Tax Avoidance; Business Responsibility Assessment Answer

Over the past number of years, several multinational organisations have been accused of tax avoidance. It appears that many of these large corporations have been using aggressive tax planning practices taking advantage of complex, yet legal loopholes in tax legislation to avoid paying corporation tax in the United Kingdom.
You must produce an individual written report that critically analyses the case both for and against such business practices. This analysis should use contemporary evidence alongside academic literature and must explicitly consider the ideological and ethical issues. Your report must also provide appropriate conclusions and recommendations to an appropriate range of stakeholders.

ABSTRACT

In the wake of global financial crisis and increasing number of tax evasion cases from the largest organizations around the world the issue of tax avoidance has become a global phenomenon. The situation is not different in the United Kingdom. Multi National Enterprises like Apple, Starbucks, and Google have been involved in tax evasion scandals. On the other hand the companies claim that they abide by the tax laws but the laws themselves are not fool proof yet. In this paper tax avoidance phenomenon has been discussed with focus on the UK. The responsibilities of the MNEs in this matter has been analysed from ethical and social perspectives. This paper also includes the possible way forward for the UK government to prevent such cases in the future.

INTRODUCTION

Corporate tax is the tax that companies have to pay for doing business in home or foreign country. The current corporate tax rate in the UK is 20% of the profits. Although corporate tax is not a topic which catches the imagination of the general public but in the recent years it has become a topic of much importance due to numerous tax avoidance cases. In the financial year 2104-15, UK raised £43 billion from this tax. This amount represents approximately 2.4% of the overall national income. Tax revenues in the UK has fallen substantially in the last few years due to various factors like- global economic crisis, Euro zone economic crisis,  recession and increasing number of government policies that are aimed at encouraging the businesses by giving tax incentives. However, global scenario is quite different in the long term. If tax data from the last three decades are analysed then it can be seen that most of the countries have increased income from corporate taxes. This has further fuelled the issue of corporate tax avoidance. 

ACADEMIC LITERATURE REVIEW

1. In the research paper “Smoke and mirrors: CSR and tax avoidance” the author Prem Sikka has discussed about the relation between the two sides of organizations- corporate social responsibilities and tax avoidance. The first one is done to make the society better and the latter one represents their action of shunting growth of the economy. The companies improve their image by prosing to improve the society but actually they end up hurting the society by avoiding tax. This paper is aimed at the gaps between what the company says and what they actually do. It can be even described as hypocrisy in some cases. The persistence of such unethical and criminal activities hurt the welfare of the company, its employees and its executives. The paper has also drawn attention to the contradictions between promises and conducts. In the long run it yields negative effect on the companies that are avoiding tax payments (Sikka, 2010).
2. In the research article named “Is CSR associated with Tax avoidance”, the authors Qiang Wu, Chun Keung Hoi and Hao Zhang have established an empirical relationship between the CSR and Tax avoidance. They have found out that the companies which are associated with excessive amounts of CSR activities have actually done more tax avoidance than normal companies. These companies’ financial reports show greater discrepancy in the tax payments. These companies also have much more uncertain position in tax payments. Overall, the research shows that companies with excessive CSR activities are usually more aggressive in the matter of tax avoidance. This leads to the conclusion that the corporate culture has a high influence in the matter of tax avoidance (Hoi & Wu, 2013).       
3. In the research paper named “The curious case of corporate tax avoidance” the author Grahame Dowling has found out that in contrast to the popular believe CSR activities of organizations are strangely silent on the matter of tax avoidance. While it can be argued that paying taxes is the best way for following CSR activities as the governments will utilise that money to improve the society as a whole. There are still many flaws in the corporate tax laws in the UK and the majority of the companies choose to exploit those flaws rather than being socially responsible for the growth of the country. This paper is aimed at the implications tax avoidance activities have over the credibility of a company. It also manages to shed light on the aspect of corporate practice which is deliberately hidden from the view of public (Dowling, 2013). 

