Why should business pursue responsible tax conduct?

Tax contributions are a key part of the positive social and economic impact made by business – helping the communities in which they operate to deliver valuable public services and to build the infrastructure that allows business to thrive. A small, but rapidly growing, number of progressive businesses now publicly recognise this and say what they pay with pride, with some even linking their contributions to the UN’s Sustainable Development Goals.

The growth of tax havens and unethical corporate tax conduct have become prominent concerns across the world. Aggressive tax avoidance negatively distorts national economies and undermines the ability of business to compete fairly, both domestically and internationally. Recent research has found that close to 40% of multinational profits (some US$950bn) are artificially shifted to tax havens each year, leading to a US$240bn reduction in corporate income tax revenue. Within this, the UK was found to suffer a staggering US$120bn of profit shifting, leading to an estimated $23bn reduction in corporation tax revenues – which equates to £17bn of missing tax, or 28% of what is collected.

Compared with other areas of corporate responsibility, responsible tax conduct has emerged relatively recently. Commitments and disclosures on tax significantly lag behind reporting on other sustainability issues, with a recent global analysis[i] finding:

  • over half (55%) of large and mid-sized companies still make no material disclosures whatsoever;
  • only a third (34%) have commitments or policies on tax transparency in place, compared to 87% for climate change and 98% for health and safety;
  • just 12% commit to comply with and follow the spirit of the law;
  • a miniscule 7% disclose country-by-country breakdowns of taxes paid; and
  • an incredible 3% have a named position responsible for tax policy at board level.

However, the pressure for change has now reached a tipping point. Across the world, there is now general agreement that tax laws need to be rewritten to end the global race to the bottom. Institutional investors and asset managers are paying much greater attention to the tax practices of companies in their portfolios, recognizing sound tax practices as an important sustainability issue and that companies employing aggressive tax practices could be exposing themselves to growing regulatory and reputational risks. Citizens across the world are insisting by a large majority that Government support for business (i.e., in connection with the Covid-19 pandemic) should be conditional on recipients ending the artificial use of tax havens and tax avoidance.

It is no longer enough for a business to claim that their tax conduct is acceptable as long as they are not breaking the letter of the law – in the same way that such a narrow framing of impact would be frowned upon if it were to be deployed with environmental and human rights considerations.

“Earnings that are reliant on tax planning rather than genuine economic activity are vulnerable to changes in tax regulation and enforcement… Even if specific tax regulations are not changed, more proactive enforcement by regulators suggests the earnings risk resulting from these strategies is increasing. As countries and their tax authorities become increasingly concerned with the exploitation of loopholes in international tax frameworks and are under fiscal pressure to fund additional government programmes, the incidence of tax disputes and litigation will increase.” The United Nations Principles for Responsible Investment (PRI)

“Effective tax policies are integral to ensuring that profits are taxed where economic value is created.” International Chamber of Commerce (ICC)

[i] Global trends in corporate tax disclosure (June 2021). FTSE Russell. Commissioned by PRI.

What do you mean by 'fair' tax?

The Fair Tax Mark accreditation standards are based on the following principles. A business should:

  • pay the right amount of tax (but no more) in the right place at the right time, according to both the letter and the spirit of the law;
  • readily provide sufficient public information to enable its stakeholders to form a rounded and informed view of its beneficial ownership, tax conduct and financial presence (across the world if they are a multinational);
  • say what they pay with pride.

Progressive business can be expected to go further than pledges around legal compliance and tax evasion. Not least as such a lowest common denominator approach would be unthinkable in other areas of corporate responsibility, such as environmental protection or human rights. A Fair Tax Mark accredited business would be expected to explicitly shun tax avoidance and the artificial use of tax havens, and commit to the declaration of profits in the place where their economic substance arises.

As part of our assessment we review policy, reporting and tax payments, and subsequently provide suggestions for improvement. Fair Tax Mark companies tell us that the process of accreditation is a valuable means to benchmark performance and move towards best practice. They appreciate that the bar is set high and view this as a valuable asset in an area where trust is often low.

The scoring system underpinning the Fair Tax Mark accreditation standards is predominantly driven by the belief that ‘transparency’ encourages, and helps business demonstrate, responsible tax conduct. The tax contribution made by a business over a number of years is also considered (with feedback from civil society strongly supporting inclusion of this additional element). However, there are many good reasons why a business may not be paying high tax rates over a given period – for example, it may be loss-making in some years, or legitimate tax reliefs are being claimed within both the spirit and letter of the law. Such businesses can still secure a Fair Tax Mark, but additional disclosures will be needed – especially in connection with shortfalls from the applicable headline rates of tax in operation.

Note: initially, Fair Tax Mark accreditation was available only to businesses headquartered in the UK, but this was extended internationally to multinational enterprises on 25th November 2021, with the launch of the ‘Global Multinational Business Standard’.

Why does the Fair Tax Foundation focus on corporation tax?

Companies pay many taxes to Government – both directly and indirectly.

  • Direct taxes would include corporation tax, but possibly also local property taxes or national environmental levies – with the latter to some degree being loosely linked to services received.
  • Indirect taxes might be the collection of employment taxes from staff or sales taxes from customers – whereby the company is acting as a tax collector from third parties.

