Reputation is now a tax risk

International Tax Review December 2012My editorial from the latest issue of International Tax Review

Contrary to the tin-hat theories on Mayan prophecy, 2012 is over and the world has not ended. But the year brought great change for multinationals and how they conduct their corporate tax affairs.

Tax avoidance has dogged companies in the mainstream press like never before. What was once at best an issue for the business sections has become front page news as governments desperately search for means to plug gaping budget deficits and the public feels the pinch of service cuts and cries unfair.

Rightly or wrongly, household corporate names are being denounced as poor citizens because of the tax planning they have employed for years that has suddenly become unacceptable in the eyes of the media and the public. Most notably of all are Google, Amazon and Starbucks, hauled before the UK Parliament’s Public Accounts Committee and its unforgiving chairwoman Margaret Hodge last month where their inability to make a compelling business case for their corporate structures only sharpened the public perception that they have been too aggressive in avoiding tax.

France has also demanded that Amazon pay more tax, while the Australian government referred to Google Australia directly in November when it unveiled draft revisions to transfer pricing laws.

The companies have done nothing illegal. And they are keen to trumpet that the amount of corporate tax they pay is not their only contribution to society. But from the hostile reaction they have received, it is clear that these kinds of arguments no longer wash with public – and customer – opinion. Now the argument comes down not simply to whether businesses are acting legally, but whether they are acting morally.

Starbucks, whose highly visible brand-orientated business has perhaps been hit hardest by customer revolt, has agreed to pay £20 million ($32 million) in UK corporate tax over the next two years. This is more than it has ever paid in its 15 years operating in the country.

Its most strident critics are unlikely to be satisfied by this move, but it is a start and a sensible one. Other companies would be wise to take note and learn from Starbucks’ misjudgements and how it is attempting to rectify them.

It is high time that tax became more of a boardroom concern. Starbucks has gone to great pains in recent years to improve its reputation by promoting fair-trade products and environmentally sustainable practices, but all that good work on CSR has been undone by one tax scandal hitting the press.

Companies planning their tax affairs can no longer afford to think only about their exposure to risk, but also their reputations. Governments around the world are closing loopholes, while transparency is shooting up the agenda with the proliferation of FATCA-like legislation promoting automatic information exchange. But tax authorities are not the only ones watching. The media and the public will be looking on too.

The world may not be over. But companies must face the fact that it has changed. Tax planning will never be the same again.

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