The UK thinks it has a novel way of raising tax revenue: by making companies come clean when it comes their tax strategies. With its Finance Act 2016, the UK will require companies to post their tax strategies on the internet for all to see. While the Act applies only to companies with a “substantial presence” in the UK, there is a good chance this will be copied by other jurisdictions if it is found to successfully raise revenue.
“[E]ven organizations without a substantial UK presence should view the requirement as a warning shot,” writes Heléna Klumpp, a partner with Ivins, Philips and Barker, in Taxnotes. She points out that the UK’s tax collector, HMRC, anticipates that the new requirement will drive positive behaviors and ultimately revenue. “HMRC associated an increasingly positive revenue effect with the measure, scoring it to raise £40 million in 2016-2017 and £625 million in 2020-2021.” With that kind of thinking in mind, “any company subject to the new requirement should be working on its strategy documentation.”
Ms. Klumpp says the types of companies that will have to comply is broad, and includes individual UK companies, partnerships, groups and subgroups, including subgroups of non-UK-domiciled parents “that have either £200million in annual sales or balance sheet assets exceeding £2 billion.” A group with members in multiple countries is also subject to the requirement “if it is subject to U.K. country-by-country reporting requirements or would have been subject to them if the head of the group were a UK tax resident a standard that applies to groups with £750 million in annual sales.”
The seemingly only bright spot is the penalty for non-compliance, which is a bit small for multinational corporations. Penalties begin “if there is a failure to publish a group tax strategy for the group that complies… or where a group tax strategy has been published, there is a failure to comply…,” according to www.legislation.gov.uk.
“Penalties start at £7,500 for an initial six-month foot fault and then accrue at the rate of £7,500 for each month the report is delinquent,” observes Ms. Klumpp in her report. Still, while the financial hit is small, companies might not want to be the delinquent tax payer either. That’s because reputation risk can be high and costly. Recall Starbucks in 2012 announcing it would voluntarily pay more tax than it had to in the UK after a series of negative media reports about its tax strategies and a talk of possible boycott.
“It’s hard to know whether the public is really more interested in tax now or if the increasing media attention on multinationals’ tax rates and strategies is a logical outgrowth of the 24-7 news cycle,” writes Ms. Klumpp. “Regardless of the cause, events such as the release of the Panama papers and the decision in the EU state aid case involving Apple have clearly pushed taxes further into the public consciousness.”
Meanwhile, that public pressure could have legislative consequences. Thus, there may not be many legislators trying to block a proposal similar to the UK’s, Ms. Klumpp says. “All it takes is for one legislator to propose it,” she writes. “Then, as happened with codification of the economic substance doctrine, no one will want to be viewed as the lawmaker who opposes a measure designed to support greater transparency among large taxpayers.”
The tax document should be posted by the end of the first financial year that begins after September 15, 2016, to avoid penalties.