How much tax is ‘fair’?

Google’s agreement with Britain’s tax collectors and the European Commission’s proposals on tax avoidance have put corporate tax firmly back on the front pages – although it never really went away.

The issue will no doubt remain near the top of political and business agendas for the foreseeable future.

So here’s four takes on what’s happened and what it means.

1. Paying your ‘fair share’ 

The backdrop for Thursday’s announcement by Pierre Moscovici (pictured), the EU’s tax commissioner, read ‘#FairTaxation’.

The in-vogue sound bite for politicians across Europe is that multinationals should pay their “fair share” of tax. So how does one calculate a fair share of tax?

Is there a formula? Probably not. Is tax now an ethical issue or a judgement call? Most likely both.

What is clear is that tax is no longer simply a number that the Head of Tax or Chief Financial Officer can claim as a cost saving for the company.

Rather, it is a complex and multi-faceted CEO-level issue that takes into account a range of issues, not least the impact on corporate reputation.

2. Will transparency be the new norm? 

New rules on corporate tax have already been agreed and others are in the pipeline – country-by-country reporting, automatic exchange of information and so on.

But in spite of policy-makers’ willingness and speed to craft new rules, the changes don’t seem to be alleviating public concern.

Greater transparency is the inevitable, albeit longer-term, solution and outcome.

Simply put, is there a compelling case to inform the public in a clear manner of a company’s revenues, profits and taxes in their country?

3. Grappling with terminology 

The terminology used in the debate on tax provides a big hint on why there is controversy and divergence of views.

Politicians refer to where profits are earned, whereas companies refer to where profits are generated or created.

This is a critical difference, especially for companies that invest heavily in ‘intangibles’ – intellectual property, patents, trademarks and so on. These companies are globally mobile, and international tax rules are playing catch-up.

Politicians want profits taxed in the countries where they are earned, where their voters live, and where they pay for schools, hospitals and other public services.

Not surprisingly, some businesses prefer that profits are taxed where they are generated or created, especially if they can shift intangibles, to which they attach profits, into low-tax jurisdictions.

To further muddy the waters, many commentators have conveniently forgotten that there is no direct link between revenues and tax (corporate tax is calculated on profits, not on revenues).

All this helps explain why the debate often focuses on the number of zeros that are apparently missing from many multinationals’ tax bills.

4. Mixing politics and tax 

Is George Osborne, the UK’s finance minister, regretting publicly welcoming Google’s agreement with Her Majesty’s Revenue and Customs (HMRC)?

The UK government is fond of stressing that a company’s tax affairs are purely a matter for the company and HMRC, not the government. If so, should George Osborne have simply referred the matter to HMRC rather than seeking to claim political credit?

Mixing politics and the tax affairs of a specific company can be high risk for both politicians and the company concerned.

But in the current context, is it unavoidable? And how does this play out across different jurisdictions? What role do politicians play in Italy, France or with the European Commission?

Whether the tax affairs of a specific company are a political or purely an administrative matter seems to be an open question in the current debate.

Corporate tax will clearly remain on the business and political agendas across Europe in 2016.

There is plenty more to come, not least the landmark decisions by the European Commission in their state aid investigations.

Paying your “fair share” (good luck with the calculation!) seems to be the new benchmark against which companies will be judged.

Words  Andrew Cecil – Chair, Burson-Marsteller EMEA Public Affairs Practice
Photos  (c) European Union, 2016; CC/Flickr teegardin; CC/Flickr edowoo / own creation

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