Triumphing on Tax – Top Tips on Tax Avoidance

If you want to avoid petitions against your company (like this one against Amazon) and consumer boycotts like that experienced against Starbucks (on Facebook) then have a look at these top tips on tax avoidance.

“Scrutiny is increasing, demands for transparency are rising and companies that don’t have a clear position will lose this debate”

Corporate CitizenshipTax as a Corporate Responsibility Issue, May 2011

Tax Avoidance – A Growing Issue

Since this series started a few big guns have published guides to dealing with tax issues (see below for the guides by EY, Deloitte and Sustainalytics). There is a shifting perception that tax strategies are an important issue for companies to get right, in addition to the plethora of media reports about tax avoidance, there is also movement at the UN and G’s 8 and 20 that indicates it is an issue that is here to stay and an issue that is likely to see legislation in the short, medium and long terms. 

The most recent and high profile corporate tax stories involve companies with complex tax structures along with headquarters and often intellectual property registered in low-tax jurisdictions or loans from off-shore entities at inflated rates. Low-tax jurisdictions, structures and practices mean that Starbucks can, hand on heart, technically say that it made virtually no profit in the UK. It also means that in spite of £2.5bn in UK sales, Google only paid £3.4m tax (0.136%). That might not be tricky to explain if the group hadn’t made 33% profit on a group-wide basis. Amazon’s sales were even higher than Google’s, but their tax bill for the UK was less than £1m. Most of us would register a higher blood alcohol content from a rum and raisin ice cream than the percentage of tax paid by Amazon, although to be fair to Amazon, they really haven’t made very much profit, ever, anywhere.

Although I understand why some have concluded that those companies couldn’t have seen it coming, I think a student of Adam Smith or someone seized of something akin to his Proportionality principle could have anticipated the shifting ground and avoided the moral and financial hazard of striving to pay no tax.

Jimmy

“We are not accusing you of being illegal, we are accusing you of being immoral.”

Margaret Hodge, UK Public Accounts Committee Chairman, UK Public Accounts Committee  Meeting, UK Parliament November 2012

Which means we need to understand the business case for paying more tax than is absolutely possible, in addition to the plethora of risks that present themselves in relation to tax matters generally (regulatory risk, legislation change risk and cash flow risk related to both of those).

Business Case for Paying More Tax

Companies are starting to realise that tax strategy is now a part of their overall corporate responsibility strategy; just like human rights, supply chain abuses and environmental damage before it. And just like other aspects of corporate responsibility, the business case is important if corporate behaviour is to change.

I think that the business case for more effectively managing the amount of tax a company pays (and paying more than the absolute minimum) is as follows:

  • Increased brand value and trust in an organisation (a shield against the negative impact on your brand if you get it wrong)
  • Unplanned cash flow risk if you get the moral or the legal interpretation wrong
  • Aggressive tax planning requires higher materiality of the related risks and increased legal and compliance costs (along with better disclosure for investors)
  • Better access to equity capital; some investors value shares including measures for tax aggressiveness and risk
  • Decreased share price volatility; Investors who are surprised by a change in tax risk (or negative exposure) may result in decreased share rating, sell recommendation and share price volatility (the natural enemy of share-price based bonuses)
  • Employees don’t want to work for the ‘bad guy’ and aggressive tax behaviour can lead them to think they are working for the bad guy, resulting in decreased productivity (unless they secretly want to be the bad guy – in which case strike this one out)
  • If your business is structured around not paying tax, regulatory change may put significant financial pressure on the business model and may be a business ending event
  • The likelihood of change to transfer pricing rules (either by collective action or by unilateral government action) and other tax avoidance strategies is now high and high compliance costs seem likely
  • Transparency on CSR issues (of which tax is only one) is a great way to create trust and further build brand value
  • If your business wants to be trusted by stakeholders, then they need to be trusted in all areas, including the amount of tax they pay.
  • More trust with tax authorities can result in decreased scrutiny and audits
  • Increased understanding of tax in particular countries will result in increased insight into each national market and better management of risks and exposures
  • Better ability of management to make decisions about tax strategies based on better quality information
  • Decreasing Government revenues are likely to result in decreased social stability and diminished infrastructure, education, health and other key economic indicators.
  • Increasingly aggressive tax avoidance strategies increases the risk that governments and trans-governmental organisations will act to prevent tax avoidance strategies

“… the economy is creating pressure on taxpayers to demonstrate their contribution to society”

Deloitte, Responsible Tax: Sustainable Tax Strategy, August 2013

sailover

There is also a significant cultural risk that sailing close to the wind for long periods changes people’s perceptions of the risk of so doing so. In turn cultures then start to adopt risky behaviour without appreciating the consequences and the risk that behaviour crosses over into illegal territory. Unlike sailing, where if you get too close to the wind the sail luffs and the boat slows down or stalls. If you are in a catamaran, whose only usual purpose is to go as fast as possible, there is often no such warning and failure ends up like the above picture.

