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Our Insights 16 Oct 2012

Tax Avoidance: It May be Legal But is it Responsible?

By Geoff Lye

The momentum around fair and responsible tax practices continues to build. I was struck by a recent comment from Britain’s highest paid executive who decided he should support responsible tax practice by disclosing that he pays all UK taxes with minimal tax avoidance (i.e. the legal ways of reducing tax bills). He believes, he says, ‘that if you want to be accepted in society you have to be seen to be paying your fair share’. His disclosures come hard on the heels of public denouncements of aggressive tax avoidance by David Cameron as ‘morally wrong’ and by a Treasury minister as ‘morally repugnant’. Nor is this issue restricted to the UK. Personal tax affairs feature strongly in the US Presidential elections. And the French billionaire CEO of Louis Vuitton was widely pilloried for seeking to shift his domicile to Belgium – allegedly to avoid the new 75% tax rate.

The issue of responsible and ‘fair’ taxation is no less topical for corporations. As governments scythe through public services to try to balance their books, tax avoidance by companies is being more widely and deeply scrutinised for inconsistencies between their profitability and the levels of corporate taxes paid. Even as I was writing this, Reuters reported how Starbucks paid only £8.6 million tax on £3 billion pounds ($4.8 billion) of sales in the UK since 1998. Reuters quote a senior UK member of parliament who is campaigning against tax avoidance: Starbucks’ practice is, he says, “certainly profoundly against the interests of the countries where they operate and is extremely unfair … they are trying to play the taxman, game him. It is disgraceful.”

The scale of the issue globally is huge. According to research by JP Morgan, US corporations alone are sitting on $1,700,000,000,000 in foreign subsidiaries beyond the reach of the taxman. Apple, Google and Facebook are all avoiding tax by shifting huge amounts of revenue to low tax jurisdictions. And the IT sector is not alone in this. Big Pharma also has a long history of taking profits in low tax jurisdictions and use low tax competition between nations to shift profits from where they were created to tax havens. Furthermore, financial and professional services have been active collaborators in promoting complex, cunning and opaque schemes to take companies to the very frontier between tax avoidance and tax evasion. A recent editorial on the topic in The Times forcefully argued that ‘such schemes may be legal but they are not right’. As Barclays and others have learnt, aggressive tax avoidance strategies carry high-risk potential – both financial and reputational.

Increasingly, attention has moved beyond responsible tax to the issue of ‘fairness’: are individuals and companies paying their fair share in times of economic crisis. Arguably, this is a deeper and more complex issue than defining what is responsible. Ultimately, it is for companies to decide whether their policies should include any notion of ‘fairness’ in how it takes tax decisions, but increasingly the issue of tax and fairly sharing the burden of working our way through the economic crisis is playing out in the court of public opinion rather than in courts of law.

I first raised corporate tax disclosure and policy with a major multinational in 1999 and the idea was dismissed with a laugh. When I interviewed senior financial executives as part of the research for our report Taxing Issues in 2005, the notion of ‘responsible’ approaches to tax avoidance was attacked as ignoring the fiduciary duty of companies to maximise shareholder returns (and, by definition, minimising tax bills). However, as Ghandi is reputed to have once said ‘First they ignore you; then they ridicule you; then they fight you; then you win.’ ‘Winning’ in this context is not to have companies paying more tax as the goal but, as our report made clear, to have high levels of disclosure of where profits are made and what taxes are paid on them. And to have a corporate tax policy which defines how the company will manage its tax affairs and what standards it will set for responsible tax management.

Our report Taxing Issues has clear recommendations and helpful guidelines which remain as valid today as when it was published in 2005. We advocate a corporate framework that seeks to ensure a responsible approach to tax policies and planning should be underpinned by guiding ‘principles’ of accountability, transparency and consistency. These principles could be applied to tax as follows:

  • Accountability involves ensuring that tax is paid in the country in which the economic benefits of the business arise. Further, that any tax planning should be secondary to the commercial purposes of a transaction (rather than its motive).
  • Transparency is complex because of the technical nature of tax decisions. However, dilemmas and risks should be shared more effectively and full disclosure on taxation paid and the associated liabilities should also be encouraged.
  • Consistency is about subjecting taxation policies to the same principles and governance as the rest of the business (rather than treating tax discreetly). This should mean that taxation practices are part of a global approach, where double standards of behaviour in different countries are avoided.

Fundamentally, the aim of this framework is not to require companies to pay more tax, but to ensure tax contributions are a demonstrably fair return to the society that underpins its success.

As noted in an earlier blog, we see fair tax following in the steps of fair trade: moving from a side debate to the mainstream of corporate sustainability. Media interest in the topic may currently be higher in Europe than elsewhere, but past experience shows that what emerges on the corporate responsibility landscape here is a good indicator of what will develop more widely later. In any event, it is timely for companies to review the risks and opportunities of their current tax policies and practices. It may be that in these times of chronic economic stress there needs to be a different way of viewing the obligations of those who have benefited disproportionately in the good times (both individuals and corporations). Over the past few decades a generation of privileged individuals and companies has accumulated relatively high wealth. Perhaps the next generation needs to be invested in not only out of fairness, but to avoid an escalation of the social unrest we are seeing in Europe and beyond as a result of austerity measures and record levels of youth unemployment. Perhaps the boundary between what is judged ‘responsible’ and ‘irresponsible’ tax avoidance needs to be shifted to a point where the spirit rather than the letter of tax legislation prevails?



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