Tax planning stuck in moral maze

The corporation tax debate needs resolution

I was interviewed on Wednesday morning by Bloomberg and BBC World, discussing our latest IBR results which reveal that the vast majority of business leaders would welcome more guidance on tax planning, even if this reduced their opportunities to cut cross-border tax liabilities.

The media is awash with stories on the tax planning activities of large corporates. In the US, Apple chief Tim Cook has had to answer some tough questions with regard to the levels of cash his company holds abroad. And in the UK, senior leaders from Amazon, Google and Starbucks have been hauled in front of a hostile government committee to explain why they pay relatively little corporation tax in the country.

What’s interesting to me is that these companies are not in any way being accused of breaking the law. The issue is not tax evasion – which is illegal – but tax avoidance – which is not.  The debate has moved on to whether these companies ought to be paying more. It has become a question of morality.

This troubles me. Morality is a nebulous concept, certainly in the business world. Whose morality do we use as a base for deciding what constitutes a ‘fair share’? Yours? Mine? Businesses need things in black and white. They have a responsibility to their investors and shareholders to keep costs down. Simply telling them to pay their ‘fair share’ is not a viable alternative to a clear set of rules or principles.

Tax avoidance has become a measure of corporate social responsibility. A brand can suffer if the company’s tax planning is deemed too aggressive. And businesses are very aware that consumers can vote with their feet. There is no shortage of coffee houses in the UK and Starbucks have taken the unprecedented step of volunteering to pay more corporation tax this year and next in the face of a marked consumer backlash. But the amount they actually pay could end up being fairly arbitrary.

For me, it would be far better to address the tax system through international institutions such as the OECD and the UN, and via global groupings like the G20. Current tax planning rules are archaic. Businesses need guidelines for a modern, digital, internet-powered world and our survey shows they would be prepared to exchange deductions for greater clarity. We need to design a system that works globally. This will take time but simplifying and clarifying the tax code would be good for businesses, consumers and governments.

Francesca Lagerberg is global leader for tax services at Grant Thornton.