Today the so-called Google Tax becomes law. It is, in cash terms, a bauble. In steady state, it will yield £350m a year; far less than half the cost of the reforms to stamp duty also introduced in last December’s Autumn Statement.
Yet its political importance is huge. Despite the Coalition’s radical programme to combat avoidance – which has changed the landscape beyond recognition – the Conservatives have remained vulnerable to the allegation that they are the friends of tax avoiders.
The Google Tax was their response.
Business was furious. The measure tore up the Coalition’s Corporate Tax Roadmap. The tax profession was no more enthusiastic. The ACCA, ICAEW, CIOT and others lined up to slam it: radical, introduced without proper consultation and pre-empting international measures to tackle avoidance. Nevertheless, and unopposed by Labour, it became law.
How did we get here? And where do we now go?
Business leaders recognise that the world has changed. Survey after survey places tax first amongst CSR concerns. Tax structured transactions are in near mortal decline. And litigating even vanilla transactions is perceived to carry prohibitive reputational risks. Yet a route to take matters forward remains elusive.
But here’s a prescription. Business needs to take the initiative. The defensive formulation – “we comply with all relevant tax laws” – will no longer do for a public dyspeptic on a diet of double Irish and Dutch sandwiches.
Boards need to take ownership of the tax issue. They should publish, with their annual reports, statements of tax policy. What strategy should the tax department pursue? What is the target rate of tax on corporate gains? Will the Group transact purely for tax advantages?
For meaningful buy in, statements should be developed internally. And, to remain relevant, there should be annual compliance audits. For laggards, a new Government will want to consider changes to the Companies Act.
Business has been on this journey before. The transparency and management of the supply chain is critical to such B2C businesses as Apple and Nike. Environmental concerns influence investment behaviour beyond pure ethical plays. Why should tax be any different?
It is, of course, a particularly significant cost. Perhaps it is this that has caused Boards to be slow to engage. But, although we have yet to experience a fiscal Deepwater Horizon, the EU State Aid probe should shake from complacency those businesses benefitting from sweetheart deals in Luxembourg, Ireland or the Netherlands.
Tax transparency, of course, brings risks and rewards. XCo, which chases post-tax gains, will be closely scrutinised by the revenue authorities. YCo, which adopts a principles based approach, may suffer a higher effective tax rate. But openness will draw the sting of the charge – beloved of campaigners and the media – of hypocrisy. And through the mechanic of statements of tax policy Boards will be able to set the strategic direction of this crucial, but ill-understood, function.
The alternative, of remaining on the side-lines, leaves a gap that politicians have no choice but to occupy. In the final analysis, it is the work of our own stayed hand we curse. To regain the moral authority to participate in the debate around what tax should look like, business must throw open the doors.
It is naïve to think that any multi national would openly declare that they engage in artificial tax avoidance and it is beyond possibility that any firm of auditors would report that their client engaged in such transactions.
The tax policy statement proposed is as far as its negative elements (ie engaging in aggressive/artificial tax planning) already included in the Corporate Tax returns.It would make more sense if HMRC was allowed to publish the names of companies who make declarations about “Tax planning”in their Tax returns
The DPT is a low point – a largely ornamental tax measure, legislated in a matter of days with no Parliamentary review. It will probably cost nearly as much for taxpayers and the tax authorities to deal with it as it raises in tax revenues.
But honestly, Jolyon – “sweetheart deals” is becoming as jaded and contentless a cliche as “loopholes” (meaning “defective laws”). Most advisers in Luxembourg, Ireland, etc, will tell you that any such “deals” were available on similar terms to anyone who asked. So, when is a negotiated settlement or agreed position proper, and when is it a improper “sweetheart deal”?
Is the contention that taxpayers should not try to discuss their tax position with the relevant tax authorities, and seek to resolve disputes to save time and trouble for everyone? That tax authorities should insist on taxpayers paying whatever amount they say is due, whether or not the tax authority’s views of the facts or the law are correct? Of course not. But when both sides reach a mutually acceptable position, that becomes an objectionable “sweetheart deal”?
Tax (like accounting) is replete with subjective factors (what is a trade? what is the arm’s length price? is this capital or revenue?) so there are bound to be areas of legitimate disagreement. The pendulum has swung so far that, as you say, many taxpayers are unwilling to dispute or litigate tax issues, even when they should.
To take a specific example, Vodafone took the commercial decision to settle its long-running CFC dispute with HMRC, paying about £1.25 billion of tax. I suspect, following the Cadbury Schweppes case, the company would have won its legal case in the long run, but it would have taken years and cost millions more, all time time carrying an increasing provision on its balance sheet. Is it immoral to establish a holding company in Luxembourg, if you want to invest in Germany or elsewhere in Europe?
As it happens, Vodafone also has a public tax policy, and annual reports on its tax contribution – see for example http://www.vodafone.com/content/index/about/sustainability/operating_responsibly/tax.html – Is that the sort of thing you want to see?
The target rate of tax on capital gains for most UK companies is zero, of course, due to the SSE (and they tend to pay zero tax on the dividends they receive too, due to further exemptions). Is that immoral? More generally, who is the arbiter of morality here?
We’ve been around the houses many times on corporate tax avoidance. You have your views and I have mine. I’m not sure even the smallest part of our one and only lives are well spent trying to persuade one another of the inherent ‘rightness’ of our positions.
But, yes, thanks for the link to vodafone’s tax risk management strategy http://www.vodafone.com/content/dam/sustainability/pdfs/vodafone_tax_risk_management_strategy.pdf. That is very much the sort of thing I had in mind.
“…the EU State Aid probe should shake from complacency those businesses benefitting from sweetheart deals in Luxembourg, Ireland or the Netherlands.”
We have yet to see but whatever the outcome, it remains the case that countries are free to organise their own internal tax affairs provided that’s within EU state aid rules. And of course countries outside the EU don’t even have to do that. The OECD itself when commenting on BEPS makes clear that it is artificiality rather then low or non-taxation it is concerned with.
So going forward you won’t get hundreds of companies’ finance affairs supposedly run by some bloke in a small office above a shop in Luxembourg. Instead you’ll get hundreds of people in an office in Luxembourg genuinely doing the same thing.
At the moment you might argue that it is too easy for businesses to reduce their tax bills. Maybe in the future they will have to make an effort to do so.
Now I know that you yourself don’t say so but there is an undercurrent from many in the tax reform debate that somehow, magically, as soon as a few ‘loopholes’ are closed, tax will come gushing into the coffers of the exchequer and we will all live in a land of tax justice where ‘fair’ amounts of tax will be paid (which means the rich will pay loads and no-one else has to pay much).
I don’t see that happening. It’s no coincidence that the clamour about tax arose as we went through the recession but as the economy picks up and governments realise there is a limit on the changes they can make to a system which is nowhere near as bad as they might believe, the clamour will die down.
I think it’s the end of ‘aggressive artificial tax avoidance’ but that this will be replaced by ‘sensible tax efficient structures’.
And in a world of multiple jurisdictions, some of whom do not believe they are their brother’s keeper, how do we address the democratic sovereignty exercised by countries who offer these zero or low tax rates? If the avoidance vehicle has nowhere to go, would it be mothballed?