Taxing issues - PDF document

Taxing issues ForewordsExecutive summary1.0 Introduction 1.1Asking the right questions The state of the debate 2.1The economic bottom line2.2Stakeholders and tax2.3Fair tax and the role of other actors The business case for responsible tax policies and planning 3.1The case for the business community3.2The case for the company3.3The case for investors At the coal face 5.0 Corporate responsibility and tax 5.1Tax risk and responsibility5.2Key principles5.3Passive vs. active Conclusions and recommendations 6.1The future of the responsible Woodward Paul 2789916161821252930 Tax Research LLP beginning to catch the attention of finance Accountancy Age 턀The importance of the companyÕs in the companyÕs tax position).턀How the tax strategy relates to corporate responsibility.As Susan Symons, Tax Partner at Taxing Issues Tax as a material CR issue element of a companyÕs economic bottom1Direct financial impacts over the 2Policy-based performance3Business peer-based norms4Stakeholder behaviour and concerns5Social norms Does the companyÕs approach to taxare likely to conflict with the companyÕs Accountancy Age 223 finance directors who participated, developed by Lord Templeman, a noted Fair tax and the role of other actors has also been highlighted. For many, a Ôfair taxÕ is as much about governmentÕsto complicate the issue further. UnderFinally, tax planning is also a highly Taxing Issues Technically legal Taxing Issues Technical terms like ÔavoidanceÕ andbehaviour, as Loughlin Hickey, Head ofKPMGÕs Europe, Middle East and Asiaconfronted by stakeholder antipathy. In recent years the scientific community, The Co-operative Bank The Tax Justice Network recentlyfrom this analysis are given below,턀The Co-operative BankÕs Tax Gap is 턀The Co-operative Bank had the 턀The Co-operative Bank enjoyed a The Co-operative Bank enjoyed a adjustments.On such a small sample basis it isimpossible to conclude whether The Co-operative BankÕs performance was a Mind the Tax Gap Ñ How Companies Could Help Beat Poverty Tax Justice NetworkTechnical terms like ÔavoidanceÕ andunacceptable behaviour. Taxing Issues and planning as an issue of corporate The case for the business Most significant of all, however, is thearrest further deterioration in the countryÕsactions,Õ said IMF managing directorTakatoshi Kato during a visit to The case for the company riskÕ. seriously. No less than 97% of thoseErnst and Young, surveying themuch on risk and, in particular, ensuring for responsible of litigation in the event of a companyÕsconsidering its affairs. The UKÕs HMRC for taxpayers suspected of dishonesty,with an individual auditor, with a wholetax agency, with a whole government.픀More tangibly, there is also an increasingSenator John KerryÕs presidential Finally, having greater certainty aboutExtensive tax planning, however, can The case for investors In addition, however, there are a variety , there are a variety but the most diligent investors frominvestigating.픀earnings. Post-tax earnings are in turn theliability, which can be substantialthe 2003 accounts for BP, equivalent towas underlined in late 2005 when Vodafone2008. The announcement knocked £10billion off the groupÕs stock marketAnd finally, once a pattern of uncertainty Taxing Issues reporting is known to exist, then it is Taxing Issues Richard Murphy of Tax Research LLP, and John Whiting, Tax Partner John, as a leading tax practitioner, do you It is clearly a companyÕs responsibility tosensible planning to manage the companyÕstax bills appropriately. There can be noThe difficulty, however, lies in balancingstrategy. What is its attitude to tax risk So the legislative frameworks are clearlyessential, with companies also needing conducts its trade. It is about a companyÕscorporate irresponsibility. It is irresponsiblewithin democratic society, and a companyÕshave that duty. What else can corporateThree things evidence this responsibility.letter of the law. The third is transparent act of corporate irresponsibility.Tax Research LLP Taxing Issues One of the more controversial aspects of tax planning has been the practice of located in the companyÕs countries of origineach other. Unfortunately it is difficult to coordinate this duty. There is nomultilaterally. This is a failure of thein accordance with local law. So, to an extent at least, companiesinvolved in this kind of dispute Ôhave it much Ôpiggy in the middleÕ. Certainly nohave responsibilities. Tax authorities canan understanding of the companyÕsalso be part of a tax authorityÕs role to carryIt is surely part of the taxmanÕs job to liaise Clearly there is an argument about how much of a responsibility lies with Ultimately it has to be part of a companyÕsthe companyÕs activities Ñ and there will be many, far more than just corporate Taxing Issues indeed responsible Ñ is not always clear.and economic circumstances. Ideally,PricewaterhouseCoopersÕ Total Tax턀Reporting the full tax contribution 턀Commenting on its tax strategy and 턀Discussing its approach to the 턀Considering reporting taxes collected, the company is making to the country.the wider economy. As all accountants know, data isit is acting responsibly.which facilitates compliance.