When corporations try to pay the least amount of tax possible, their defense is usually based on delivering shareholder value. What company shouldn’t seek the lowest tax bill possible? But the line between tax avoidance — using legal means to lower tax bills — and criminal tax evasion is blurry.
Too often governments and accountants collude to bend laws. Some laws on the books can also be deemed morally unacceptable because of the role (conflict of) interested lobbyists played in writing them.
This need not be the case but it will take a conscious steps on the part of both governments and business to change the current culture of secrecy. It should be a priority. Tax evasion and aggressive tax avoidance by multinational companies deprives developing and developed countries alike of resources that could otherwise be used for social services such as schools, hospitals, and infrastructure.
And then there’s the reputational and legal risks: Google, for example, was fined by the EU commission to pay a massive £11 billion ($14.3 billion) for illegal state aid from Ireland.
There are estimates that U.S.-based multinational companies hold $2.72 trillion offshore to avoid paying U.S. taxes — roughly equal to the GDP of France or the United Kingdom. Based on these numbers these companies owe various tax bodies approximately $803 billion in taxes, and experts estimate an additional $142 billion is lost each year to aggressive use of tax havens.
When companies establish subsidiaries in offshore secrecy centers, relocating their books rather than their actual businesses, they are removing themselves not only from tax jurisdiction but from legal enforcement. They are actively concealing their business from owners and other stakeholders. In some cases it is to avoid tax, in others it might be to conceal bribes. Oxfam found the 50 largest U.S. companies had 1,600 subsidiaries in offshore centers between them.
But it is not only offshore centers that collude to reduce corporate tax bills. Tax breaks and the design of tax systems can also be influenced by lobbying, which has a legitimate function but can also be abused.
In the UK, representatives of large businesses are involved directly in the design of tax laws that could advance their own interests. In the United States, lobbying by private equity firms has contributed to the maintenance of a tax loophole — the carried interest tax loophole — from which they directly benefit.
At the EU level, 98 percent of the experts advising the Directorate-General for Taxation and Customs Union come from the industry it is supposed to regulate.
The LuxLeaks revelations showed the world that many multinational companies made special tax arrangements with Luxembourg specifically to lower their global tax bill. The sweetheart deal Apple had negotiated with the Irish government had the firm pay as little as 0.005 percent tax.
There are a number of steps that governments and business must take to stop the manipulation of tax regimes for the benefit of the few, rather than the many.
First, law-makers should to coordinate their policies internationally, close relevant legislative gaps and impose fines for undue corporate practices.
Second, companies should assess whether aggressive tax planning is legal and whether it is legitimate or perceived as legitimate by their stakeholders. The UN Principles for Responsible Investment have issued helpful guidance on corporate tax responsibility.
Third, investors and lawmakers must demand higher standards. Some investors already do by requesting companies at a minimum report on revenue and earnings attributed to each country of operation and the amount of taxes paid in each. Governments should legislate for this too.
The Extractive Industries Transparency Initiative (EITI) requires participating companies disclose all payments to host governments. In the EU companies from the extractive, logging and financial sector are required by law to disclose this information. But in the United States, the Administration and Congress unfortunately recently withdrew a relevant provision for the extractive sector.
Fourth, there must be transparency of beneficial ownership information, kept in a publicly accessible central register that regulators, financial institutions, business partners, investors and citizens can
The most effective way for companies to tick the five boxes would be to publish their tax policy along with their annual financial statements or as part of Sustainability or Corporate Citizenship reports.
If this was a global requirement, there would be no question of corruption, tax avoidance or over aggressive evasion; it would simply be transparent tax planning.
Jermyn Brooks, pictured above, is Chair of Transparency International’s Business Advisory Board and a founding member of the World Economic Forum’s Partnering against Corruption Initiative (PACI)