Fair taxation – time to stop skirting the issue

Jun 28, 2021 | Articles, Monthly Briefing


G7 ministers are safely home from their recent trip to Cornwall for the summit. Meanwhile their wider G20 colleagues are starting to pack for July’s Venice meeting of bank governors and finance ministers. Fancy locations, if not the full holiday experience in these Covid-constrained times. Thankfully for the rest of us stay-at-homes, they are finally making some progress on that thorny issue of corporate tax.

I say “finally” as tax has been on the responsible business “to do” list for several years, even if governments have been slow to act. In fact here at Corporate Citizenship, we published our first guidance a decade ago, still available here. The issues haven’t changed much since then, although they’ve gained greater traction as the switch to digital increasingly breaks down national boundaries and hollows out traditional businesses such as high street shops.

Finance ministers are now discussing what is the right basis for calculating tax on company profits in different countries, and whether there should be minimum national rates to prevent a zero-sum race to the bottom. The OECD’s Centre for Tax Policy and Administration has been working on complex issues like transfer pricing for much of the last decade too, but without concerted action by governments.

Whatever the outcome of the deliberations, the bottom line for any company is this: can you show your stakeholders that you are paying a fair amount of tax at national and local levels? Can you explain what you mean by “fair”? Or do you dodge the question by saying you pay what governments ask of you, within the letter of the law (with an unstated rider that you go through convoluted hoops to ensure it’s as little as possible while still staying legit)?

Back a decade ago, our tax map helped companies navigate these issues. That wasn’t about paying more tax voluntarily; rather about a convincing explanation based on a thought-through and consistently applied approach. Three years later we went further and said every large company should codify its approach to tax through a published set of principles. We gave guidance on drafting them, still available here.

All that advice holds good. A lot turns on where value is truly created and whether you can show it – or whether secrecy fuels suspicion. That’s why country-by-country reporting is so important, even if still resisted in some quarters.

Of course, tax professionals like to debate where profit is actually generated – where the customer buys the product or service. Or where the productive processes are, or the people, or the fixed assets like factories. Or where the intangible or intellectual assets or the brands are registered (lots of scope for creativity there). Or where senior decision-making is located. (Strangely, they really matter when deciding levels of personal remuneration, but not when determining value creation for corporate tax purposes.)

All that said, governments do determine the rules, and until they are more consistent around the world, the tensions will remain. Even if the G20 finance ministers follow the G7 lead, that still leaves a lot of places that are more flexible, a lot of contentious issues still to address, and a lot of companies that still need to adopt their own principled approach.

For the Rip Van Winkles out there, it’s time to wake up and smell the coffee – you have to have a credible answer to the question of how much tax you pay, where, and whether it is fair. It’s time for responsible business professionals to stop skirting around the issue of who gets what share of the rewards when companies prosper. And it’s time for purpose-led companies to get comfortable talking about what they gain from society – like an educated workforce and the ability to enforce legal contracts and so get paid – and thus what they should contribute towards that.

Then, perhaps, if governments go too far and levy unfair taxes, you just might have some credibility, and some allies, in answering back.