Now surely everybody can agree on this principle from the OECD on companies and tax:
“Existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income”.
This is a particularly potent issue in the debate around how much tax companies pay, and whether their approach is fair in the eyes of different stakeholders.
The new OECD report, on which we are writing a series of blogs, volunteers an example:
“In many countries, the interpretation of the treaty rules … allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary… without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor. In many cases, this has led ….[to] a resulting shift of profits out of the country where the sales take place without a substantive change in the functions performed in that country.”
Critics will allege that sounds highly dodgy!
You are in South Africa. The saleswoman is in South Africa. The goods or service will be delivered in South Africa. By fiscal sleight of hand the transaction takes place in Luxembourg.
Translated into English roughly what the principle is saying is: “If you make your money in a country you should pay the relevant taxes there- not somewhere else”.
Surely nobody could disagree with that?
The truth is that few will be willing to say they disagree in so many words. Yet in terms of actions many companies (and some individuals) show that it is not a principle that they hold dear.
When challenged they put on a butter-wouldn’t-melt in-my-mouth look and say solemnly: “Everything we at Consolidated Intergalactic have done is legal”.
As some of this series of blogs show, the OECD proposed actions will take away great chunks of that “I’m within the law” defence.
The Corporate Citizenship Tax Map provides further insights into different positions for companies interested in thinking about tax and its implications for corporate responsibility.
Note: This blog addresses issues raised by OECD’s proposed Action 5. Action 5 is scheduled to be completed by December 2015. For more on Corporate Citizenship’s views on tax see our paper Tax as a Corporate Responsibility Issue