Corporate tax: Are companies right to avoid it?

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!