EVASION, avoidance, mitigation; tax is the proverbial hot potato for many companies and an issue that’s never far from front page news. However, as a significant operating cost and burden on all businesses, lessening the load is essential. But to ensure companies tackle this within the spirit and letter of the law, and not fall foul of public opinion, they should be open about their tax arrangements. In short, companies need to own the debate rather than become embroiled in it.
To understand the furore over corporate tax practices, we must first consider why tax has become such a challenging issue for business. Part of the reason lies with the nature of the beast. The tax regime is complicated and porous. There are specific country-by-country policies and often complex systems governing how these national frameworks interact (in some cases there’s very little governing the interaction between regimes, which is how tax havens are established). This intricate set-up makes tax fertile ground for opportunistic practices and often why businesses face public rebuke.
The other contributing factor is that the tax regime has not kept pace with the changing nature of business. Technology has broken down borders and enabled companies to market their products worldwide – whether through a physical or digital presence. But, in this new environment, how should we define where profits are generated (and therefore, where taxes should be paid)?
Take Amazon as an example. Is revenue generated in the country where Amazon has a warehouse, where it delivers or where its servers are based? And what about profits? Many businesses today attribute their success to intangibles like technology and brand. Arguably, then, corporate profits should be taxed increasingly based on where that “IP” sits and where the innovation driving the IP was managed.
A lack of clarity around these answers leads to difficult decisions for the company concerned and increasing challenges on tax from countries around the world, which must be managed.
It’s important to note here that we are not talking about tax evasion; this is illegal and should be penalised. We are referring to tax mitigation and some forms of (non-aggressive) avoidance. While many companies who perform tax mitigation are operating within the letter of the law their activities are coming under a moral spotlight. Paying a marginal rate of corporation tax, while it may be legal and the company may be paying other taxes such as national insurance and business rates, jars in this post-recession climate, as austerity measures continue to bite. The Government may not judge these companies but the public is.
The duty to reduce tax
As a result, tax has become a highly charged, emotive subject. But it’s worth remembering that company executives have a fiduciary duty to reduce operating costs and maximise shareholder returns for stakeholders like pension funds. As one such operating cost, it’s legitimate and sensible for companies to reduce their tax burden within the spirit and letter of the law.
In fact, failure to take action could spur a shareholder revolt. When you consider these expectations, the disconnect between directors’ obligations and wider public opinion is thrown into relief. This is where Base Erosion and Profit Shifting (BEPS) comes in, as it attempts to resolve the moral quagmire and international ambiguity by objectively tackling questions related to where economic activity actually takes place and how companies should be taxed.
The government’s role
It might be surprising to some but FTSE 100 companies and other large corporates are mostly keen to ensure they are whiter than white on tax. As such, there’s a concerted drive to regularise tax affairs and resolve disputes with authorities over previous, complicated tax planning. However, that’s not to say that companies can’t legitimately mitigate tax. For this to happen in a responsible manner, we need action from the tax authorities:
First, HMRC needs to foster a more open, consultative relationship with corporates – both large and mid-sized. Working closely with HMRC to agree tax positions has got to be the best first step.
Second, we need to demystify and simplify the tax regime – particularly for mid-sized companies who cite tax complexity as a barrier to growth.
The UK tax regime has more than 17,000 pages; three times the length of that in Germany. Far from helping, the breadth of rules only increase the likelihood that businesses will accidentally or wilfully misinterpret rules, or see opportunities to avoid tax, that law makers may not have originally envisaged when creating the legislation. In short, businesses are more likely to comply if the rules and procedures are simple to understand.
If and when HMRC has signed off on a given tax arrangement, a company should be open and honest about its tax calculations to protect their reputation. The key is to shape the debate rather than react to it. Then companies can get on with producing value and growth for our economy, instead of being tied up in knots over tax.
The Starbucks tax debacle is an interesting case in point. It seems that Starbucks did in fact operate within the letter of the law; however, following public outcry over a number of revelations in the media, it made a voluntary payment. In reality, voluntary taxation muddies the waters and sets an unsustainable precedent. Had Starbucks been open about its arrangement with HMRC, might we have seen a different response from the public and the media?
Thames Water is another example of a company that employed legitimate tax mitigation but was heavily criticised in the press for not paying tax on its revenues. However, the company had lowered its tax bill by investing a huge amount of money into infrastructure and helping deliver long-term benefits to the general public. Had it owned this narrative, the company may have avoided such hostile criticism.
Although examples of aggressive tax avoidance are receding, more needs to be done to ensure companies are seen to pay their fair share. The good news is that businesses want a more collaborative approach – working with HMRC and others to agree the correct amount of tax. However, not falling foul of public opinion will hinge on companies owning the narrative around their tax arrangements. In this environment, businesses don’t just need accountants focused on tax liabilities, but professional advisers who can assess the business landscape and advice on what’s best for the entire business.
Jonathan Riley is a partner and head of tax at Grant Thornton