TAX AVOIDANCE: BUSINESS RESPONSIBILITY

At a time when the countries all around the world are struggling due to global recessions and slowdowns some multinational wealthy firms are avoiding paying corporate taxes to the countries where they are operating. Government tax policies usually have many loopholes in them and these corporates are exploiting those to increase their profitability while the public and governments are struggling (Fuest & Riedel, 2010). These types of cases are seen all over the world and UK is also suffering due to this. At the moment corporate taxes in the UK accounts for 2.4% of the national income but in many other countries this percentage is much more despite UK being a global destination for corporates. 
Ipsos MORI conducted an IBE survey in the year 2012 and the results of the survey shows that the British public feel that tax avoidance is the second most significant issue that the corporates need to address. Sadly the situation has not improved over the last few years. A company which is avoiding taxes are seen as greedy and selfish and this damages their reputation in the market. For example, Amazon and Starbucks were accused of avoiding taxes and the people organized rallies and campaigns against these leading companies. This has put a dent on their reputation in the UK market (Sikka & Willmott, 2011). 
The corporate tax rate in UK is 20% which is less than many other countries. UK has reduced the tax rates over the years to increase business ventures within the country. But, the companies are still unwilling to pay taxes even at this fair rate. Paying fair amount of taxes is seen as a socially responsible thing to do for the corporates as that tax money is invested in services such as healthcare, infrastructure and education. In another way it can be said that the companies themselves benefit from these services directly or indirectly. Tax avoidance has largely been considered as not only immoral but also unethical practice. This practice undermines the integrity of the tax system of the country (McGuire & Omer, 2012).
Corporation tax is a type of tax which is paid based on the profits earned by a company. If there is no profit then there should be no corporation tax. However, there are discrepancies regarding how the profits were calculated. Sometimes companies show high sales figures but they calculate profits in such a way that shows they have not made any profits which is highly unlikely and it raises questions regarding ethics of the company. Many MNEs currently operating in the UK are paying no or very little corporation taxes (Clausing, 2014). 

TAX AVOIDANCE: BUSINESS IRRESPONSIBILITY

There are counter arguments in almost anything and this case is not an exception to that. While it is largely seen that it is the responsibility of the corporates to pay their taxes but the corporates have a different view in this matter. Directors of some tax avoiding companies have argued that their duty is to ensure increased profitability for the companies they are working for. They say that their responsibility is to increase the profitability of the shareholders. In order to ensure that they pay only as much taxes which is can be considered as legal (Dyreng & Hanlon, 2013). 
Some sceptic corporates have a totally different view in this matter and they question the usefulness of the taxes that they are paying to the governments. They even argue that tax avoidance and evasion works for the benefits of the society as a whole. For this point of view the crucial point is how one sees the benefits of government activities. People have two general views about the working of a government. The first one is that the government only works for the benefits of its citizens. But, this view is considered as naïve by many people. The second view is that the government does some necessary works which has to be done and can only be done by the government and they do a larger portion of work that shouldn’t be done at all. So, it is beneficial for the country if the corporates avoid taxes and the government has no funds for such harmful activities (Shafer & Simmons, 2010).  
This type of thinking was supported by Public Choice theory which was developed in the later stages of the 20th century. This theory states that the people who run the state are individuals like the rest and they are driven only by self-interest. These interests are expanded by giving power and scope to the government itself. Governments try to maximize the revenues and this revenue is not only used for the benefit of the public. Corruption in the government is rampant in many countries in the world and these corruption cases fuel this theory (Huseynov & Klamm, 2012). 

EXAMPLES OF TAX AVOIDANCE CASES

    1. There were much controversies regarding Amazon. Amazon paid very little or no corporate taxes between the years 2009 to 2011. In that time they had sales figure worth £7.6 billion. Amazon UK has more than 15000 staffs. This controversy led to public outrage over the company and their brand name was affected by it. 
    2. Apple had shown an effective tax rate of 2% in the recent years on non US profits. Around 60% of its sales were routed through subsidiaries in the Northern Ireland. This followed an investigation as Apple is one of the biggest brands in the world and the tax rate of 2% was just astonishing. It has been found that the tax rate doesn’t represent their current status of business (Schwartz & Duhigg, 2013). 
    3. In a similar type of case it was found that Google has reported a tax rate of 2.4% on it’s off shore businesses. They also shown majority of their non-US sales through Ireland. The leader of the labour party of UK said that Google had paid a tax of £10 million with revenue figures of £11.9 billion. 
    4. Another case that generated much controversy in the UK was the case of Starbucks. They paid tax of £8.6 million between the years of 1998 and 2011. In this time they had revenues of £3 billion. They used to reduce the taxable income by paying interest for other parts of their business in other countries like Netherlands and Switzerland (Austin & Wilson, 2015). 

IDEOLOGICAL ISSUE OF TAX AVOIDANCE

Due to the tax avoidance activities of many MNEs in the UK, the government has reportedly lost about 1% of the GDP. International laws regarding taxes are very complex and the companies have to make sure that they do not pay any unnecessary taxes. The core ideology behind tax avoidance is somewhat similar among the tax avoiders. They believe that the government should not get a chunk of their money and also think that government does not properly utilise their funds. This ideology was famous among American neoconservatives and this has spread to other countries as well (Barker, 2009). 

