Wondering why corporate tax has become such an issue in corporate responsibility? Look no further than the exploitation of debt and interest payment deductions in corporate tax practices.
According to a new OECD Report that we are writing a series of blogs on:
”… the concern regarding interest expense deduction is primarily with lending from a related entity that benefits from a low-tax regime, to create excessive interest deductions for the issuer without a corresponding interest income inclusion by the holder”.
“The result is that the interest payments are deducted against the taxable profits of the operating companies while the interest income is taxed favourably or not at all at the level of the recipient, and sometimes the group as a whole may have little or no external debt.”
In the language of the real world, that means that companies are borrowing from themselves just to reduce their tax bill. No new products are manufactured as a result. No real investment is made. But less tax is paid. As a result the shareowners (or is it the clever top management team?) get a bigger share of the pie.
Hmmm.
Let the last words of the quote ring in your ears “…the group as a whole may have little or no external debt”
Ultimately public opinion determines what is and isn’t acceptable practice. The kind of arrangements described in the quote certainly don’t seem normal or authentic to most people.
Times they are a changin’. For businesses interested in a responsible approach to tax, as far as this practice is concerned it looks like it is a case of “Time Gentlemen, please”.
Note: This blog addresses issues raised by OECD’s proposed Action 3. Action 3 is scheduled to be completed by September 2013. For more on Corporate Citizenship’s views on tax see our paper Tax as a Corporate Responsibility Issue