Fiscal responsibility

Corporations would be well advised to take note of the recent blockades outside Vodaphone stores by protesters wielding “tax dodgers” banners. As Vanessa Holder pointed out in the Financial Times recently, tax is becoming an important source of reputational risk. Whether in court, in the press or in the street, campaigners are beginning to draw attention to the issue of corporate taxation payments with as much zeal as the more immediately emotive problems of the environment or child labour.

As public deficits skyrocket all over the Western world and the public braces itself for a period of austerity, the comparison between welfare cuts and corporate tax avoidance is likely to be made increasingly vociferously. Organisations such as the Tax Justice Network, the Publish what you Pay Coalition, Global Financial Integrity and the European Network on Debt and Development are successfully raising the profile of this issue, and they are grabbing cash-strapped governments’ attention.

In the UK, in 2005-6, seven per cent of businesses in the Large Business Category (50 businesses out of 700) contributed two thirds of the total Corporation tax raised. Around 220 companies (one third) paid no Corporation Tax at all and a further 210 businesses paid less than £10 million each (Source: the National Audit Office). Similarly in France, only four of the CAC40 companies pay the full 33 per cent tax on corporate profits (Source: Commission des prelevements obligatoires).

Civil society groups now link the issue with the fight against poverty in developing countries. According to some estimates by the US-based campaigner Global Financial Integrity, the mis-pricing of transactions between companies’ headquarters in the West and their subsidiaries located in the developing world, syphons close to $500 billion of legitimate tax revenue from African, Asian and Latin American countries each year. Subsidiaries pay inflated prices to their parent structure for goods and services, thus diminishing their local tax base by decreasing profits reported in developing countries. Campaigners compare these financial flows to the $50 billion developed countries spend globally on aid.

The calls for companies to report their profits and tax bills for each individual country they operate in (country-by-country reporting) are increasingly common and vocal.

Some corporations have started heeding the call. Fiscal responsibility is more frequently being inserted in corporate Codes of Conduct as a core value of governance.

Governments have also started to take notice. In the US, the recent Dodd-Frank act requires US-listed oil, gas and mining companies to disclose all payments made to foreign governments.

Business failing to demonstrate transparency and integrity on this issue will run a growing risk of reputational damage. This is an issue that is gaining momentum and businesses would be well advised to take note.