Global tax reform: it’s time to act

The global backlash against corporate tax avoidance means companies that trade across borders need to get their tax affairs in order sooner rather than later 

Tax shaming’ really is as bad as it sounds. Just ask Starbucks, Amazon, Google and HSBC. All four multinationals have faced public outcry in recent months after being ‘named and shamed’ by the media for tax avoidance practices.

Mid-sized businesses could be forgiven for thinking that tax shaming is only a danger for globally recognisable brands. But the stark reality is that if you transact across borders, you need to future-proof your tax practices to stand up to the scrutiny that bigger organisations are currently facing.

Shift in attitudes

This scrutiny has shone a light on tax practices that are not illegal but are no longer viewed as acceptable in the eyes of the public. This has led to a shift in attitudes towards corporate tax planning. Public opinion is increasingly clear: tax structures that appear to be convoluted and obscure might well earn you negative publicity.

Medium-sized companies are as much at risk as large corporates. The UK tax authorities publish a quarterly list of deliberate tax defaulters that, in the main, features small and medium-sized firms.

When the list was first published in February 2013, the Trade Beverage Company, which owed the largest amount of tax, attracted damaging headlines in the local press in northwest England, where it traded. ‘Named and shamed: Wine firm on tax blacklist for £500k dodge’, was typical of the negative publicity.

And it's not just a matter of a few embarrassing headlines. When the story about tax evasion in HSBC’s Swiss operation broke in mid-February, the bank’s share price fell by nearly 5%, demonstrating a direct link between tax practices that fail the public test and a fall in shareholder value.

But knowing what is and isn’t acceptable when it comes to limiting your tax liabilities is a major challenge for companies around the world.

Early last year, we asked the heads of 3,500 medium-sized businesses if they would welcome more global cooperation and guidance from tax authorities on what is acceptable and unacceptable tax planning, even if this provided less opportunity to reduce tax liabilities across borders. Fifty-three per cent said yes, compared to 34% who said no.

And when we asked the same group how global tax systems could be improved for business, 61% called for more transparency in what is acceptable tax planning.

Global fightback

The good news is that governments and other major bodies are starting to listen. The OECD’s Base Erosion and Profit Shifting (BEPS) project, which is due to be completed this year, will give member countries the tools to ensure profits are taxed where the economic activity generating those profits occurs, while giving businesses some clarity over what they can and can’t do. However, no one doubts that BEPS may be hard to execute globally.

Last month, the European Commission announced proposals for a tax transparency package. Under the proposals, European Union member states would share information with each other about agreements with individual multinationals on how their activities will be taxed. This shows a renewed eurozone interest in tackling tax challenges.

Beyond Europe, the United Nations, the International Monetary Fund, the World Bank and the G20 all have independent but complementary tax transparency initiatives in the works. So while there’s no shortage of global action, questions remain about when any new rules will come into effect and how consistently they might be applied.

With this in mind, many national governments have taken their own steps to bring in tougher tax avoidance rules at a faster rate. The latest example is the UK’s diverted profits tax, which is targeted at large multinationals with business activities in the UK and applicable to all profits arising on or after 1 April 2015. Meanwhile, Google, Apple and Microsoft are all 'under review' by the Australian Tax Office, meaning the agreements with the companies on transfer pricing have not been renewed.

Tough questions

Businesses operating in countries acting unilaterally need to establish whether new national tax laws apply to them and, if so, what they need to do to comply. However, in light of the general anti-tax avoidance climate, all companies would do well to put their tax affairs in order.

That should start with a thorough audit of tax practices across your business, cataloguing each tax risk and how it is being managed. The exercise should be sponsored by your CEO and the board, and be driven by your CFO. The audit would highlight areas of uncertainty that need attention. Crucially, these reviews shouldn’t be a one-off event but an ongoing activity.

As part of your tax review, ask yourself a number of tough questions:

• Do you know what your business’s tax policy is? If it doesn’t have a tax policy, one needs to be drawn up. Tax authorities see tax policies as a sign of transparency.

• Where are the weaknesses in current policy and how can they be strengthened?

• Do you know what your business’s tax planning history is? Are there any tax avoidance skeletons in the cupboard that you’re not ready for?

Uncomfortable answers

Tax authorities are most interested in companies that transact across borders with great frequency. If you’re such a company, they’ll be asking themselves a number of questions about you:

• Where is your company’s headquarters? Is it in the same jurisdiction where you’re economically active? If not, why not?

• Are you interacting with jurisdictions that have reputations for being tax havens?

• How much tax are you paying in places where you have a visible presence? Is it proportionate to the profits you’re making there?

If you’re uncomfortable with the answers to any of these questions, it’s possible that your tax practices need addressing. The key question to ask yourself is: if customers or journalists decided to question your tax practices, would you be comfortable with your answers?

The crackdown on tax avoidance affects any organisation engaged in international trade and if you have tax structuring in place that no longer stands up to public scrutiny, you’re just as susceptible to ‘tax shaming’ as the biggest names on the high street.