Big multinational corporations are starting to feel the strain in a particular tug of war involving their customers on the one hand and their shareholders on the other. Directors of public companies may be employed by their shareholders to maximise net after tax profits and dividends but, in today’s highly transparent business environment, they must also remain vigilant to any possible criticism by consumers on the grounds of overt tax avoidance. Leading London accountants Baker Tilly, who are known for their expertise in tax services, are already flagging the likely impact on large corporates of the “Action Plan” on Base Erosion and Profit Shifting ( BEPS ) initiated last year by the OECD.
In a nutshell, the dilemma centres on the ability of multinational companies to shift their profits around the world to countries or even small tax havens where taxes on profits are either negligible or nil. Not surprisingly, individual taxpayers in those countries where high volume sales occur but miniscule amounts of corporate taxes are paid feel extremely aggrieved about this and, as many of these people are also customers, conspicuous tax avoidance can easily backfire in the form of boycotts or other adverse consumer behaviour.
The most well-known recent example of this phenomenon is Starbucks, the American coffee shop chain, who routed their coffee sales internally via subsidiaries in tax havens who then invoiced other subsidiaries in high tax countries at inflated prices, thereby minimising local profits or eliminating them entirely. Publicity surrounding this caused significant damage to both sales and to the reputation of the brand.
It is this practice of shifting profitability around between different tax jurisdictions that is causing the developed countries represented by the G20 to develop a common approach to the problem and to ensure that, in future, taxes on profits are paid in the countries where the revenues are actually earned. Unfortunately the template for corporation tax in most developed economies is based on a bygone era and one in which huge digital empires like Google and Amazon had yet to materialise.
However, as those in the tax services sector point out, company managers do not always shift profits around just to avoid higher rates of corporate tax. They cite, as an example, the German discount supermarket operator, Lidl, who, it seems, conduct many back office functions in Germany and charge these out to its UK subsidiary in order to reduce UK profits and enhance profitability in Germany where, perversely, corporate tax rates are actually higher than in the UK.
In other words, top-level management may be juggling a whole raft of different considerations when deciding where to concentrate large chunks of their organisational infrastructure.
In many cases, it may very well come down to how straightforward tax compliance is in individual countries. Here in the UK, where HMRC is quite accessible, compliance is relatively simple. However, in many other nations, company finance departments have to struggle with hugely complex tax regimes in order to pay the correct amount of tax and on time.
The OECD is due to publish its initial BEPS related ideas within the next few weeks and, hopefully, this will provide finance directors with a hint of the legislators’ direction of thought. Clearly, multinational companies have to think first and foremost about any threats to their brands posed by consumers who resent any suggestion of unfairness in the way taxes are levied but this is only the first in a long list of other considerations that have to be taken into account and there is little doubt that future tax strategy is going to feature much more prominently on boardroom agendas from now on.
If you need help and advice on any aspect of your tax affairs Baker Tilly’s team of tax services experts are ready to discuss your requirements.