The Tax Planning / Avoidance Debate

Tax avoidance is a hot topic in the UK at the moment after the furore over Starbucks last year when a Parliamentary Committee revaled the firm had only once reported a taxable profit during its very successful 15 years of operation in the UK, and amid government moves announced in this spring’s UK Budget to clamp down further on tax avoidance. What is avoidance though, in comparison to merely efficient tax planning? The subject was keenly debated at a recent Eversheds law firm roundtable and corporate responsibility from both a legal and moral standpoint was also a central theme. Strong consensus was reached in areas such as the need for UK tax competitiveness to attract business, and whether the coalition government has yet succeeded in its aim of ‘opening Britain up for business’.

Treasurers need to be aware of these tax moves and debate in the UK and elsewhere across Europe surrounding tax policy and take account of any changes in the law. There are also tax changes afoot in the US where the supranational Foreign Account Tax Compliance Act (FATCA) is seeking to prevent individual tax avoidance but at the same time placing reporting burdens on corporations. 

A Moral Approach

Participants at the Eversheds roundtable this spring, including UK business leaders and tax experts, were in broad agreement that the current UK furore around tax avoidance is in many ways based on decisions made in the past and does not truly reflect the way many organisations approach to tax planning today. The consensus was that tax avoidance within UK businesses is not currently a widespread problem. It was felt that many of the issues highlighted by the media arise from actions and corporate polices put in place several years ago, in a very different financial climate and by a minority of businesses. 

Those in the debate felt that most UK businesses now adopt a moral approach to tax planning, fulfilling not only the letter but also the spirit of the law. Indeed, many said that the question company boards and tax directors ask themselves is whether any particular tax policy would pass the ‘Daily Mail’ test (a reference to the UK’s best-selling mid-market tabloid)? In other words, while in general most aspects of corporate tax planning may be legally justified and do not break the current laws, consideration must still be given as to whether public perception would view such actions as legitimate tax planning or unacceptable tax avoidance – with all the associated reputational damage that could follow the latter. There was broad agreement that if companies believed their tax planning would be perceived in this way many would not follow such a path, regardless of whether they could do so within the law. This is particularly pertinent after the UK government publicly reprimnaded Barclays bank last year for its over-zealous tax efficiency advice and work. 

There was also discussion of the greater flexibility available to multinational corporations (MNCs) to manage their overall tax burden through operating in lower tax jurisdictions. Again, this has been a subject of some scrutiny from the media and was clearly identified by participants as an important issue, citing Starbucks, Google and Amazon. The general view was that reasonable progress has been made in recent years to tackle tax avoidance in this area. International taxation laws now place a strong focus on business operations in low tax jurisdictions having ‘real substance’ in terms of the people, locations and resources involved. As was made clear in the UK Budget and also recent meetings of the G20, work is set to continue in this area.  

The group counselled against any knee-jerk reaction by the UK government to the public perception of tax avoidance by MNCs. Indeed, many fear that an overly aggressive stance from the UK may encourage similar stances from other jurisdictions, with a potentially detrimental impact on UK-headquartered companies operating overseas. This response could also undermine attempts made by the government to seek to reassure the international business community that the UK is not a high-tax jurisdiction. It seems that this approach is shared by government ministers, who appear to be aiming to work with the international community on this issue rather than introduce reactive legislation, which they could have done in the UK Budget. 

A Bias against UK Business?

The issue of international bias in the UK tax system was also considered. While the UK corporate tax system has become more business-friendly in recent years, in certain areas the country’s tax code favours overseas investors into Britain, placing home businesses at a competitive disadvantage. 

Attendees felt that too much attention has been placed on attracting overseas investment and not enough on ensuring a practical and fair tax regime for existing and long-standing UK companies, such as Whitbread’s Costa UK coffee chain, for instance, which has recently been advertising the UK tax it pays after the Starbucks furore. 

A Complex System and GAAR’s Impact

The discussion on bias was followed by a debate on the inherent complexity and uncertainty of the UK tax system. Many concede that the tax regime at a headline level has become more generous for corporates over the past few years, with a further drop in the headline rate to 20% announced in last month’s UK Budget. However the benefit is offset by the intricacy of and constant changes made to the UK tax code, which mean there remains the potential for ‘surprises’ for organisations doing their best to comply.

Real concern was expressed that current tax policy is focused on tackling avoidance and legislating against historic tax planning decisions at the expense of addressing the real areas, where the business community requires assistance and change needs to be driven by the authorities. Simplification and stability were highlighted as key requirements. Many roundtable attendees called on the government to refocus efforts on simplifying the UK tax regime to make it easier for companies to operate in the UK, rather than continuing to add complexity through avoidance measures aimed at largely historic behaviours. It was, however, acknowledged that in the current climate it is difficult for individual businesses to make this point without the risk of being perceived as tax avoiders.

The potential impact of the proposed General Anti-Abuse Rule (GAAR) unveiled by UK Chancellor, George Osborne, was something that raised concerns for the roundtable participants. Although many stated that tackling tax abuse was to be applauded, the uncertainty surrounding the GAAR – on issues such as the lack of practical guidance on its scope and the inability to obtain formal advanced rulings from Her Majesty’s Revenue and Customs (HMRC) tax authority – was problematic. Such uncertainty could, in the view of participants, adversely affect the UK’s tax competitiveness. 

In summary, the concensus is that business organisations in the UK require a manageable and stable tax environment and that there is still plenty of work to do towards achieving this. The strongly-held belief is that the current media focus on tax avoidance may have distracted both the government and the authorities from addressing these fundamental requirements. The ongoing challenge is to ensure that such focus does not negatively influence the real and called-for need to continue moving towards a less complex and more stable, business-friendly UK tax regime. 

 

 

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