A consultation: What is your company’s tax policy?

The tone of corporate tax policies has changed “to reflect the hostile climate to avoidance”, according to research conducted by the Financial Times. This morning the paper noted that a number of the companies with the biggest public sector contracts said they aimed to be viewed as “low risk”, saying that as government suppliers they were subject to particular scrutiny.

Last year the UK government tightened its policy on procurement in order to “promote tax compliance”, and Pinsent Masons published a useful guide to the new policy in March 2014. But the reputational risk associated with tax avoidance is not limited to companies bidding for government contracts.

In recent weeks the taxation of multinationals has been on the agenda at least three events in London. The Chartered Institute of Taxation has published a short report and video highlights of the Lord Mayor’s Tax Forum on 30 April.

I attended the second event, a useful conference on “tax risk management” hosted by the Oxford University Centre for Business Taxation on 15 May. Much of the discussion centred on HMRC’s strategy for handling disputes in a complex area where tax law often provides a range of tenable answers, but speakers also discussed whether there was enough information in the public domain for people to judge “whether [tax] outcomes are fair”. The speakers’ presentations and links to media coverage are provided at the foot of the OUCBT web page.

But my question is prompted by the third debate, one that I missed (I blame the Finance Bill!), last week. JustShare and Christian Aid hosted the event and posed the question: “Paying up: Is tax a question of ethics?”

Some attendees tweeted using the hashtag #PayingUp (see tweets for 4 June). Tim Davies, head of tax at Mazars, tweeted:

“I think [a company’s] tax policy must align with the company’s values and position on [corporate social responsibility] etc taking on board all stakeholder views.”

This reminded me that earlier this year Mazars published for consultation a draft Board Charter. The initiative seems to have received very little publicity but the consultation, which ends on 30 June, is a useful contribution to the debates surrounding tax transparency and the ongoing efforts to modernise the international corporate income tax system.

Richard Murphy gave the Board Charter a cautious welcome last month, but suggested that it did not go far enough. Murphy is technical director of the re-launched Fair Tax Mark, which suggests that companies should declare an intention “not to abuse tax havens” and “not to structure transactions artificially or abusively for the purpose of avoiding tax”.

Mazars’ draft (see The Board Charter, page 5) says: “The board keeps under review its policies on taxation and other payments to, and receipts from, governments and other state bodies in the countries in which it operates and is satisfied that they are fair and transparent.”

And the firm posed the following question: “What are the practical challenges for boards in seeking to determine whether their taxation policies are fair and transparent?” In an explanation of the draft Board Charter, the firm said (emphasis is mine):

“As a guiding principle, it may be appropriate that the amount paid by a business in each jurisdiction in which it operates should be fair having regard to the amount of activity undertaken and/or value created there. Whilst applying this principle in practice is unlikely to be simple, it will be important that taxation arrangements appear reasonable having regard to the substance of the activities of the business and generally that taxation schemes that an independent observer would consider artificial should be avoided.”

It is interesting to see a major firm of accountants openly suggesting that companies might adopt this approach. The tax outcome seems to be in line with what the OECD’s action plan on base erosion and profit shifting (BEPS) seeks to achieve by bringing about changes in domestic tax laws and international treaties. In the OECD’s words this would “better align [governments’ taxing rights] with economic activity”.

Action 5 of the OECD action plan reads: “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.”

Action 7 (prevent the artificial avoidance of permanent establishment status) notes that in some cases “multinationals have been able to use and/or misapply [the] rules to separate income from the economic activities that produce that income and to shift it into low-tax environments”.

The BEPS project is very ambitious and there are signs that it is meeting some resistance, particularly in the US. In the meantime, it seems clear that some companies have adopted a more cautious approach in managing their tax affairs. Others will continue to engage in what the OECD has called “aggressive tax planning” until tax laws are changed.

But what should those companies seeking to manage their reputational risk do now?