Corporate tax avoidance: you pay, why won’t they?

What do Apple and Virgin Australia have in common with Donald Trump? Spoiler: it’s not their charismatic leadership.

All three have – alongside a huge range of other companies and individuals – been accused of paying less in taxes than they should have. Whether or not this “makes them smart” or breaks the law, many people feel the practice shows businesses failing to meet their obligations to broader society.

Whether this is true or not depends on an important, subtle distinction between ‘tax planning’ and ‘tax avoidance’.

Responsible companies will seek to minimise their liability through good planning – making the most of the tools and mechanisms government provides: allowances, deductions, rebates and so on.

This is different from tax avoidance. Although legal, when financial instruments are exploited to provide tax advantages they weren’t designed to create, companies can obey the letter of the law while simultaneously undermining its spirit.

The behaviour can also be seen as aggressive – for instance, in the use of overseas tax havens.

Unlike tax evasion, avoiding tax and bending the rules of the tax system is not illegal. However, that doesn’t mean it’s entirely ethical.

Tax as a social responsibility

At a time when government spending cuts are having a real impact on the everyday lives of people, how can multinational corporations justify avoiding paying their fair share of taxes?

A 2015 survey by the Institute of Business Ethics and Ipsos MORI found the British public think tax avoidance is the most important ethics issue for business to address. Avoiding tax is avoiding a social obligation. In the UK, companies such as Apple, Starbucks and Amazon were vilified and boycotted for their tax policies. Tax avoidance can make a company vulnerable to accusations of greed and selfishness, damaging its reputation and destroying the public’s trust.

Paying a ‘fair’ amount of tax in the countries in which they operate is seen as the socially responsible thing for companies to do. Taxes provide the funds for public services such as healthcare, education and public investment in infrastructure – services that companies benefit from directly and indirectly.

Tax planning arrangements that go beyond the policy intent of the law and involve deliberate approaches to exploit the tax system are not ethical. It’s as simple as that.

For this reason, tax avoidance has been branded by some as an immoral and unethical practice that undermines the very integrity of the tax system.

However, company directors see their responsibility as being to maximise the value they deliver for their shareholders. This includes keeping tax costs to a legally permitted minimum. They might also point out the various other ways businesses contribute to the economy: employee and employer contributions, business rates, sales taxes and building sustainable businesses for employment.

Fairness

Remember, corporation tax is a tax on profits. If a company makes no profits, it can’t and shouldn’t be taxed on them. The issue is whether the profits are calculated correctly.  There’s a difference between sales and profits – a company might have high sales but still not be turning a profit. But in these cases we would be wise to question how those profits were calculated.

Tax policies should be underpinned by the guiding ethical principles of accountability, transparency and consistency. Tax planning arrangements that go beyond the policy intent of the law and involve deliberate approaches to exploit the tax system are not ethical. It’s as simple as that.

Rather than hiding behind the business case for tax avoidance, businesses need to be transparent about their tax planning.

The public expects businesses to pay their ‘fair share’ of tax but what is a ‘fair’ amount is subjective. What businesses most want out of a tax system is certainty – they want to know what their tax bills will be so they can plan their strategy and investments accordingly.

So if the tax planning industry were able to obtain official clearance for any new tax avoidance scheme, it would be able to operate with confidence that its activities were considered fair according to the standards of government. This would provide it with the confidence and foresight it requires, as well as helping give citizens a clear understanding of what measures are permitted and why.

Striking a balance

Arguments for and against tax avoidance are missing the point. Politically, it might be too difficult to argue that companies pay more tax, but government and business should ensure that corporate tax contributions make a fair return to society.

Rather than hiding behind ‘the business case for tax avoidance’, businesses need to be transparent about their tax planning. Both companies and government need to pay more attention to openly communicating their position on taxation and their interpretation of tax law. This would both restore public trust in business and provide more certainty for those trying to manage their tax requirements.