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Law for Business

Knowhow - guidance - precedents

05 FEB 2013

A taxing issue

If you were paying the amount of tax you are legally required to do, would you voluntarily pay more if your actions were being scrutinised by the public, media and Government?

 Chart 2


27% - Yes

73% - No, why should I?


Revelations about how little corporation tax some major multinational companies, including the likes of Starbucks, Google and Amazon, were paying in the UK, preoccupied business headlines during the final months of 2012, and have continued to do so as 2013 gets underway. While the amounts of corporation tax being paid on behalf of some of these corporations were shockingly low, and on the face of it seem wildly unfair, are these companies actually doing anything wrong if the law allows it to happen?

When discussing these matters, it is important to get the terminology right. What these companies are doing is not ‘tax evasion': 73% of respondents regarded this practice as a ‘tax avoidance scheme', with a further 17% calling it capitalism. It would be unwise to listen to several of the more outspoken politicians at the end of 2012, when they were endeavouring to blur the distinction between ‘avoidance' and ‘evasion', with references to ‘aggressive tax avoidance' as a moral issue.

Issues surrounding morality do not feature in the Companies Act 2006, therefore not making it a legal requirement to consider. However, much of the debate surrounding the argument about whether these companies should be paying more corporation tax than they are, does come down to morals and a corporation's willingness to voluntarily pay more than the legal requirement.

This is where the arguments ‘for' and ‘against' paying more tax become muddled. Our current Quick Question survey identified that a majority of the respondents (55%) agree that large multinational corporations which have been targeted for using loopholes in the British tax system, should pay more tax in the UK. However, when the Governance & Compliance/CSS panel were asked to put themselves in the - albeit larger - shoes of these corporations and were presented with the scenario: if you were paying the amount of tax you are legally required to do by law, would you voluntarily pay more if your actions were being scrutinised by the public, media and the UK Government? 73% confidently responded, ‘no, why should I?'

A couple of valid points came out of this exercise surrounding, stakeholders, shareholders and a company's reputation. One respondent said that, ‘whilst avoiding tax legally ensures a better result for shareholders, they are not the only stakeholders, so the needs of customers, suppliers, staff and the community also have to be taken into account. Those needs might outweigh the needs of shareholders.'

But shareholders are important too. When asked whether our panel thought paying the least amount of tax a company is legally obliged to is actually part of its fiduciary duty to shareholders to keep the company as profitable as possible and therefore good governance, 59% agreed that it did to a certain extent, with 25% agreeing that it was. ‘Directors have a legal duty to "act in a way he/she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members". Many legal tax avoidance schemes help directors (initiated often by the finance director/tax departments) to achieve this goal', acknowledged one of our respondents. In support of this, a majority of respondents believed that there would be open discussions at board level about how zealous a company should be in avoiding tax, with only 23% disagreeing completely.

Reputation was also considered an important factor when weighing up whether one would voluntarily pay tax as a way to face the critics, in addition to company corporate ethics and accountability. ‘If the business model is based on ethical/socially responsible considerations, then paying more than the legal minimum might be considered part of that social responsibility', offered another respondent.

The giving of ‘voluntary' tax payments by companies highlighted by the media, is not the answer, as this is not a PR exercise, but simply the case of companies paying the correct amounts of tax within the tax regime in which they operate. The more popular consensus in terms of handling this problem is that it is up to the Government to pass legislation to block avoidance measures which have been legitimately taken. HMRC has already faced a plethora of criticism for not being awake to this in the first place.

However, there is no disillusionment over the potential uncertainty change in this area could bring. When asked if a reform of the British tax system is the only solution and needs to happen, 63% of the corporate governance and compliance community responded with, ‘I don't know - even if the tax system does change, businesses can move their domiciles and revenues more or less wherever they choose, so how much of a difference will there be?'

While it is unclear as to what extent change is on the horizon, this tax debate is unlikely to come to its own conclusion. But as one respondent so aptly put it, be mindful of the maxim ‘be careful what you wish for'.

This article first appeared in ICSA's Governance & Compliance Magazine, February 2013 issue



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