Death, taxes and fairness

Companies should view taxes as a cost like any other but also realise the risks to their reputation as a result.

This article first appeared in Aimzine  www.aimzine.co.uk

Benjamin Franklin famously said that in life there are only two certainties, death and taxes. Well for IKEA, the “love-it-and-hate-it-at-the-same-time” furnishings retailer, it seems the two are closely linked. Last month a Swedish team of investigative journalists uncovered that the IKEA group is a complex web of companies and foundations with more parts than an ASPELUND wardrobe. The ultimate holding company turns out to be in Liechtenstein, and this, the founder, Ingvar Kamprad, claims is intended to ensure “eternal life” for IKEA even after the 84 year old has passed away.

You have to give Mr Kamprad credit for blaming his company’s tax avoidance structure on his own mortality. It’s a disarming attempt to deflect criticism even if it is more transparent than a 19p TEKLA tea towel. But like a Scooby Doo villain, just as he thought he might be in the clear he said too much, adding “We have always viewed taxes as a cost, equal to any other cost of doing business”. Well, Mr Kamprad, that rather gives the game away, but of course, he’s absolutely right. Taxes are just another cost of doing business and like any other cost if a company can reduce that cost then it should.

But like most costs, whether suppliers or employees, if it is reduced too far by whatever means then it gives rise to potential issues. You only have to look at the negative publicity surrounding certain clothing companies which a few years ago were exposed as buying from overseas suppliers who use child labour or require their staff to work in appalling or dangerous conditions.

Message to Vodafone
Last September, the Vodafone store in Oxford Street was blockaded by around 50 people. That’s not a huge topple-the-corrupt-dictator turnout but the message was nevertheless a potentially powerful one. Since then there have been further blockades in other stores across the country. The protest was over the fact that Vodafone had reached a settlement with HMRC and agreed to pay £1.25 billion in taxes dating back to 2000. This  related to a subsidiary in the tax haven of Luxembourg. For those of you with a tough disposition the dispute centred around whether the Luxembourg company was a Controlled Foreign Corporation (“CFC”) or not ie. was it a company merely based there for tax avoidance but actually controlled and run out of the UK, in which case it should pay UK taxes.

Protestors claimed that the true tax bill should have been in the region of £6 billion and that the difference, had it been collected, could have allowed cuts to the welfare state to be less severe, or that the budget deficit could have been reduced.

What made the level of the settlement more remarkable was that Vodafone itself had set aside in its accounts a provision of £2.2 billion. At the time HMRC said that the settlement amount had been reached after a rigorous examination of the facts. However, this action seems to mark a new trend in HMRC which favours reaching settlements rather than pursuing claims through the courts, and the Revenue found itself in an awkward position supporting Vodafone’s assertion that the £6 billion claimed by protestors was an urban myth.

HMRC under scrutiny
Last month, HMRC officials were grilled by the Public Accounts Committee which expressed concern that there is little transparency for the ordinary taxpayer in the Revenue’s dealings with multinational corporations. Consequently, the National Audit Office announced during the month that it is going to launch an inquiry into how HMRC settles disputes with large companies. Meanwhile, there are £15 billion of disputes at the moment, only a third of which are expected to go to court, with the remainder subject to a settlement with the companies concerned.

Despite the apparent lack of vigour on the part of HMRC, ultimately the issue is one for companies to manage by reducing their tax charge but not taking undue risks to their reputation and always appearing to be paying their fair share of tax.

Heightened sensitivity
The sensitivity of this issue is heightened amongst the public at the moment by the fact that HMRC is actually becoming more aggressive in pursuing individuals who are potentially avoiding tax, by for example holding secret off-shore accounts. At the same time increases in indirect taxes such as VAT mean that the ordinary member of the public expects to see fairness in how taxes are charged and paid by companies.

It looks to me that the Vodafone protestors haven’t yet established a strong connection between over-aggressive tax avoidance and the losers of such actions. Unlike those companies turning a blind eye to child labour being used in their suppliers’ factories there is no emotive figure such as a malnourished child that they can draw upon.

However, once a connection is established then companies will have to be more vigilant and ensure there is trust amongst an increasingly sceptical public that they are paying their taxes fairly. The alternative is that they could face the risk of their brands being tarnished. That may not worry IKEA’s family shareholders but for shareholders of public companies the short term gain on tax avoidance could quickly turn into the long term loss of losing the trust of their customers.

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