The Corporate Tax Debate

Overview:

Media scrutiny surrounding multinational tax affairs has significantly increased in recent months.  A multitude of household names have faced intense criticism over their tax planning policies. Increased measures from multi nationals to achieve goals has resulted in the moving of profits to where they are taxed at a lower rate, shifting expenses to where they are relieved at a higher rate, and making use of such tax attributes as tax losses, credits etc. These measures have been implemented by companies to minimise their tax burden, whilst remaining within the boundaries of the law. Changing economic, political and business landscapes have resulted in a major shift in many of the duties of CEO’s across boardrooms. Directors need to be adaptable in evaluating the business implications of the tax debate, and the potential for it to result in new tax laws or possible tax reform. 

The United States:

There is increasing force on multinationals in both Europe and the US to engage in more transparent dialogue about how much tax they pay and where. The US is one of few OECD countries to tax foreign earnings under a worldwide tax system. It is much more common practice worldwide  to allow for all or most foreign earnings to be free from taxation. Many analysts would argue that the higher tax rates of repatriated profits in the US are affecting its’ ability to compete at its most effective in foreign markets. Many feel this has resulted in the” lock-out “effect. This is described by the U.S Senate’s Committee on Finance as ‘the ability of the U.S multinationals to defer paying U.S tax on some foreign earnings until they are repatriated creates a disincentive for U.S multinationals to repatriate such earnings and invest them in the U.S….This disincentive does not exist if the foreign earnings are taxed abroad at a higher rate than the U.S rate.’ The trouble is however, the U.S has one of the highest statutory corporate tax rates compared to other countries. In addition to this, most publicly-traded multinationals will also be concerned with their book income, and avoiding financial accounting taxes is just as important to them as avoiding cash taxes. This may heighten the lockout effect. It is estimated that an excess of $2trillion in U.S multinational profits is currently held in foreign subsidiaries.

Ireland:

Ireland falls under particular scrutiny, with most of the large tech-companies basing at least some aspect of their enterprise here, due to their low corporation Tax rates of 12.5%. The Irish defence for this has always been that any company can avail of this, making it fair and transparent. This argument seems somewhat flawed however, after allegations of a deal between The Irish Government and Apple yielded a rate of less that 0.05% corporation tax to be paid on profits in excess of earnings over €22billion. In addition to this, Britain put these issues centre stage after discovering companies such as Starbucks and Google were using Tax loopholes to move profits to tax safe havens via Ireland. As the European Commission confirmed earlier this month that Ireland is one of three countries under examination for its tax arrangement, Taoiseach Enda Kenny continues to advocate that Ireland is committed to a ‘transparent’ tax system, and willing to co-operate with Organisation for Economic Co-Operation and Development (OECD) and other organisations. OECD released in its economic report on Ireland, confirming that it does not believe Ireland to be a tax haven.  In the 2013 Budget, Finance Minister Michael Noonan stated that Ireland is ‘100% committed to maintaining their 12.5% Tax Rate’. It will be interesting to see if this policy will remain in the forthcoming 2014 budget this month.

UK:

The Public Accounts Committee (PAC)also see these issues as highly relevant this year, with their report ‘ Tax Avoidance, The Role of the Large Accountancy Firms’  indicating that the Big Four accountancy practices ‘insisted that they no longer sell the type of very aggressive avoidance schemes that they sold ten years ago.’ Despite claims in this report that their practice has simply shifted to more subtle forms of tax avoidance, the PAC’s inquiry concluded that the Big Four accountancy firms agreed that international tax rules need to be updated to reflect the increasing complexities of modern business. 
In British Boardrooms, The Public Affairs Committee has made numerous contributions to changes they feel are required to amend Corporation Tax Policy in the UK. These surround a severe overhaul with simplicity and transparency of the most crucial importance. The PAC has put consistent emphasis on increasing the HMRC resources in order for them to be better equipped to deal effectively with the issue of tax avoidance. 

OECD Report:

In February of this year the OECD presented a report on Base Erosion and Profit Shifting (BEPS) to G20 Finance and Central Bank Officials, responding to growing fears  that tax profits are being lost though the shifting of profits from one location to another by large organisations. Some of the key observations included in the report where:

• There is an increase in the segregation between where profits are made and the location in which taxable profits are reported.

• Current technologies do not provide for accurate taxation on non-resident tax-payers driving substantial profits from customers located in other jurisdictions.

• Most domestic rules on International Tax are not in line with modern pace and technology of business, with large economic integration across borders.

• Planning opportunities may result in profits not being taxed in any jurisdiction whatsoever, through a hybrid of arrangements. Corporations can establish branches in foreign jurisdictions with low or zero rate income tax and then use financial instruments and to move profits, avoiding any tax.

The Future:

Whilst it is widely acknowledged that significant tax reforms from a Global perspective will take time to implement, multinational corporations and their advisors are highly anticipating how the issue of BEPS will be addressed.
Anticipation of such drastic changes means that tax is at the forefront of boardroom discussions, particularly in connection with strategic decisions. Critics on the issue of corporation tax speak of it in terms of ‘morality’ and companies failing to pay their ‘fair share’. This new emphasis is one that will be interesting to follow in the coming years.