Top Tips on Tax Avoidance

Other Top Tips on Tax Avoidance are:

  • Understand that avoiding tax is not a legal duty, and as far as I’m aware never has been.
  • Ensure your organisation is familiar with existing and emerging international frameworks on human rights – they are connected to tax avoidance (particularly in developing economies).
  • Ensure that publicly available information allows a relatively inexpert user to draw reasonably sound conclusions about tax arrangements.
  • Think about using PwC’s Total Tax Contribution method for disclosing tax on a country-by-country (and tax-by-tax) basis. Other frameworks also exist, and Rio Tinto’s example is as good as any.
  • Take a leaf out of Adam Smith’s book, and measure how much your company relies on the infrastructure and services provided by government, and agree to pay at least that much to the government, even if you can’t bring yourself to pay tax.
  • Get properly modern, and consider using a good infographic like the one below to communicate how much the organisation is paying in tax and where.

death and taxes

  • Use existing reports to communicate on tax – CSR and Annual Report, including potentially negative information on tax.
  • Use any additional tax information gathered from a more transparent and data-driven approach to communicate more effectively with stakeholders and shareholders.
  • Use tax as a lens to understand your organisation’s Social License to Operate and the relationship between communities and the organisation.
  • Sit your CSR policies next to your tax practice and ask yourself – does that look like it is from the same company?
  • Build a cost/benefit model of your tax strategy and ensure risks are properly identified and priced, including brand and PR damage to the company and suppliers and customers.
  • Identify relevant stakeholders (including tax advocacy groups, investors, media, etc…) and their views on tax avoidance
  • Benchmark against competitors
  • Collaborate with others on issues of tax
  • Assume that all your tax affairs are public and act accordingly
  • Read what Kofi Annan has to say on the effect of tax avoidance on Africa.
  • Watch this stunning video on the importance of MNCs paying tax in developing countries:

The Future of Tax Avoidance

Starbucks agreeing to handover £20m as a tax transfer payment cost them much more than that figure alone. In addition to the lost sales and costs of managing the public protests, employee motivation and productivity must have taken something of a hit as well. The unplanned effect of that amount of money is significant. Not least of which because it has stirred governments into action to prevent it happening in future.

For long-time readers of this blog, you will have noticed that I rely perhaps too heavily on The Guardian as a source for referred articles. That’s no less true of this article than any other, but it’s important to note that while The Guardian has been running many stories on tax avoidance, it apparently does not have its house in order. According to one article, the Guardian has exploited tax loopholes to save millions also. 

tax as percentage of GDP key

tax as percentage of GDP

Data from World Bank

 

This is the final installment of a Four part series on Tax. Other parts are available below:

Part 1     Part 2     Part 3     Part 4

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Personal Disclosure

As a result of investigating the issue and writing this blog, I now avoid Starbucks (unless the person I am having coffee with bleats about their love for it) and will only buy from Amazon if I can find a UK-based seller in their selling platform (meaning someone in the UK is paying tax) or simply cannot get what I’m looking for from anywhere else (rare).

I haven’t found a search engine as good as Google, so I’m still using that. Sorry. But there are other alternatives out there to help wean yourself off Google. I’m investigating several other alternatives.

Resources

PwC’s reports on global tax burdens are backed by the weight of their global accounting team. Check out their Paying Taxes website. It’s not perfect (it uses a fictitious Case Study company to compare countries’ effective rates of tax and ease of paying taxes) but it is a great snapshot.

Christian aid’s Tax and Sustainability Guide of October 2011 has a perspective on tax motivated by its work on poverty and sustainable development. It also looks at how companies should structure their tax affairs and report on tax paid in each country of operations. Other resources are available on its Tax Policy page

SustainAbility’s Taxing Issues: Responsible business and tax is now a bit old (2006), but gives reasonably current and thoughtful comment on the relevant issues.

The Business and Human Rights Resource Centre collates a much longer list of largely left-leaning and NGO perspectives on the issue

Although it’s apposite mostly for extractives, Publish what you Pay also has a good set of resources to use when it comes to tax.

Sustainalytic’s and Arisag Partner’s publication Tax Transparency and Multinational Corporations: Issues for Responsible Investors (August 2013). This publication is a tour-de-force through the most recent critical reports and reporting of tax avoidance strategies, with particular focus on implications for MNCs based in Europe.

EY‘s publication Tax Transparency: Seizing the Initiative is a pretty good take on avoiding tax avoidance as a core business issue, and includes a relatively robust (if simple) process for managing tax payments as a corporate issue that affects brand and trust.

Deloitte‘s Responsible Tax: Sustainable Tax Strategy is a short thought piece on how to tackle some of the issues that an organisation will face in relation to tax avoidance.

 

 

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