The word tax makes most people shudder. Everyone knows and understands why we pay a percentage of our hard earned money to the Government, but nevertheless the majority of us don’t like it. Well surely, this is applicable to the business world. The profits produced by an organisation’s time, effort, capital and resources, is often issued with a 25% corporation tax bill (HMRC, 2012) from the UK government. Is that fair? Well obviously some corporations don’t agree, hence the existence of Tax Evasion and Tax Avoidance.
Tax revenues are the lifeblood of democratic government and the social contract, but the majority of multinational businesses have been structured so as to enable tax avoidance in every jurisdiction in which they operate.
(Christensen and Murphy, 2004).
Tax avoidance is a legal way of structuring a business in order to avoid paying the highest tax percentage, without breaking the law. A prime example of a popular way of avoiding tax, is the use of an off-shore ‘tax haven’. Certain multinational corporations make use of a ‘holding company’, whose headquarters are located in a tax haven. By the use various methods, organisations can conduct business around the globe, yet save paying high tax premiums by filtering money into the holding company. This sounds very ‘Dell Boy’, but as long as it is done correctly, there is no law being broken. There are many different types of Tax Havens, a country offering 0% income tax (such as the British Virgin Islands) will benefit certain companies, however a complete tax exemption for all international business operated by non-residents (such as Seychelles) will attract other companies. For more information on offshore jurisdictions visit:
By avoiding tax (legally, of course), surely a company will benefit from increased profits, which in turn will be passed on to shareholders of the company, who are anyone who has invested in the company, such as me or you. So what is the problem, the only one losing is out is the Government, because they can’t get their grubby little hands on the money. Isn't it?
No, not at all, the graph below shows 66.26% is free floating shares that are available to general public. Yet the 21.66% shows long term strategic holdings by investment banks or institutions seeking a long term return. These institutions will have large stakes in numerous large corporations, thus benefiting hugely by the increase in dividend payments. Is this wealth creation or corporate abuse?
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Tax evasion is a much more serious act. The illegal practice where a corporation intentionally avoids paying its true tax liability (Investopedia, 2012). Whoever found guilty on charges of tax evasion are subject to criminal charges, substantial penalties and more often than not, imprisonment.
India have recently been in the business media spotlight, due to 'seismic corruption and rampant tax evasion. With 645 million inhabitants living below the poverty line, India is not the first country when you think of corporation tax. However, a major problem with India, is the rich are getting richer and the poor getting poorer, which is primarily down to tax evasion.
India is subject to $500 billion illegally deposited in tax havens. This often occurs when money is taken to Dubai/Singapore etc, transferred to Swiss bank accounts and the routed the British Virgin Islands or other tax havens. India's top corruption official blames not only his rich countrymen but also the 'bureaucratic hurdles' created by overseas financial centres.
An interesting report conducted regarding why American business owners are moving to tax havens.
And finanlly, Geoffrey Colin Powell (a former economic adviser to Jersey), defines a tax haven as:
The existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance.
So, in your opinion do you agree with tax avoidance? If it was your decision as to how to structure tax within a company you owned would you want to be a 'dell boy' type character and take advantage of this to remain competitive? Or would you be thinking of the potential impact avoiding tax could potentially have on the UK population? It seems its a decision between remaining competitive or being ethical!
ReplyDeleteI think it would be very easy for me to say, ‘I would take the ethical approach’. However, when faced with the decision in order to stay competitive and continue a steady dividend pattern, I may be forced to change my mind. The problem organisations face is, staying competitive, if one competitor conforms to tax avoidance, then their profits will increase, thus dividend payments may increase, and finally the value of the firm will increase. Shareholders may want a company to do everything in their power to increase dividends, leaving management in somewhat of a pickle.
ReplyDeleteI believe it depends on the type of culture and management within an organisation, yet I still do not condone tax avoidance, however if competitors are doing it in order to gain a competitive advantage, a company who opposes tax avoidance may lose value due to shareholders jumping ship.
Finally, even though tax avoidance is widespread through big international corporations, by being as tax honest as possible may gain a reputation of being ethical and this may be a ‘selling point’ for investors.