Corporation tax – caught between a rock and hard place?

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November 16, 2014 by Paul Goldsmith

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It has often been argued by the Chief Executives of companies who are being exposed have having avoided corporation tax that they are performing a legal duty to maximise shareholder value. In other words, if the company didn’t do what they could to minimise their costs (thereby maximising profits) then the shareholders would have legal recourse to punish them for their behaviour. This argument, which may seem to shut the case for insisting that companies do their moral and ethical duty to pay the taxes they are supposed to breaks down on a simple point. It’s not true.

In September 2013 the law firm Farrer & Co issued a written opinion to the directors of all FTSE 100 companies which said simply that “It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax.” Farrer went on to say that if the company chose “to pay tax responsibly rather than structure around tax, they would, in fact, be protected by the applicable law rather than at risk of liability.” The firm’s CEO went on to point out that “Indeed, in the current corporate environment aggressive tax avoidance has the potential to cause significant reputational brand damage, which could be detrimental to companies and their shareholders over the long term.”

In this country, there is a growing movement to boycott companies like Starbucks and Amazon, who have managed to make billions of pounds of revenue here but pay barely a penny of corporation tax. Amazon have a notably opaque tax avoidance strategy, where you and I are paying British Pound Sterling for a book to be taken from a warehouse in Britain and delivered to us in a house in Britain…but our money is going to Luxembourg, or perhaps Jersey. Wherever the corporation tax is lowest. Why is this done? To make more profit. It is nothing to do with being legally compelled.

Let’s be clear, Amazon uses British roads, which are maintained by government tax income. They have British employees, many of whom are educated by the British state school system, and kept healthy by the National a Health Service, maintained by government tax income. If you or I committed a fraud against Amazon, they would expect the British police to pursue us, paid for by government tax income. Yet they seem to not feel a need to contribute to that government tax income.

Starbucks, announced a while ago they were going to pay a voluntary corporation tax contribution of £20 million by 2015. As if that would make up for what had gone before. The mere fact that they feel they can pluck that figure out of thin air instead of just paying the corporation tax that they owe sums up the farcical situation we have now.

Yet the corporation tax wars continue. The Scottish National Party, those self-confessed left wing paragons of social justice, have made no secret of the fact that they want to offer the lowest corporation tax rates in a Britain in order to attract businesses there. As long as this tax competition between States continues, the companies will take advantage of it. Why shouldn’t they?

You can talk about their obligations, but it’s just like anything else. If company A follows their obligations and has to charge higher prices as a result, they lose market share to company B, so they are not going to want to do that. So the answer is to create rules and regulations so that they are both on a level playing field. Until there is global tax harmonisation, tax avoidance will continue. Yet, it would be a quite enormous cut in a country’s sovereignty if they are TOLD what tax rate to employ.

So on corporation tax the government IS caught between a rock and a hard place. The companies? Not so much.

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