Although the concept of “corporate citizenship” is relatively old, its tax effects seem to have been neglected until recently. However, numerous headlines in the daily news have changed the public mindset and have made public opinion sensitive to the importance of financial issues relating to the way some multinational companies are structured.
At the same time, the G-20 has given a mandate to the Organization for Economic Co-operation and Development (OECD) to launch a huge project to fight base erosion and profit shifting (BEPS) and a growing number of non-governmental organizations have started digging into tax matters and publishing their own assessment of the tax policy of some corporate groups.
Tax in the Age of Communication
The tax world is now in an age of instant communication, and economic players are starting to feel the consequences. Because they face the risk of loss of value of their shares following the publication of adverse news regarding their tax behavior, corporate groups are increasingly struggling to prevent criticism and to publish codes of tax conduct.
This practice is now quite widespread in the U.S., some Latin American countries and Europe. However, this is probably only a first step towards a new era where companies will have to account, not only for their compliance with human rights, but also for their ability to refrain from aggressive tax planning, and to abide by an “ethical code” that takes into account the interests of developing countries, as well as developed countries’ budgetary constraints.
Country-by-country reporting (which implies disclosure of the amount of taxes paid in the respective countries where a group is established) is already there; sooner or later, its content will become public in many countries, including Europe, where a directive is currently being discussed on this matter.
Moreover, tax risk disclosure is going to become “business as usual,” with the development of accounting rules that make it compulsory.
A New Vision of Tax
This change is the sign of a deep evolution in the way contemporary society views taxes. Tax managers have long seen tax as a cost which, as any other cost, should be reduced in order to be fair to shareholders. Paying a low amount of tax used to mean that invested capital was properly managed and, in that sense, a low income tax bill was the proof of loyal and moral behavior.
But the world has changed, and it is now widely accepted that companies should account for their tax management to many stakeholders, and justify that they pay their “fair share” of taxes. The concept of tax has ceased to be understood primarily as a burden of economic activity and has (re)gained its political dimension, as a tribute to the state acting as a supplier of public goods and policies.
To a certain extent, this evolution also shows the failure, or at least the inadequate nature, of classic tax policies which attempted to counter aggressive tax planning through specific anti-avoidance rules.
Many countries do have multiple sophisticated tax tools at the disposal of the tax authorities to fight, for instance, excessive interest deduction, hybrid entities, controlled foreign companies located in tax havens, etc. This is still the current approach which is to be found in the BEPS action plan developed by the OECD and in the EU directive on tax avoidance (ATAD).
However, no measure is able to address the infinite array of possible structures that exist in the real world, which is why the global trend now is to establish general anti-avoidance rules which are “catch-all” tools bearing a high level of legal uncertainty.
Against this background, where states feel to a certain extent powerless when facing sophisticated tax structures, and are moreover unable to a great extent to coordinate their efforts, it is clear that traditional legal and tax rules cannot respond to all the challenges of globalization.
Hence the development of a new tool: stigma. Public shaming has been rediscovered as an efficient way of impacting actual corporate behavior. When law is inefficient, shaming takes over, based on the assumption that consumer boycott is a more serious threat than administrative penalties to compel companies to adopt ethical tax policies.
Hence the development of the possibility for the tax authorities to publish the name and activities of corporate (and sometimes even individual) taxpayers which have been subject to high tax penalties following a tax audit. In many countries, tax is also becoming a criminal issue, as being subject to high tax penalties may lead a company directly to the criminal courts in addition to tax courts.
Criminalization of tax law therefore goes together with stigmatization of “wrongdoers” in tax matters; it is a fundamental change in the tax environment.
The outcome for companies is extremely clear: they should include in their “corporate governance” a layer of “tax governance.”
All companies of a significant size should set up clear procedures of identification of tax risks, define decision-making policies in tax matters and make sure that they are properly enforced.
Increased transparency towards tax administrations is clearly on its way. Many countries have developed compliance programs that build on mutual trust between companies and tax authorities. It is probably in the interest of most economic actors to take them seriously; by not doing so, they would not even protect themselves against further disclosure obligations that will be enacted anyway.
Let us note in passing that many states have already laid down such obligations in the field of aggressive tax planning and that a European directive has done the same last year. Many management policies will have to be reconsidered, from those that align managers’ remuneration with tax performance to those that define the extent of reporting obligations from subsidiaries to the parent company of a group.
Will consumers of the next decade buy goods or services supplied by multinational companies only if they are labeled “tax-evasion free”? Whether you like it or not, this may well happen. This is why tax planning, and more generally corporate tax policies, must now be considered as a major reputational and boardroom issue.
Daniel Gutmann is a Partner with CMS Francis Lefebvre Avocats, France.