The focus of the Fair Tax Mark’s consideration is corporate income tax. Businesses are subjected to many different types of tax, but corporation tax has an importance way beyond the revenue it raises. As argued by the Tax Justice Network: “It holds the whole tax system together. It curbs political and economic inequalities and helps rebalance distorted economies.”

Uniquely, international financial reporting standards rightly urge that the corporation tax charge is detailed in financial statements, together with an explanation of its major components.

Which is why, in addition to Fair Tax Mark accreditation, we operate Fair Tax Week – which looks to celebrate the companies and organisations that are seeking to do the right thing and are proud to pay their fair share of corporation tax (i.e., businesses that pay the right amount of corporation tax at the right time and in the right place, and who overtly shun the artificial use of tax havens and contrived tax avoidance practices). We hope that the scope of Fair Tax Week will expand as Fair Tax Mark accreditation grows internationally.

How do you define a tax haven?

The use of low tax jurisdictions (more commonly referred to as ‘tax havens’) has been an area of high concern for civil society, institutional investors and the public in general for many years.

The growth of tax havens and unethical corporate tax conduct have become prominent concerns across the world. Aggressive avoidance negatively distorts national economies and undermines the ability of business to compete fairly, both domestically and internationally.

Sometimes a business will use a combination of tax havens to shuffle money around the globe and exploit loopholes in the bilateral tax treaties between particular countries. So, for example, Google has, in the past, combined a ‘Double Irish’ and a ‘Dutch Sandwich’, with a zero-tax haven such as Bermuda as the final destination. There have even been instances of corporate profits becoming ‘stateless’ from a tax perspective, as was revealed in the Paradise Papers and with Apple’s income flowing through Ireland.

On the other hand, business should not be condemned for their presence in a tax haven if there is evidential economic substance in that jurisdiction (demonstrable via public Country-by-Country Reporting). Economic substance might be indicated by the presence of a significant number of staff or substantial third party sales.

So, for example, the Fair Tax Foundation’s Global Multinational Business Standard includes the following question:

“Does the business utilise tax havens as locations for either registration, subsidiaries or operations?”

Four points are awarded if the business does not utilise tax havens as locations for either registration, subsidiaries or operations.

Alternatively, four points are awarded if it is clear (from public Country-by-Country Reporting) that the use of tax havens reflects the economic substance of transactions located in the territories, and that these transactions are taxed where value is added.

The Fair Tax Foundation’s identification of tax havens is informed by the work of the Tax Justice Network and their Corporate Tax Haven and Financial Secrecy Indexes.[i] The determination of tax havens is periodically reviewed and a current listing is provided to businesses as they begin assessment and accreditation (see below).

The Fair Tax Foundation’s current listing of tax havens is available online.

[i] For example, see Tax Justice Network’s Corporate Tax Haven Index 2021.

How does the process of accreditation (and re-accreditation) work?

The annual process of accreditation is simple, collaborative and confidential, as follows:

1) Contact us. Use our contact form to let us know that you are interested, and provide us with some basic information so that we can respond fully and quickly.

2) Letter of Engagement. We will speak with you about your exact needs, and agree the process of accreditation that is appropriate for your business. Then we’ll agree and sign a Letter of Engagement with you – which details scope of services, fees, timescales, responsibilities, confidentiality undertakings, criteria and other matters.

3) Information sharing and Assessment. We review your recent Financial Statements and connected communications.  From this, we produce a detailed and confidential report (in the form of a scorecard) that highlights how you would perform against the relevant Fair Tax Mark accreditation standard, together with suggested areas of improvement. This stage normally takes around four to eight weeks, subject to the information required being readily available. The suggestions we provide could feed into the production of your next set of Annual Report and Accounts, or lead to the production of a bespoke public documentation that augments your existing Annual Report and Accounts (should you wish to progress more quickly).

4) Licencing and Announcement. As and when reporting, policies and practice pass the Fair Tax Mark threshold, you would be able to use the Fair Tax Mark in public communications for a qualifying period of usually twelve months. A Licence Agreement would be issued and you would then be able to use the Fair Tax Mark logo and related materials in public communications for the qualifying period.  We would work together to announce and celebrate your certification via a range of communication channels.

Fees

Our fees are based on the size, structure, and complexity of the organisation, as set out:

  • here for UK-based business, and,
  • from November 25th 2021, here, for all multinational business head-quartered outside of the UK.

Please note: re-accreditation is an annual process, with each of the two aforementioned stages progressing afresh based on the information detailed in the updated set of annual financial statements.

How much does Fair Tax Mark accreditation (and re-accreditation) cost?

Our fees are based on the size, structure, and complexity of the organisation, as set out:

  • here for UK-based business, and,
  • from November 25th 2021, here, for all multinational business head-quartered outside of the UK.

Please note: re-accreditation is an annual process, with both assessment and licencing progressing afresh based on the information detailed in the updated set of annual financial statements.

Is there a risk of you changing the Fair Tax Mark criteria so we suddenly lose our eligibility?

To date, none of our individual Standards has substantially changed.

Rather, we have added new Standards over time. For example: in 2017, we launched a bespoke Standard for UK microbusinesses with a turnover of less than £1m; and, in 2021, we will launch a new Standard for multinational businesses headquartered outside of the UK.

If and when a Standard requires substantive update, we will consult with accredited businesses and (subsequent to it being finalised) allow an accredited business a two-year transition period toward the update Standard – i.e., they will have the option of a further two annual cycles on the original Standard.

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