픠 Tax risk and responsibility more broadly, as well as with customers,be prejudiced by ÒaggressiveÓ tax planning,forgo the tax opportunity.픀We stress however, that while important,responsibility, but if it is the sole criterionÔeconomic bottom lineÕ.more particularly, actively manages thepayment of tax is seen in this way. Taxing Issues responsibility 5.0 as a cost to be avoided but as a Taxing Issues Key principles address this agenda respond? We outline any discussion of corporate responsibility being held to account in this way.considered the broader, economicsense accountable, even if indirectly.To their credit, many companies have턀The planning does not seek to shift the 턀The tax planning is secondary to the Transparency the disposal of ShellÕs Brent Spar andMonsantoÕs attempt to introduceof Shell, Cor Herkstršter, then Chairman of the companyÕs Committee of Managingbehave responsibly, nor indeed did theycontroversial issues. Transparency, ShellSimilarly, the issue of tax is also now As KPMG argues, ÔAn attitude of benignissues.픀 practice generally, combined with specificTransparency, however, is likely to require And finally, in the same way that, in the same way thatof taxesÕ as part of the companyÕs ÔcredoÕ. AstraZenecca says, ÔWe draw a distinctionin the latter.픀 Passive vs. active least implicitly, on strong principles ofconsistency and accountability. We wouldThe framework summarised in Box 10 takes Taxing Issues Transparency, however, is likely to Taxing Issues Transparency Passive tax responsibility Tax seen solely as a cost to be minimisedTax policy and practice incidental to Tax acknowledged as a key element of acompanyÕs economic impact on societyTrue to the spirit of the law: avoidsTax policy and practice integrated intoBox 10 Taxing Issues with corporate responsibility, companies There is increasing attention andimportance being given to the wider groups. Key issues that have emerged inlending practices in the financial sector, Particularly controversial issues such as thepoverty reduction in developing countries.픀potential trajectories. Similarly, companies financial standards, to one focused on Tax has traditionally been the preserve recommendations6.0 tax policies and planning need to be brought Taxing Issues As KPMG pointed out in its 2004 report Tax in the Boardroom , ÔParties involved ingovernance debate.픀company, we recommend that companiesas well as a reputational screenÕ. The latter,he confessed was Ôinfinitely more difficultÕ.1Do I mind others knowing what 2Who does my decision affect 3Would my decision be considered More specifically, tests have been createdthe Australian Tax Office has generated illustrated in Box 11.While the Australian Tax Office approach companies also experience. We therefore10 to take account of wider interests and business activity. good reasons why a companyÕs tax issuesFirst, and probably none truer, is that taxstanding of almost alien terminology.픀 The Australian Tax OfficeÕs ÔchecklistÕ 턀Significant variations in the amounts 턀Unexplained variation between 턀Unexplained losses, low effective tax 턀A history of aggressive tax planning 턀Weaknesses in the structures, processes 턀Tax outcomes that are inconsistent Box 11 We strongly recommend that companies As a tax director at one FTSE 100 companytold us, ÔTax exists in an alternative universeax exists in an alternative universedirectorÕs eyes glaze over when you broachthe subject of tax.픀 Internally, the arms-length approach to thecompanies will need to change. Tax risksfor the issues to be managed in this way. expressing an interest in the companyÕsThis does, however, leave many companies턀Building links with other business 턀Specific recruitment and/or training for 턀Undertaking corporate responsibility and 턀Reinforcing governance processes to The public face of the profession the tax industry, dented by scandals attax planning. In particular, efforts arechemical industry, finance and therequired to report publicly. reporting against a code ofconduct or quality standard that outlines a strategies, and to generate greater 턀Greater general awareness of the tax 턀Encouraging a balanced view of tax 턀Responding to information demands 턀Tailored stakeholder reporting and 턀Longer-term reputation risk benefits.support (74% of 70 respondents) from the Taxing Issues the reporting of tax policies, planning and So how should companies report on theirapproach to tax? Given the complexitiesstage model leading from ÔcomplianceÕ to Current status of reporting Co-operative Financial Services, Kesko,Philips, Placer Dome, PotashCorp, SABMiller, Talisman and Unilever all providecompanyÕs broader responsibilities toTEITIEITI Taxing Issues the reporting territory, but provides noresponsibility.a companyÕs overall approach to CR. subsidies received) by geography.