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
This article is tagged with the following keywords. Find out more about MyNBR Tags
Most listened to
- Nikko analyst Michael Sherrock on why he still has hope for Fletcher Building
- Tower chairman Michael Stiassny weighs up Suncorp's rival bid
- NBR VIEW: Screw the golfers, let's build houses instead – Green MP
- E tu Union industry coordinator Chas Muir is urging Cadbury supporters to take action
- Social bonds "will make a difference to communities," says APM CEO Karen Came