This article was first published in Edition 8 (January 2014) of Accountancy Futures, ACCA's research and insight journal.
Businesses are being pulled in opposite directions over corporate tax. On the one hand, directors have a duty to act in the best interests of shareholders, which is traditionally interpreted as maximising returns to them and keeping down costs, including tax costs. On the other hand, society expects businesses to pay a ‘fair’ share of taxes, not least to help restore the health of the public finances in the wake of the global financial crisis. Governments around the world are looking harder at the tax payments companies make and whether these seem appropriate in light of their profits.
Business leaders therefore have to balance the demands of commercial reality and corporate social responsibility. They need to build profitable, sustainable businesses while understanding that the social responsibility profile of large companies is increasingly identified with their attitude to tax. Overly aggressive approaches to the minimisation of tax liabilities are not well received.
Walking this tightrope is complicated by the complexities of accounting and tax concepts, and their interaction with modern business practices, particularly internet-based activity. Business transactions can often be interpreted in ways that result in very different tax outcomes. The difficulty businesses face in working out whether a particular position reflects the law is exacerbated by the way governments increasingly try to blur the boundaries of acceptable behaviour.
The tax environment is complicated yet further by the fact that businesses are increasingly global while tax authorities are national.
corporate taxpayers’ response
Boards need to view their tax obligations as part of the process of building a sustainable business. They should not pursue aggressive tax avoidance – artificial arrangements with no clear purpose other than to avoid tax by complicated schemes. Although companies have a commercial imperative to maximise profits, they also have a wider responsibility to be good corporate citizens. Some approaches to tax may be technically legal, but may not be widely viewed as ethical. Decisions on tax policies need to be taken in the broad strategic context of what is best for the business in terms of sustaining its long-term value – and this includes issues of public perception.
Greater transparency on how decisions on tax are made would also be useful. It could help defend corporate reputations from attack, while educating stakeholders, including the general public, in the complexities that surround corporate tax payments.
Companies could review the disclosures they make about their total tax contribution. Businesses face a range of levies and taxes, direct and indirect, as well as corporate taxes. They also act as unpaid tax collectors, withholding and paying over significant employment and consumption taxes on behalf of tax authorities. Such activities contribute to the public good but are not widely recognised.
The role of tax advisers
As the public and press criticism of businesses’ tax-paying record has grown, so their tax advisers have also come under scrutiny. Public perception is often that professional advisers must at least be complicit in the minimisation of corporate tax, and quite possibly the prime movers behind such behaviour. Tax advisers therefore need to consider their role, and the advice they provide to companies, carefully.
Professional tax advisers have a duty to advise their clients on the full range of options for maximising profits. This recognises the fact that businesses are under no obligation to pay tax beyond the requirements of the law. However, professionals also have a clear duty to advise their clients on the risks associated with any tax policy – including the risk of reputational damage due to perceptions of unethical behaviour. Not to do so could expose professional accountants and tax advisers to accusations of professional misconduct.
Tax advisers therefore need to apply their judgment and provide balanced advice. This should take account of the fact that tax is a cost to the business that needs to be managed alongside other factors affecting business success or failure. Tax liability will affect any business’s profitability and hence its ability to create sustainable value for shareholders. Professional input is essential to ensure that tax decisions form part of the overall strategic management of the organisation.
Moving policy forward
There is an urgent need for policymakers to update tax laws to reflect modern business activity. Today’s tax rules struggle to capture the substance of economic activity in the calculation of tax liabilities. Policymakers should consider whether corporation tax can be made to work at all in the new global and digital business environment – or whether other ways of taxing businesses need to be developed.
Policymakers in different countries need to co-ordinate their efforts to modernise the corporate tax system. The Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting, published in July 2013, looks at whether taxable profits can be allocated to locations other than those where the business activity takes place. The challenges raised by the digital economy are specifically being addressed. OECD members and G20 countries are participating in devising a workable tax system for global companies.
Whatever the outcome of this project, policymakers should aim to develop tax laws that are clear, simple and certain. Businesses need certainty to plan future business activity. Tax laws that require extensive judicial interpretation are unpopular with businesses and advisers alike. Taxpayers also have rights, which must be recognised and respected.
Above all, the tax laws that policymakers frame need to reflect the ethical framework that society wishes to have in place. Without this starting point, generating fair corporate tax revenues and rebuilding public trust will remain unachievable goals.
Tom Duffy FCCA partner, affecton
‘Tax is very often discussed in the abstract from wider company policies. It can also become a very complicated debate, based on technical discussions around interpretations of tax law. And of course it can be emotive, based on perceptions of what is a fair contribution. But taxation of corporates should be seen as part of a wider discussion on the economic value companies bring. In this world, companies have a purpose and a mandate to provide goods and services for their customers and by doing so create long-term value for society, their employees, themselves and their shareholders. But how they do this should reflect their remit to be good citizens and bring a wider value to society. Their approach to tax should be part of an overall strategy to enhance social and other capitals, taking into account the need to maximise financial capital. This means we should see tax alongside other meaningful contributions to society – employment, intellectual capital, a good environmental record, fair prices, etc. Boards of directors should ensure their tax policies are consistent with the values and reputation that the company wishes to embody. We also need to ensure that professional standards and ethics in accountancy keep pace with developments in tax practices. Business also needs to partner with policymakers to ensure tax laws help to sustain a business-friendly and competitive international economy while working for today’s global business models.’
Chair, ACCA Global Forum for Taxation