Until recently, many business leaders have been on the back foot when it comes to tax transparency and accountability. With ever closer scrutiny of companies’ international tax arrangements, now is the time for the C-suite to make their voice heard in the responsible tax debate, says Stephen Herring, Head of Taxation at the Institute of Directors.
As momentum continues to build behind the responsible tax agenda, the C-suite must take a much more hands-on approach to tax strategy. Rather than simply setting a target tax rate for the Chief Tax Officer (CTO) to work towards, today’s executives must clearly set the tone for the group’s attitude and approach to tax, both at a global and local level.
Within a responsible tax environment, this means challenging the CTO to implement authentic tax strategies – which should be chosen by evaluating the different commercially-sustainable routes for completing group transactions. Of course, any artificial tax schemes that have little economic substance should be immediately discounted. It is important to note here, however, that responsible taxation is not the same as higher taxes (see Figure 1).
In fact, there is no reason why responsible tax cannot go hand-in-hand with commercial logic. Tax is a business cost, just like energy and employment. Money spent on tax is money taken away from investment in capex, entering a new market, or launching a new product – all of which could help drive company expansion and economic growth.
So, while many boards have thus far remained understandably quiet on the subject of responsible tax, mounting public and media interest means the C-suite must now begin to fight their corner. There is a perfectly valid case for commercially-based tax planning – and structuring the group to make sure that unnecessary tax burdens aren’t incurred. As such, it is time to dispel the notion that tax planning is either something to be ashamed of or something that goes against the responsible tax agenda.
Another widely-held perception that deserves to be challenged is the idea that a company which pays more tax is somehow more socially responsible. Economic research shows that countries with lower tax burdens grow more quickly and deliver more rapid improvements in living conditions. In the UK, for instance, aggregate taxes are circa 36-7% and economic growth continues to be steady. Meanwhile, our European competitors, such as France and Italy, have higher levels of tax but their economies are suffering. In short, higher taxes do not necessarily equate to greater social benefit.
That said, the C-suite can certainly do more to explain the contribution that their group is making to local and global economies. For example, instead of issuing a blanket statement saying that the organisation complies with the tax laws in all of the jurisdictions in which it operates, why not take the opportunity to demonstrate how the value of various tax incentives has been cascaded down through customers, employees and the wider economy?
After all, a clear illustration of how tax efficiencies have led to a product coming to market more quickly, or to customers receiving better service, can only help to reinforce the benefits of responsible, yet commercially-minded, tax planning.
One of the key issues when it comes to tax is the interplay between global and local regimes, says Simon Walker, Director-General, IoD.
Tax strategy is fundamentally a board-level issue. As we have seen recently, companies’ tax affairs are increasingly making the headlines. In such an environment, decisions cannot be left exclusively to the accounting department. The board has a responsibility to understand all of the different factors which should influence their tax strategy – both financial and non-financial. This includes how decisions will affect a business’s reputation, along with the impact a certain strategy could have on relationships with stakeholders from tax authorities to customers and employees.
This does not mean, however, that the board should automatically stop managers from following authentic tax planning strategies for fear of a potential backlash. If there are legitimate reasons for following a certain strategy, boards should be transparent about why they have chosen that option, and demonstrate that it is in the best interests of the company.
The fact is that most multinationals’ corporate tax rates are around the average of the countries in which they operate. This means, more or less, they are paying what they are due. It is, of course, right that governments seek to close down the most egregious and abusive schemes, but business leaders need to be much more willing to get on to the front foot and make the case for legitimate tax planning. There is a big difference between doing everything possible to exploit a questionable loophole or striking sweetheart deals and the genuine tax planning shareholders expect. If the latter is to be protected, business leaders have to make the case that it is in the interests of both the business and wider stakeholders.