The issue of how big businesses manage their tax affairs has attracted a remarkable amount of public scrutiny this year.
A heated debate has pitted activists and some politicians against some of the world’s best-known multinationals.
The likes of Google, Amazon and Starbucks stand accused of avoiding paying billions of pounds into the public coffers, while such companies, their industry associations and advisers point out that they are operating within the law.
The corporate lobby also claims that the media has largely failed to understand the nuances of an incredibly complex subject and explain these properly to a concerned public.
In the meantime, the OECD’s “action plan on base erosion and profit-shifting” to support national governments’ efforts to “shape fair, effective and efficient tax systems” – a programme that’s likely to be highly influential when it finally comes to fruition – rumbles on behind the scenes.
But has the furore started changing businesses’ attitudes to tax strategy already with regard to implementation and transparency, or are they toughening their stance, insisting that they are sticking to the letter of the law and merely serving the best interests of their shareholders by minimising their tax obligations?
According to the Confederation of British Industry (CBI), companies had been reassessing their approach to tax strategy and how to communicate this for some time before the issue hit the headlines.
“I think the world has changed – and not only because the parliamentary public accounts committee has taken an interest in the issue,” says Richard Woolhouse, the CBI’s head of tax and fiscal policy.
“It’s a long-term situation where the relationship between HM Revenue & Customs and large corporations has changed. This has come at a time when corporations have moved away from using more aggressive schemes. In tax affairs, reputation is now a powerful driver of behaviour – as we have seen in recent high-profile cases.”
Woolhouse says that a number of CBI member firms have tried to get on the front foot by issuing far more detailed information about their tax-planning activities.
“We urge everyone to explain more, but also caution companies to be careful not to send out a wrong message that can be misinterpreted,” he says, adding that a host of prominent British businesses have issued comprehensive guidance.
“We support companies that are more proactive in narrative reporting and integrated reporting that addresses this area.”
The use of narrative reporting to provide more information on a company’s approach to tax is an idea that appeals to Philippa Foster Back, director of the Institute of Business Ethics, but she warns that this will work only when “companies stick to a framework in how they do this. Without setting a tax strategy in its context, it can be fairly meaningless.”
Whichever form tax-strategy reporting takes, the most significant shift in corporate behaviour will have been to put the matter high on the board agenda, Foster Back argues.
“The big thing is that boards are making a decision about how aggressive they want to be. That’s where best practice is heading, although not every company has gone the whole hog. The reason that it is an ethical issue is because boards are exercising a choice about where they strike that balance.”
The only way is ethics
Pressure groups seeking greater tax transparency are, understandably, suggesting that businesses – particularly companies operating in the spotlight, such as firms with strong consumer brands and those working in extractive industries – would be well served by falling in line with changing public sentiment.
But one such campaigner, Joseph Stead, economic justice adviser at Christian Aid, questions the corporate appetite for change.
“While there has been some progress, notably in the extractive sector, there remains a long way to go towards real and verifiable action,” he says.
“For companies that rely on their brand, the reputational risk of an aggressive tax strategy has, I suspect, moved up their list of priorities. For those that are mostly business to business, there may not have been much movement.”
Stead does think that corporate tax planners are taking a more considered view of how their strategies might play out.
“We are in a process of change with tax specialists. For many years they faced relatively little scrutiny, but more questions are being asked now, both by boards and by a wider range of stakeholders,” he says.
“Some are responding well to this and accepting the need for, and potential benefits of, having a better and broader discussion about tax. Others are trying to maintain the line that tax is too complex for non-specialists to understand and refusing to engage.”
He continues: “We may be on the verge of some significant change on the part of shareholders, although it will require a shift away from short-termism. Aggressive tax avoidance holds a number of potential risks for shareholders, because tax regimes may change and profits based purely on avoidance can disappear rapidly. Similarly, while a complex tax avoidance scheme may confer a temporary advantage, companies that are able to compete on business fundamentals and not on creative accounting are likely to provide the best long-term value for shareholders.”
Other campaigners believe that many companies have been completely unmoved by the call for greater openness about their tax affairs.
One such doubter is John Christensen, director of the Tax Justice Network.
“Judging from recent discussions, transnational companies remain resistant to public and political pressure to end tax avoidance,” he says.
“It’s still seen as a legitimate activity, despite evidence that it creates harmful market distortions that impede fair competition. While some debate is clearly occurring within the tax planning community, there’s little evidence at this stage of a serious shift of culture. If anything, there seems to be resentment at the public’s reaction against tax avoidance.”
The advisers’ perspective
So how are tax consultants approaching their work in this light? “We are in something of a hiatus,” says Bill Dodwell, head of UK tax policy at Deloitte.
“Although the OECD is changing its rules, this is not going to happen overnight, while an EU directive covering the extractive sector will take effect in 2016. Nevertheless, we are encouraging our clients to introduce additional narrative reporting on the subject.”
Bradley Phillips, tax partner at law firm Herbert Smith Freehills, is not even sure that there will be significant changes at international level, despite the OECD’s best efforts.
But the guidance he offers his clients is based on the belief that they need to send a clear message about their approach to tax.
“While I’m not sure there’s been a fundamental change in the tax strategy of multinational companies – maximising shareholder value is still paramount to them – I think a lot more companies are feeling the need to put something out that explains what their tax strategy is,” Phillips says.
William Dantzler, head of tax in the Americas for law firm White & Case, agrees. “There has been an ongoing process of change in which more clients are asking: ‘Are we paying the right amount of tax?’ This has been going on for a number of years, but it has accelerated over the past year because of the tone of press reports,” he says.
But Christensen remains critical of the tax-planning industry at large.
“I have spoken with many progressive tax advisers who are totally aligned with our position on the need for reform,” he says.
“But I suspect that most in the industry remain wedded to the existing framework of rules – and especially to the arm’s-length method of transfer pricing, which, let’s face it, is a nice little earner.”
Christensen argues that, if multinationals truly wanted to simplify their tax affairs, they would be pushing for the abandonment of the current OECD framework and the adoption of a unitary approach entailing combined reporting and country-by-country disclosure.
Woolhouse says that the CBI is opposed to country-by-country reporting on several grounds.
“Some companies make the point that it will be illegal for them to reveal details of activities in some regions, such as in the Middle East, or be anti-competitive in sectors where they may be competing in global oligopolies. As a result, we don’t think it is a panacea.”
But transparency activists such as tax accountant Richard Murphy dismiss such arguments against country-by-country reporting, which he has been campaigning for since 2003.
“Are we really going to say ‘if it’s illegal to publish various pieces of information in Turkmenistan, then a British company cannot publish these under UK company law’? And, to the argument that it would be anti-competitive to publish, I say that it would be anti-market and anti-business to prevent this level of disclosure,” Murphy says.
“Under the changes to the EU directive on transparency, 90 per cent of companies in the extractive sector will be affected, which undermines that argument.”
Whether companies have taken it upon themselves to review their strategy on corporate tax, or whether it is being imposed on them by a set of external forces, there is little doubt that change is occurring.
The speed at which various firms will move depends largely on their public visibility and on how seriously their boards treat the risks associated with not having a well-considered global policy on tax.
Reforms at the EU or OECD level may be moving slowly, but at some point their effects will be felt as policymakers will be influenced by a debate enlivened by the media’s continuing preoccupation with the subject.
Perhaps most significantly of all, governments are under ever-increasing pressure to raise as much tax revenue as possible – a point not lost on tax planners in any company.
Illustration: Christian Montenegro
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