion of generalised denial between the two parties can only leave the worst suspicions firming up as facts in the public’s mind.

Our report on tax suggested much greater (not even ‘radical’) transparency on tax policy and practice should be part of basic corporate responsibility. If the level of tax avoidance by individual companies is defensible, then the details should be released and defended. All rests, of course, on the interpretation of ‘defensible’. Our view is that provided the economic and social impacts of particular tax policies and practices are fully assessed at board level (ie at a higher level than the finance and tax planning team) and are judged to be consistent with the company’s values and business principles, then appropriate tax avoidance can be perfectly aligned with progressive corporate responsibility commitments.

As our report proposed, questions business leaders should be asking include:

  • Does the company’s approach to tax policy and planning expose the organisation to challenge from key stakeholders that are likely to result in direct financial impacts over the short term?
  • Does the company have business principles or policies that apply (either explicitly or implicitly) to economic impacts including the payment of tax?
  • How do tax payment rates compare with company peers and what might the reasons be for any discrepancies?
  • How would your stakeholders view the company’s approach to tax policy and planning if it were reported on publicly?
  • Are there other standards of behaviour – either codified in regulation or not – that are likely to conflict with the company’s approach to tax policy and planning?

On the face of it, business seems unprepared as fair tax follows fair trade into the spotlight. Welcome, CFOs, to the deepening sustainability agenda!

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