Directors taking part in our Series 1, 2013 Directors’ Roundtables came up with some explanations.
Part of the reason, directors suggested, is the ‘discovery’ that major global corporations such as Apple and Google appear to be paying negligible corporate income taxes despite reporting multi-billion dollar profits. Others argued that at a time when many governments are raiding every hollow log and cutting programs in an effort to staunch soaring budget deficits, anything that looks like corporate tax avoidance typically provokes a strong public backlash.
(And as several directors put it, lashing out at alleged corporate and individual tax avoiders can divert attention from governments’ own profligacy and mismanagement.)
“If governments want us to pay more tax, they should amend the rules accordingly rather than trying to shame companies into paying more tax than they need to under the existing tax legislation.”
At a more fundamental level, in many countries the use of taxpayers’ funds to support banks and other financial institutions in response to the global financial crisis has left a bitter taste in many mouths. Even if it is misplaced, the resentment runs deep and the resort to so-called ‘austerity’ programs to correct fiscal imbalances intensifies these feelings.
Our Roundtables thought so.
“The focus on the ‘tax morality’ and the ‘social responsibility’ of companies is growing in support and media attention.”
Most audit committees are aware of the threats posed by tax non-compliance and tax disputes. Good tax management has been about identifying these potential problems and neutralising them as well as minimising tax liabilities. It’s the latter concern that’s now the problem.
Companies that appear to be paying low rates of corporate income tax in relation to their reported profits usually plead that their tax position is perfectly legal. That may be correct, but, as the Roundtables conceded, legality is no longer necessarily the same thing as public acceptability. Many companies (and their audit committees) are going to have to come to terms with this dichotomy. Failure to do so risks being caught unprepared for everything from consumer boycotts to government ‘tax crackdowns’.
(Entities taking advantage of past tax losses or investment allowances or accelerated depreciation provisions can probably justify their position because the nature of these tax breaks is understandable to many people and, in any event, they are usually temporary in nature. Those with more complex arrangements will probably find it harder to justify their position publicly.)
There are two emerging dimensions to tax risk governance. The first focuses on what should constitute proper behaviour by large corporate taxpayers. This ‘tax morality’ dimension challenges the traditional perception of appropriate behaviour (paying tax according to the law) and seeks to impose a community standard (paying one’s fair share).
The second dimension emerges from the repercussions of the global financial crisis and the global budgetary problems facing many governments. Post-GFC fiscal revenue constraints are now giving rise to governments revisiting their business tax take and working to change long established tax rules and principles to protect, but in many cases expand, this tax base.
In a social media environment where public whistle-blowing, naming and shaming and lifting the corporate veil are increasingly viewed as acceptable behaviour, large corporate entities are finding that their tax obligations now carry reputational risk. Large corporate taxpayers will need to be prepared to communicate a sound narrative to support their tax figures, and be able to respond to the risks associated with potentially ill-informed commentary and discussion.
In doing so, there will be judgment calls to be made in balancing the expectations of shareholders against the aspirations of other tax system stakeholders.
Roundtable participants believed the tax avoidance issue is unlikely to go away any time soon. Indeed it could well intensify.
There are no easy answers, participants concluded. It was acknowledged that many companies use tax minimisation practices to increase returns to shareholders and improve their competitive position. Are companies now required to consider the commercially unnatural decision to pay more tax?