Expert questions application of independent 'fair tax' accreditation mark to multinationals

Out-Law News | 20 Feb 2014 | 4:56 pm | 4 min. read

The opening up of an independent 'fair tax' accreditation scheme for UK businesses is a "valid contribution" to the debate on corporate tax planning, but it is difficult to see how the scheme could be extended to the complex multinational businesses at the centre of the debate, an expert has said.

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, was commenting as campaigning group Ethical Consumer announced that it had accredited the first businesses under its Fair Tax Mark. It intends to accredit those companies that are making a "genuine effort to be open and transparent about their tax affairs", and to pay the right amount of corporation tax at the right time and in the right place.

Corporate tax expert Self said that the final version of the scheme was much improved on an initial pilot, which had "seemed to be arbitrary in a number of respects" and which used "some very odd methodology to reach an 'average' tax rate".

"The new version is much better: it is voluntary; it focuses much more on transparency and explanations than on raw numbers; and it sets out clearly what its criteria are," she said. "I don't agree with all of them, but I do think this is now a valid contribution to the debate."

"The huge challenge will be how to apply it to multinationals, and particularly to non-UK groups. Sensibly, this first stage applies only to UK-based companies, and is aimed primarily at SMEs. Frankly, with a bit of additional disclosure, it is hard to see many SMEs failing to qualify, so it may well get a wide take-up. But why would a multinational want to bother, and how will it apply to them?" she said.

Midcounties Co-operative, Unity Trust Bank and The Phone Co-op are the first businesses to be accredited under the scheme, which has the backing of Margaret Hodge, chair of the House of Commons' Public Accounts Committee (PAC). Companies applying for accreditation will be assessed against a number of criteria covering their transparency; and their tax rate, disclosure and avoidance.

Potential tax avoidance is now the UK public's biggest concern about corporate behaviour, beating issues such as executive pay, according to the Institute of Business Ethics. Publication of the survey results followed considerable media scrutiny about the tax affairs of companies including Amazon, Starbucks and Google. The PAC has also been highly critical about tax planning practices such as 'profit shifting', which occurs when a business deliberately transfers profits from a high tax jurisdiction to one with a lower rate of tax; while international initiatives such as the work of the Organisation for Economic Cooperation and Development (OECD) have focused on developing a global standard against base erosion and profit shifting (BEPS).

"The reaction to the revelations about the tax practices of big names like Starbucks, Amazon and Google shows that this is an issue the public really cares about," said PAC chair Margaret Hodge. "Given the choice, many people would prefer to give their custom to a responsible business that does the right thing and pays its fair share of tax. The Fair Tax Mark helps give them the power to make that choice, and seeing customers vote with the feet is perhaps the most effective deterrent there is to companies engaging in tax avoidance or other irresponsible practices."

Tax expert Heather Self said that the disclosure requirements developed as part of the Fair Tax Mark were broadly similar to those published by business body the CBI as part of its Statement of Principles last year, meaning that many companies were already providing much of the analysis and explanations that would be expected as part of the accreditation process. However, the Fair Tax Mark expected those disclosures to be made as part of a company's statutory accounts, she said.

"The CBI stopped short of this, out of concerns that it would lead to disclosures that were too prescriptive, and also that it may add to expense if the disclosures are required to be formally audited," she said. "The 'model disclosures' suggested for SMEs will be hard to apply to larger groups, and I think the more flexible CBI principle of appropriate disclosure, tailored to the facts of the particular group, is better. But in turn this could make the awarding of the Fair Tax Mark more subjective, which will make it harder to gain consumer confidence. There is more work needed to identify what disclosures, and in what form, would be suitable for a large multinational."

Multinational companies would also struggle to allocate tax to different countries worldwide under the Fair Tax Mark accreditation scheme, given that the original proposals required country-by-country reporting, she said.

"I have real doubts about country-by-country reporting, purely on cost:benefit grounds," she said. "I agree that tax authorities need sufficient information to be able to risk assess companies properly – this is the main focus of the current OECD proposals – but I cannot see companies being prepared to invest significant sums in order to provide a lot of additional detail, some of which may be commercially confidential, in order to gain a small number of extra points in a Fair Tax Mark assessment."

"The issues for non-UK companies – particularly US multinationals – are more fundamental. In my view, much of the aggressive planning which is a focus of the OECD BEPS project is a result of long-standing defects in the US tax system:  effectively, the US Government is happy for its multinationals to reduce their tax rate on foreign operations, provided full tax is paid on the US profits. The average effective global tax rate of US multinationals is therefore often well below the US headline rate, but it is hard to see the political will in the US for making significant changes to the system. Nor can I see US companies paying much attention to a UK initiative which could cost them significant amounts of money," she said.

Last year, Pinsent Masons called for the creation of a 'kitemark' for responsible tax advisers that meet certain standards. Self said that much of the focus of campaigners to date had been on the "demand" side of tax planning, rather than the "supply" side.

"Perhaps the Fair Tax Mark campaign would like to take us up on the suggestion of a 'kitemark' for advisers," she said.