The Big Bad Corporation Tax Debate
Several weeks ago, after reading articles on the Panama Papers and Luxleaks scandals, I was prompted to think about the effects of corporate tax avoidance. I wanted to try to understand this complex matter, so here is my layman’s take on it.
What is corporate tax avoidance?
Corporate tax avoidance is using the legality of the tax system in a particular country to the financial advantage of a business or corporation – finding ways to reduce the amount of tax that is payable by means that are within the law.
Seemingly, corporate tax avoidance scandals have prompted EU governing bodies to fast-track their plans to bring through corporate tax policies that increase tax transparency and also make parameters clear for businesses operating in the EU.
In light of the Brexit vote, you might wonder how significant this will be for the UK, and the answer is this: it will be as significant, if not more so, than before an exit. UK businesses, if they wish to trade in Europe or have bases there, will still need to adhere to these laws, and many economists have thrown their weight behind the UK adopting these laws internally, helping to save on the administrative and logistical headaches that Brexit poses for multinationals doing business here.
An environment of complex tax rules, fiscal secrecy, non-cooperation between member states in the context of globalisation, and fast-evolving business models allow some multinational corporations to exploit the legal loop holes in the tax system in order to reduce the amount of corporate income tax paid.
Top five drivers for a more joined-up approach to corporate tax policy:
- Tax should be paid where companies operate, so that they are contributing to public services
- The current rules are old and are allowing companies to take part in tax avoidance
- The risk of reputation for companies
- The chance to showcase commitment to the development of society
- To establish the trust of shareholders (less risk of being embroiled in legal battles over tax avoidance)
Internationally, the Organisation for Economic Co-operation and Development (OECD) has launched the BEPS (Base Erosion and Profit Shifting) project, which is closing the gap in tax regulation rules between countries. At an EU level, by 2018, there will be country-by-country reporting to tax authorities. These records will be publically available online for five years and will need to be filed in each country with the business register. These reporting mechanisms will apply to EU headquartered companies and non-EU headquartered companies with operations in the EU. EU banks will not be required to disclose under this policy, as they already do so under the Capital Requirement Directive; however, non-EU banks operating in the EU will need to do so.
The objective of the BEPS project, and the work at EU level, is to fight against tax avoidance and aggressive tax planning. This links to Corporate Social Responsibility because even though aggressive tax planning is not currently illegal, it is not socially acceptable.
An estimated €15-17 billion is lost in the EU every year due to this tax avoidance, but what does this really mean?
It means that . . .
- The ordinary working-class person is paying higher tax to make up for this loss in revenue to the state; and
- It offers an unfair competitive advantage to companies not engaged in aggressive tax planning. These are normally home-grown Small-to-Medium-Sized Enterprises (SMEs) who avail of export markets, thus the ability for 80% of our businesses to thrive in the global economy is potentially affected.
Looking for any opportunity to cut costs in business is a symptom of the Capitalist world in which we live; however, a word of warning to those partaking in tax avoidance and aggressive tax planning – you cannot claim to be a responsible business or an ethical organisation if you have dodgy tax governance standards. Many multinationals caught out due to this unethical behaviour have seen their stocks suffer significantly as a result.
So, how will your business benefit by engaging in good tax governance standards?
- You will mitigate risk both reputational and fiscal
- Investing in the sustainable development of the country in which you operate will only serve to strengthen your business
- You will support Human Rights by equipping host countries with the revenue collection needed to realise these rights
So, to be a truly responsible business, you must get your house in order and contribute to the welfare of the state, before considering engaging in nicer CR activities.