By Ted Howard
The UK’s tax authorities think making companies reveal their tax strategies to the public will eventually raise cash.
The UK may have come up with an easy way to raise 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.
A paper released in 2015 by the UK’s tax collector, HM Revenue and Customs (HMRC), outlines what the rule is designed to do: “Ensure greater transparency around a business’s approach to tax to HMRC, shareholders and consumers. And board level oversight of those strategies will embed tax strategy in existing corporate governance processes. Taken together this should drive behavior change around tax planning and therefore enhance tax compliance.”
“[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 a report on taxnotes.com. She points out that the 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,” Ms. Klumpp writes. 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 £200 million in annual sales or balance sheet assets exceeding £2 billion.”
Companies in multiple countries are also subject to the requirement if they are “subject to UK 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 only bright spot is seemingly 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 Schedule 19 of the new legislation (available at 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.
“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.”
“I don’t know that anybody on the Hill has gotten wind of [the UK’s plan] or really noticed this but it wouldn’t surprise me if we eventually see it in the US,” says Barbara de Marigny, a partner in the tax practice at the law firm Orrick. “Not because it’s a good thing to do but because they’re so desperate for revenue raisers.” She adds that as it stands, any current tax law-change proposal has a host of hurdles to overcome from being revenue neutral to being filibuster-proof. So something as easy as a transparency requirement like the UK’s might be easy to pass.
Companies should already be thinking of what their tax policies will look like in the light of day. Currently the OECD is promoting Action 13 of its BEPS plan—country-by-country (CbC) reporting (see related story), which calls for companies “to report annually and for each tax jurisdiction in which they do business.” MNCs are worried countries will either use the reports to create special circumstances taxes or possibly release (i.e., leak) them to the public. The OECD now has guidelines for countries to follow and will penalize any country that abuses the CbC reports.
Despite this safeguard, in light of these and other transparency initiatives, MNCs should be at least moving their tax policies from the footnotes.
New Race to the (Tax) Bottom?
With persistent weakness in the global economy, countries are starting to go rogue when it comes to taxes. Many are doing the math and deciding that kinder, gentler tax policies are better economically than just raising taxes.
This is now a worry of the OECD, which says eight countries reduced their corporate tax rates in 2017, with cuts averaging 2.7 percentage points. Hungary had the most sizeable cut, reducing its corporate tax rate to just 9%. The OECD says juicy tax incentives, including those for research and development and activities linked to intellectual property, were also on the rise.