Strategy & Operations » Governance » Tax avoidance “not legal duty”, according to law firm

BRITAIN’S BUSINESSES cannot justify engaging in tax avoidance strategies by claiming they are seeking the best return for their shareholders, according to the advice of law firm Farrer & Co.

The firm’s legal assessment is to be sent business leaders by its client, the Tax Justice Network, warning they cannot claim it is their fiduciary duty to avoid tax for the benefit of shareholders.

“It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax,” the firm found, adding directors have discretion on the social impact of their decisions and, by paying tax responsibly instead of putting in place complex structures, they would be protected by applicable law, rather than risk liability.

Many advisers and companies have argued that part of their responsibility to shareholders entails driving down costs, including tax.

The OECD put forward a 15-point action plan to tackle the issue, particularly in the case of multinationals, in July, when it presented its proposals to the G20 in Moscow. In particular, the action plan attempts to address the digital economy, which offers a borderless world of products and services that too often fall outside the tax regime of any specific country, leaving loopholes that allow profits to go untaxed.

The Tax Justice Network will dispatch a copy of the legal assessment to bosses of all FTSE 100 businesses.

Tax barrister David Quentin, who was involved in drawing up the opinion, said: “When companies talk about being under duty to shareholders to mitigate tax, they are not telling the whole story. Board-level executives often benefit from performance-related reward packages which are indirectly affected by the amount of tax the company pays. Corporate tax avoidance is presented as a matter of high-minded fiduciary duty, but it is probably better understood as being about personal reward.”

Despite Farrer & Co’s assessment, much time has been devoted to reviewing and refining the UK’s corporate tax system, with the House of Lords’ Economic Affairs Committee calling for greater funding for HMRC. Greater parliamentary oversight of HMRC would instil greater public confidence in the tax system, it added, while it was also proposed that advisers responsible for establishing and marketing avoidance schemes should have their right to practice revoked.

The Public Accounts Committee has been particularly vocal in its criticism of both companies’ behaviour and the corporate taxation system.

Companies including Google, Amazon and Starbucks have been in the firing line for their use of offshore jurisdictions to drive down their UK tax liabilities.

In a Public Accounts Committee hearing held in November last year, committee chair and Labour MP Margaret Hodge (pictured) branded their practices “immoral” and, in a more recent hearing, described Google as “evil”, in reference to the company’s mantra – “don’t be evil”.

Primarily, the companies have been using transfer pricing, which some claim has the effect of mitigating their liabilities. The method sees multinational corporations value and purchase goods and services moving across international borders from one of the group’s corporate entities to another. An ‘arm’s length’ principle is usually applied to ensure the transaction is made at market value, but there have been questions raised over whether all companies do so in practice.

A harmful practice

Research produced by Oxfam warned this month that tax avoidance behaviour was not only harmful to the countries in which companies were based, but also to developing nations, with African countries annually losing 2% of national income to tax avoidance by businesses.

“Urgent and concrete action” is required “to fix a broken tax system that allows companies to suck billions of dollars out of Africa”, the charity said.

Head of development finance and public services Emma Seery added: “The G20 should be ashamed to be at the helm of an economic system that allows companies to rip off Africa to this extent. The G20 would never allow companies to fiddle them out of a trillion dollars. It is an outrage that the poorest countries not only suffer this, but are not even invited to the table to take part in tax talks.”

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