Keeping costing to a minimum has always been a philosophy in
the business world, after all why would anyone want to pay more out than they
should? However in these challenging economic times this has become the vital
issue for businesses whose structure must operate in the most cost effective
manner.
The concept of tax
avoidance comes in here - this must not be confused with tax aversion which is
illegal! Tax avoidance however is completely legal and so has prompted many companies
to tax advantage of lower tax rates offered around the globe by restructuring
their business and locating their headquarters in countries which will benefit their
operations. With countries like Bahrain, Bermuda and the Cayman islands
offering 0% tax rates, is it surprising so many companies are choosing to go
down the restructuring route?! From a manager point of view if maximising
shareholder wealth should be their priority then isn’t this a method of achieving
this? It would certainly seem that way, by reducing their tax bill in some
cases by billions, this will help improve profits and increase capital
available for dividends.
I am going to use the case of Google again in my blog this
week - the company was mentioned in my second blog in terms of stock market
efficiency. Here however the company has received scrutiny over its
tax-avoidance techniques with payments as low as £1.2million for the UK
operation revealed despite its parent company in the US making massive profits!
Matt Brittin who heads up the UK subsidiary of the company said: “We have an obligation
to our shareholders to set up a tax-efficient structure, and our present
structure is compliant with the tax rules in all the countries where we
operate" (London Evening Standard, 2011).
According to Bloomberg (2011) Google managed to reduce its
tax bill by $3.1billion over the past 3 years by using techniques which divert
profits through Ireland, the Netherlands and Bermuda. Through this shifting of
income they have managed to take advantage of an average overseas tax rate of
2.4% despite operating in some of the world’s highest taxed countries! Google’s
ability to achieve this relies on transfer pricing which allows income to be
allocated in tax havens, like Bermuda, and expenses allocated to the countries
with higher tax rates. It is estimated this costs the US government as much as
$60billion every year!
However is this really ethical? I certainly don’t think so -
after all isn’t it the company’s duty to contribute to the society in which it
operates? By avoiding tax the home government whether it be the UK or elsewhere
is missing out on vast amounts of income
which will have a detrimental effect on the country we live in, with the only
option left for them to make cuts or attempt to generate the money from elsewhere
– probably our pockets! In this respect I think it is unfair for multi-million
pound companies to avoid what it is their moral duty to pay!
On the other hand, thinking about this from a manager’s
point of view allows me to see why this happens. As I brought up in my first
blog, bonus culture in today’s business world is often linked to maximising
shareholder wealth - tax management is seen as a wealth generating strategy. So
if I was managing one of these firms pressure to perform and meet targets would
make it almost impossible to avoid such strategies!
So, it is clear tax avoidance is a popular strategy in the
business world. The UK government has assured public it will do more to try and
put a stop to big companies abusing the system. It has also been claimed that
some large corporations have developed ‘unduly cosy’ relationships with HMRC;
with the public accounts committee claiming around £25billion of tax is
currently outstanding (BBC, 2012).
Goldman Sachs faced legal proceedings from UK Uncut last
year over claims that HMRC waivered the banks interest payment on their tax bill
- this claimed ‘error’ was estimated at between £5-8million by the National
Audit Office (BBC, 2011). If this is the case it’s no wonder the public are
becoming increasingly frustrated about the situation!
What is you opinion...If you were a financial manager of a large multinational company in the UK, would you stay there and pay the high corporate tax rate or would you opt to move your HQ to Ireland and take advantage of the lower tax rate? Also, those companies who pride themselves on being socially responsible, what do you think they would do? Do they choose money or do they choose fairness?
ReplyDeleteWell I think if I were in a situation where say my performance was judged in financial terms then although unethical this might be the only option I have… if by relocating there I can take advantage of the 12.5% tax rate as opposed to 28% here then it would be hard not to! It seems quite unreasonable that I would have to pay so much here when other potential competitor companies could be taking advantage of significantly lower rates elsewhere… so if as finance manager I didn’t do this in order to remain in a competitive position would I not be doing my job wrong? After all, if the primary objective of the business is to maximise shareholder wealth by not taking advantage of this I’d be failing to complete this goal!
ReplyDeleteAs for companies who regard themselves as socially responsible this could be a different situation as shareholder value may be lost if they don’t adhere to socially responsible strategies which tax avoidance is quite clearly not! But it again comes down to the management themselves needing to fulfil performance goals and remain competitive meaning again it is hard to avoid these strategies. However it could be more damaging to the reputation of these companies.
So regarding your final point I think in the business world when it comes down to it, it is money which is regarded as the most important when considering business decisions. This may not be fair but it’s often said ‘life’s not fair’! I think unless the government step in to stop companies from abusing the system this trend of tax avoidance is not going to stop. What do you think?