Morality, corporate tax and regulator relationships

The debate around the level of tax paid by multinational corporations, and where they pay them, has morphed into a drama involving protagonists that are household names. 

Fuelling the debate is social media and popular opinion. The context is how to equitably fund fiscal deficits while managing politics.

In part, the root of the controversy lies in the fact that businesses can now operate virtually with limited physical presence while traditional tax rules have been developed for what was historically a physical world. The issue is exacerbated when global brands appear to be operating somewhere but actually aren’t, or if they are, their physical presence is a fraction of their virtual one.

The emotion is fuelled by the amount of aggregate tax paid by certain multinationals, which can be a function of the favourable tax regimes that exist in countries where these businesses’ operations are based. Labels like “legitimate tax avoidance” are a nonsense and add nothing to the debate.

Complicating matters is that addressing how, when and where global businesses that operate virtually should be taxed can’t be addressed by any one jurisdiction alone. It is for this reason that the topic is currently being considered by the OECD.

In response to the debate, impacted multinationals are adopting a range of approaches.  One end of the spectrum has Starbucks in the UK announced in an open letter from its CEO that it would not claim tax deductions for intercompany charges and royalties.

This to stem the public outrage that its UK operations had sales of £398 million in 2011 and yet paid no corporation tax since Starbucks has reported losses in the UK for 14 of the past 15 years. The company's response is estimated to cost Starbucks a further £20 million in tax payments over the next two years.

In contrast, Google’s former CEO and current chairman Eric Schmidt has stated to Bloomberg, “We pay lots of taxes; we pay them in the legally prescribed ways. I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate. ...It’s called capitalism. ... We are proudly capitalistic. I’m not confused about this.”

The New Zealand manifestation can be seen in the most recent Inland Revenue compliance focus document. On a basic level, it has chosen visuals of schools and hospitals as part of the document’s pictorials to link tax compliance with communities, the funding of social services and the provision of infrastructure, rather than simply presenting the subject matter of where the IRD will focus its compliance activities. 

It has joined the recent global movement to encourage wider awareness of a corporate’s tax policies and approaches outside of the traditional in-house tax specialists and finance teams, to the senior executives, the CEO and the board. At its most formal this has resulted in Cooperative Compliance Agreements, which seek to introduce a new level of transparency and partnering between regulator and corporation.

The upshot is that today’s tax world is materially different from what it was even five years ago, both in looking to apply rules in different and unforeseen contexts, and in the manner  that the regulator and regulated interact.

All facets of the tax landscape are evolving and the debate, and resulting judgments, are increasingly being conducted in the public arena. These are some of the most topical tax discussions of the day for which there can be no easy answer.  Where the debate will end is unclear but it is likely to remain in the public eye.

Thomas Pippos is chief executive officer of Deloitte New Zealand

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9 Comments & Questions

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"The context is how to equitably fund fiscal deficits while managing politics." the context is how to contain envy. If we were to focus just on corporate tax the positions, and thus the context, is easy: The consumer pays all the corporate taxes. In any competitive marketplace if you remove corporate taxes, prices will fall. It is the net return on investment that every investor focuses on.

When we talk about deficits, that is surely a different context. One which needs consideration and healthy debate about the level of state involvement in our lives. And, of course, who should pay for it.

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When I invest in a company, I expect it to minimise its taxes to the maximum extent permitted by the law, but not to engage in rorts. If the former is categorised as avoidence by some, I am not concerned. If parliament passes laws that offer opportunities within those laws to manage taxation obligations, directors will not be accepting their responsibilities if they refuse to consider those options?

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The largest tax avoidance in NZ is at the growers markets, flea markets, "cashies"", amd all thos "cas" transactions - at least the larger corporates are collecting & paying PAYE, GST, FBT and paying their rates etc...

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The antics of big business underline the need to abolish all taxes and substitute a simple transaction tax of say 5%. Then everyone pays. The tax is simple and levied by banks only. We could sack most of Inland Revenue and many accountants.
A simple 5% transaction tax.

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If big business avoid tax then why should the rest of us pay it.

A 15% sales tax on all revenues in NZ for Gooogle would be a good start.

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They don't avoid it. They decide where to operate and pay tax accordingly.

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"Labels like “legitimate tax avoidance” are a nonsense and add nothing to the debate."

How can a tax professional write such utter rubbish? Every business wants to minimize its tax and do so legitimately. There is nothing nonsensical about doing so and labelling it accurately.

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Yes, it's the Sam Morgan syndrome. Having taken advantage of our tax l in a sensible way that this commentator would seemingly frown upon, he then joins this commentator in criticising the tax laws that enabled him to do so.

One could argue he sold his business as a "legitimate tax avoidance scheme". He avoided future personal tax by taking a tax free capital gain on the sale. His investments now are no doubt structured to avoid being labelled a share trader. Etc, etc. And I would be his greatest champion.

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Times change. Tax evasion was bad. Tax avoidance was ok. Now tax avoidance is bad; but tax minimisation is acceptable. It is all semantics which change as the rules change. The real problem is that all tax is bad. Hopefully we will evolve eventually beyond the use of force as a basis for society. There is no avoiding that tax uses force. That has not changed for 2,000 plus years.

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