Tax Avoidance

by Patricia Mansfield-Devine

[Published in: Ethical Performance]

Over the past few years, news headlines have been full of the issue of corporate tax evasion and avoidance.

Tax evasion is the illegal non-payment of taxes, such as not accurately declaring earnings. Tax avoidance, in contrast, is legal non-payment of taxes, such as shifting profits across borders to a jurisdiction where taxes are lower.

However, evasion and avoidance may be different in law, but in the eyes of the general public, they often amount to the same thing, which means there is a strong business argument against avoiding tax.

At a time when wages have stagnated, benefits and services have been cut and many people’s standard of living has dropped, it often angers the public to see how little tax some companies – particularly giant multi-nationals – actually pay.  The result has been a series of grass-roots sit-ins, occupations and demonstrations against some of the best-known tax avoiders such as Google, Amazon and Starbucks, and the emergence of an Action Plan by the OECD to tighten the loopholes that multi-nationals have used to their advantage.

The OECD launched its Action Plan in July last year, at the request of the G20 finance ministers. Called the Base Erosion and Profit Shifting (BEPS) Project, it identifies 15 specific actions to equip governments with the domestic and international instruments to deal with the problem of tax avoidance. In December, the organisation published a timetable for planned stakeholders’ input into BEPS, which will be discussed at the next OECD meeting, in September this year.


A fair share

The view that tax avoidance is unethical is one that is strongly held by NGOs fighting poverty.

“There is no doubt that tax avoidance is unethical,” says Murray Worthy, senior economic justice campaigner at War on Want.

“What it really means is large companies and rich individuals not paying their fair share for public services, and the welfare state and other things that the people in this country rely on.”

There is a spurious argument that tax avoidance is legal, says Worthy, “But that’s simply because the rules haven’t caught up with the way that big companies are operating.

“There is nothing about what these companies are doing that is somehow different from being illegal,” he continues, “other than that the rules haven’t caught up and made their actions illegal yet.”

The tax rules that currently exist in the UK are out of synch with the way companies are now able to structure their businesses, says Worthy, and the Government could do much more to tighten them up, particularly when it comes to British overseas territories such as Bermuda and the British Virgin Islands, where companies can use financial vehicles to avoid paying taxes in the UK.

“Most people don’t believe that’s just ‘tax planning’,” he says.

“They think if companies are using complex methods to avoid taxes that something needs to be done.”

Complexity in tax avoidance is also something specifically discouraged by the Confederation of British Industry (CBI).

“It is right to highlight and try to root out businesses that evade or aggressively avoid tax,” says the CBI’s senior press officer Mark Hadley.

“The CBI does not support abusive tax arrangements which serve no commercial purpose.

“We encourage UK businesses to only engage in reasonable tax planning that is aligned with commercial and economic activity and does not lead to an abusive result. The Government recently introduced a General Anti-Abuse Rule (GAAR) which is there to determine and combat artificial and abusive tax avoidance schemes.”

Campaigning at grass roots level, particularly against firms such as Starbucks, which has a strong UK high street presence, has done a great deal to push tax up the political agenda, but there are those who doubt its true effectiveness.

“There are some areas where it has paid off,” says Worthy, “for instance the abuse of hiding the true owners of companies – the Government has announced a register of beneficial owners, but there is much more that still needs to be done.”


A business argument

However, it is not simply a moral issue, believes Worthy – there is also a strong business argument for not avoiding your fair share of tax.

A public backlash entails business risk. When Starbucks was occupied in a grassroots boycott, it took months before the company’s sales started to recover. This kind of adverse publicity does long-lasting damage to a company’s reputation.

To avoid being tarred with the same brush, the CBI encourages its members to undertake narrative reporting to provide a broad and meaningful picture of a company’s business.

Last year the organisation published a business-led voluntary Statement of Tax Principles, which is intended to promote and affirm responsible business tax management by UK businesses. The Statement encourages businesses to seek to increase public understanding of the tax system in order to build public trust in the system, and asks businesses to consider how best to explain more fully to the public their economic contribution and taxes paid in the UK.

Measures that businesses could take, he suggests, include an explanation of their policy for tax management and the governance process that applies to tax decisions, along with some details of the amount and type of taxes the firm is paying. “A straightforward one-page narrative report on the company website would probably be sufficient,” he says.

The business community is actively engaged in a broad set of initiatives to promote tax transparency, he adds. “Business supports global action on high-level profits reporting to tax authorities [as in the G8 commitment that was negotiated at Lough Erne in 2013] which will allow tax authorities to design more focused and targeted audits, without placing disproportionate extra burdens on businesses.

“In addition, there is an international register of beneficial company ownership, the BEPS Action Plan, and efforts to support developing countries in designing and enforcing effective tax rules – all of which the CBI supports.”

However, it is important to avoid a broad-brush approach that puts all businesses in a single basket, he says: “Especially in the media. If this continues, then it could risk making the UK a less attractive place to do business.”


Further measures

All eyes are now on the OECD meeting in September, but War on Want, for one, will not be inputting directly on this occasion. “[The meeting] will be trying to fill in the big cracks,” says Worthy, “but there are still lots of weaknesses, such as treating individual arms of companies as separate traders – this is not how multinationals work and we won’t see big changes until that’s addressed.”

Of most concern, he believes, is the backlash from the US on the digital economy, as the US has refused to accept any specific wording on digital trading, leading to less detail in the proposed agreement, and also the rules on permanent establishment – the presence that a company needs to have in a country before it can be taxed – might be changed.

There are many political and technical problems, says Worthy, and importantly no developing countries are involved. The new OECD measures won’t benefit many of the world’s poorest, he says, and the tax system needs to work for the majority of people in the world.

One instance he cites is that the anti tax haven rules being discussed are not binding on individual governments but have to be signed off by individual members, which could result in a stiff political battle.

“The UK Government is trying to get companies to shift their headquarters here,” he says, “and it wants to be able to offer tax incentives. Anything that impacts the City will be opposed by the UK Government, which is keeping an eye on financial instruments reforms such as the use of derivatives to avoid tax.”

From the business perspective, says the CBI’s Hadley, the CBI is supporting the multilateral efforts at the G20 and OECD level to modernise international tax standards. “But as the UK seeks to shape this agenda it must not crush recent competitive gains,” he says.

“We must co-ordinate reforms with other countries so UK firms are not disadvantaged. A unilateral approach that creates competing regimes risks uncertainty for businesses and increases the compliance burden.”