(employerÕs tax liabilities) and on Level 3 Extensive BBVA, BP, The Kesko, Philips, PlacerDome, PotashCorp,SABMiller, Talisman, Taxing Issues drawn from the extractive sector, thequality of reporting is clearly ÔsystematicÕ. Statoil in particular, provides agovenance of tax at the company. The future of the responsible company and tax with startling regularity. Many, if not all,through this new ÔCR lensÕ. For many CR andof a companyÕs responsibility to the Taxing Issues activity, and certainly individual actors suchas Citizens for Tax Justice in the US and theAustralian Tax Office have served at the턀Corporate responsibility reporting, led limited by geography. At the behest of턀The payment of tax in developing offshoring in the services sector, as well턀In addition, as the major NGOs involved in the Make Poverty History campaign턀Wider efforts to increase transparency 턀Increasing use of fiscal instruments to Ultimately, we believe that as pressure of their responsibilities on this issue. Toorobust and responsible way. The days whentax could be managed by ÔgentlemenÕs managed by ÔgentlemenÕs agreementÕ Taxing Issues by AccountAbility, specifically the report Public Policy for Effective Corporate , 2003. The State WeÕre In Little Brown, 2002.Quoted in Vanessa Houlder, ÔThe Tax Avoidance Story as a Morality TaleÕ, NLNLellusUSUSomorrowÕs CompanyResponsibility, SustainAbility, Swiss Re, Insight Investment and Foley Hoag LLP, A DirectorÕs Guide to Trends in Corporate , 2004.medicines in least developed countries Untangling the Web of Price Ireland, Korea, New Zealand, Russia,We have used Ôtax and corporate Publish What You Pay; Christian Aid, The Shirts off Their Backs Ð How TaxPolicies Fleece the Poor Save the Children, Measuring Revenue Transparency Tax, Risk and Corporate Governance Kenneth Lee, Generation (Ta)X example, Finland, France, Germany, ItalyOver Ethics and Tax AvoidanceÕ, Accountancy Age Responsible Tax Clare Bolton, The Role of Tax Tax Planning InternationalReview, by AccountAbility, specifically the report Public Policy for Effective Corporate , 2003. Tax in the Boardroom: A Discussion Paper Vanessa Houlder, ÔThe Tax Avoidance Story as a Morality TaleÕ, Roger Cowe, ÔTax Avoidance is Rising Financial Times Ethics and Tax AvoidanceÕ, AccountancyAge What is a Responsible Tax Strategy? www.pwcglobal.com8 NZTC 5,219.The Tax Gap Ltd, Mind the Tax Gap Ð How companies could help beat poverty Tax Justice Network, 2006.in September 2005 of the Tax Justice Tax Us If You Can which concluded that US$11.5 trillion Loughlin Hickey, ÔThe Debate: Accountancy Age SustainAbility/UNEP, The 21st Century SustainAbility, 2003.Tax Faculty of the Institute of Chartered Accountants in England and Wales, How Tax Policies Fleece the Poor Fiscal Exemptions to Mega ProjectsÕ, Mozambique Business Ð Daily InvestorIntelligence , 21 September 2005. Tax Risk Management What is a Responsible Tax Strategy?, www.pwcglobal.com.Ernst & Young, Tax Risk Management: the Evolving Role of Tax Directors Ernst & Young, 2004.Taxes?Õ, Tax Notes Kenneth Lee, Generation (Ta)X Alex Hawkes, ÔVodafone Shares Sink Under Tax BillÕ, Accountancy Age, PricewaterhouseCoopers as a sponsor. Responsible Tax Taxing Issues Tax in the Boardroom Total Tax Contribution Framework Ð What is YourCompanyÕs Overall Tax Contribution?, see www.sustainability.com/insight Responsible Tax Tax in the Boardroom www.ibe.org.uk/tests.html A similar ÔtestÕ developed by Texas(see www.ti.com/corp/docs/company/Australian Tax Office, and tax compliance Kenneth Lee, Generation (Ta)X Equity Research Europe, 2005. Tax Moves up the Agenda for See for example John Plender, ÔHow Everyone Pays For Ethical Lapses at , 20 June 2005.range of newspapers including the Financial Times and Observer of TJNÕsstudy, www.taxjustice.net/cms/upload/pdf/Briefing_Paper_-The_Price_of_Offshore_included Responsible Care¨ in thechemical industry, the Equator PrinciplesIndustry Transparency Initiative in theextractives sector. Total Tax Contribution Framework Ð What is Your CompanyÕs Overall Tax 54Global Investors recommends in itsreport, Responsible Tax Publish What You Pay Coalition(www.publishwhatyoupay.org).www.eitransparency.org and the Tax Justice Network. Taxing issues: ISBN 1-903168-15-5judgement are ours: if you detect any,please let us know. Kelly CruickshankTax Research LLP Disclaimer only, and does not constitute professionaladvice. You should not act on theand, to the extent permitted by law,this publication accept no liability, anddisclaim all responsibility, for the Acknowledgements The Taxing Issues time and energy. We would like to thankTuppen (BT), Philip Gillett (ICI), ProfessorColville and Alan Miller (Pearson).We would also particularly like to thankWoodward from PricewaterhouseCoopersand Paul Monaghan, Colin Baines and Joproject. We would also like to thank Robwell as John Elkington, Peter Zollinger andKavita Prakash-Mani from SustainAbility for Taxing Issues environmental Waterless Offset processSeacourt Ltd holds ISO14001 and renewable energy. 001www.sustainability.com