ETHICAL ISSUE OF TAX AVOIDANCE

Tax avoidance by bending around the rules and regulations of tax system is not strictly against the law. The best way to describe it would be that the companies which do this follow the words of the law rather than following the spirit of it. In a global market the competition between the companies is very intense and they want to grow by any means possible. Countries set laws about taxes and companies are required to pay the taxes. This matter seems very straight forward at first. But, the question of ethics arises in this case because the companies have a choice of how to interpret the laws. Depending on their interpretation the tax calculation changes very much and some companies come out as ethical while some come out to be legal but unethical (Desai & Dharmapala, 2015). 

RECOMMENDATIONS

The recommendations regarding tackling the problem of Base Erosion and profit shifting are listed below. 
    1. UK needs to introduce proper laws regarding anti avoidance of corporate taxes. The laws present at the moment are ambiguous in nature so many companies are taking advantage of it. The law needs to be close ended and strict actions need to be taken if the laws are violated.
    2. The UK government can make it mandatory for the corporates to publish financial reports country wise. It means that the operation done in one country will be separate from another country. If this is applied then the companies will not be able to show interest expenditures of another country. This will increase the taxable income. 
    3. Tax reformation needs to be done in not only for the MNEs but also for the SMEs to discourage them from avoiding tax. SME sector is very large in the UK and they account for a large portion of the GDP.
    4. A system needs to be there to properly enforce the companies into declaring proper financial reports for tax purposes. The system needs to evaluate the taxes paid by the companies. There should be no scope for bending the rules of law. 
    5. Last but not least important recommendation is that the UK needs to reverse the trend of job cutting in the HMRC. HMRC staff numbers has been declining steadily over the last decade. In 2005 there were 92000 staffs in HMRC and now there is less than 60000 staff. This number is simply not enough to ensure tax payments. HMRC needs to increase its staff so that they can collect the taxes in a proper way. 

CONCLUSION

The UK government has recently argued that the tax gap is reducing over the years. But, actual data shows that the gap is just as large as the previous years. The two global recessions have crippled the world economy and now tax collection has become even more important. Basically the government can’t afford to lose any source of income and corporate tax is one of the best sources of easy income for the nation. Currently there is a huge gap regarding the estimation of tax gaps and the actual data shown by HMRC. After the Brexit the UK is currently in unchartered waters. There is uncertainty about the way forward and the Prime Minister has also announced about his resignation. This volatility may also bring some positive changes into the economy. After EU exit, UK will have full authorization about their laws. This might enable them to turn the current situation around and become prosperous in the coming years.

WORKS CITED

1.    Austin, C. & Wilson, R., 2015. Are Reputational Costs a Determinant of Tax Avoidance? Journal of Accounting and Economics, 40(6), pp.89-93.
2.    Barker, W., 2009. Ideology of Tax Avoidance, The. Journal of Business Ethics, 12(2), pp.14-18.
3.    Clausing, K., 2014. Multinational firm tax avoidance and tax policy. National Tax Journal, 45(6), pp.12-17.
4.    Desai, M. & Dharmapala, D., 2015. Corporate tax avoidance and firm value. The Review of Economics and Statistics, 24(7), pp.55-57.
5.    Dowling, G.R., 2013. The curious case of corporate tax avoidance: Is it socially irresponsible? Springer Science: Business Media, 13(6), pp.173-84.
6.    Dyreng, S. & Hanlon, M., 2013. The effects of executives on corporate tax avoidance. The Accounting Review, 39(4), pp.46-49.
7.    Fuest, C. & Riedel, N., 2010. Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the literature. Report prepared for the UK , 38(5), pp.89-92.
8.    Hoi, C.K. & Wu, Q., 2013. Is Corporate Social Responsibility (CSR) Associated with Tax Avoidance? Evidence from Irresponsible CSR Activities. The Accounting Review, 88(6), pp.2025-59.
9.    Huseynov, F. & Klamm, B., 2012. Tax avoidance, tax management and corporate social responsibility. Journal of Corporate Finance, 38(5), pp.77-79.
10.    McGuire, S. & Omer, T., 2012. Tax avoidance: Does tax-specific industry expertise make a difference? The Accounting Review, 39(3), pp.45-47.
11.    Schwartz, N. & Duhigg, C., 2013. Apple's web of tax shelters saved it billions, panel finds. New York Times, 78(3), pp.114-18.
12.    Shafer, W. & Simmons, R., 2010. Social responsibility, Machiavellianism and tax avoidance: A study of Hong Kong tax professionals. Accounting Forum, 20(2), pp.33-35.
13.    Sikka, P., 2010. Smoke and mirrors: Corporate social responsibility and tax avoidance. Accounting Forum, 34(3), pp.153-68.
14.    Sikka, P. & Willmott, H., 2011. The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness. Critical Perspectives on Accounting, 23(6), pp.78-83.