The conventional wisdom is that, in the eyes of the business person, tax is just another expense; one which needs to be kept as low as legally possible. "Anybody who does not minimise their tax wants their head read", asserted the late Australian media baron Kerry Packer to a 1991 parliamentary committee. Nearly 25 years on, some international companies have failed to revise their tax arrangements in time with heightened scrutiny of their culture and practices.
Yet the latest annual edition of the Grant Thornton International Business Report (IBR), surveying 2,580 businesses in 35 economies, has shown a possible change in opinion with respect to how businesses view their taxes as an expense.
83% of UK business leaders surveyed agreed that paying more taxes might be acceptable if the result was better clarity from tax authorities – up from 59% when asked the same question a year before. Similarly, 83%,and 75% from the US and the G7 shared this sentiment, including a staggering 95% from India.
The results are timely given the seismic changes in the world of international taxation, namely the OECD and G20 Base Erosion and Profit Shifting (BEPS) Action Plan, guidelines geared towards improving tax collection from multinationals by global authorities. Consisting of 15 "Action Points", the project is still a work in progress; with seven points being released in September 2014, the rest are due for delivery this October.
However, confidence in the ability of countries to actually deliver upon the BEPS Action Plan was down by one point to 23% amongst the overall survey respondents. Rather, 71% were more supportive of unilateral action taken by their own governments to recover tax revenue – amongst UK respondents, this rose to 79%.
Indeed, this year saw the UK government introduce its own measures to combat tax avoidance in the form of the Diverted Profits Tax (DPT), known in the media as the "Google Tax" in reference to multinationals being popularly perceived to have avoided hundreds of millions of pounds of tax here. Companies seeking to avoid a taxable presence in the UK must now report their company structures; and if it is deemed they have diverted profits out of the UK artificially, those profits are taxed at 25% rather than the current 20% UK corporation tax rate (set to reduce further to 18% by 2020)
For example, if a group has a presence in two countries: the UK (where it has a warehouse) and Ireland (where it is headquartered) and makes significant sales in the UK, the group can claim that a warehouse is not a "Permanent Establishment" for tax purposes and therefore does not pay tax on profits from its UK sales, shifting taxability to Ireland instead (at lower rates). If DPT applies,, the group will now owe HMRC 25% of profits from its UK sales. Since the regular 20% corporation tax is a more attractive rate, the group is incentivised to set up a Permanent Establishment in the UK in order to make itself eligible for the lower rate.
DPT ostensibly corresponds to the OECD's BEPS Action Point Seven: "Prevent the Artificial Avoidance of PE Status". The underlying implication, though, is rather different. While it is arguable that implementing a unilateral action on multinational tax avoidance adheres to the wishes of the electorate, pre-empting the release of the OECD's guidelines suggests the UK government has decided to apply a pre-emptive strike in advance of the OECD's ability to design, and other countries' ability to implement effectively, the BEPS project. This is despite the facts that the BEPS timeframe is much faster than previously seen in the international tax landscape and that the UK itself has been a prominent and pro-active contributor to the initiative.
Implications aside, we can say the DPT is another grey area in an already complicated and voluminous tax code. UK businesses tell us they want more clarity on tax, and pre-emptive strikes like DPT, and similar measures by other countries, may well be prove to be a drag on business growth for the benefit of their stakeholders and communities.
However, the UK has at least supported the BEPS project in a fairly even handed way. Many countries including those heavily involved in the BEPS project such as China, are unlikely to adopt all the proposed measures. There is potential for countries to cherry-pick only those measures that suit their interests.
Francesca Lagerberg, global leader for tax services at Grant Thornton said: "Businesses may be pessimistic on the chances of a global agreement - the Doha Round and climate change negotiations have taught us that these things take time. However, the work being undertaken by the OECD on tax planning should go some way to allaying business concerns by moving this debate away from talk to action.
International tax standards clearly need to be stripped down and rebuilt for the world we live in today. The existing legislation is creaking at the seams in an increasingly interconnected, digital world in which the definition of a 'border' is looking archaic. The research is showing that businesses are asking for more help to enable them to navigate the new challenges of a digital economy."
Taxation of multinationals is, understandably, an emotive topic. The evidence, however, is that it is not the absolute levels of tax that businesses are concerned about – instead, it is the complexity of tax regulations around the world. If a trade-off existed that meant a little more tax could be paid for clearer laws on what tax to pay – or indeed, a more consistent approach over time from tax authorities despite existing complexities – then perhaps progress may be set in motion.