This post illustrates what I consider to be an ideal tax policy for hypothetical company, XYZ plc. The recent publication of “Rebuilding a social compact on responsible tax” by CoVi states that “There is also a clear moral dimension [to tax] in a society that is committed to responsibility and the common good. Businesses and business leaders already make moral and ethical judgements on what is right and what is fair, and this is no different in relation to tax decisions.” I disagree with this view.
When it comes to taxation, I believe that there is no moral issue. In my view those who complain that tax avoidance is immoral are confusing tax and charity. The amount of tax paid is determined by the law and the role of a moral individual applies to decisions made relating to charitable donations and ensuring the disclosure of truth to tax authorities. Company directors are stewards of other people’s money and should not attempt to use it to effect their own moral choices.
XYZ PLC – MISSION STATEMENT AND TAX POLICY
At XYZ plc, the goal is to make profits so that dividends are paid to shareholders that are as large as possible consistent with retaining sufficient funds to expand the business. XYZ plc makes these profits by selling couplings to manufacturers of agricultural tractors and ice cream sweets to teenagers. Both divisions operate under brand names that do not obviously connect them with XYZ plc. XYZ plc avoids diversification to focus on core competencies.
XYZ plc does not make charitable donations except where there is a direct marketing benefit to the business. Accordingly the couplings business makes no donations, while the ice cream division budgets 1% of its profits for high visibility charitable donations which will enhance the brand. Otherwise it is left to shareholders to decide whether to give away their money and note that due to past legacies 17% of our share capital is now owned by charitable foundations which rely upon our dividends to fund their activities.
The directors are conscious that they are stewards of £10 billion of shareholders’ funds. They believe that they can achieve higher returns on these funds within the business than shareholders could achieve for themselves. However if the future projections for the tractor couplings and ice cream businesses indicate that this will no longer remain true, XYZ plc will not hesitate to sell off all facilities and terminate all employees who do not transfer with the businesses in order to return the £10 billion to the shareholders.
XYZ plc is incorporated in the UK and has subsidiaries and branches in many countries around the world. They regard the UK as offering an excellent combination of high legal standards and attractive tax policies for multinational companies. Should other countries offer a more attractive legal and tax regime for our group, XYZ plc will not hesitate to reincorporate elsewhere, since the directors’ duty is to our shareholders who are located all around the world. XYZ plc owe no allegiance to any particular country.
As far as taxation is concerned, XYZ has a policy of complying scrupulously with the laws of all countries in which it operates. Where countries have levels of corruption that make it difficult to operate without paying bribes, XYZ plc will exit operations from that country.
XYZ plc regard it as impossible to operate without paying profits taxes, transfer taxes, payroll taxes and other taxes in the countries within which they operate. However the directors never forget that all such taxes are taking away money that would otherwise be part of profits and available for shareholder dividends.
Accordingly XYZ plc will consider all lawful methods to reduce our tax costs in all countries in which they operate. XYZ plc apply the following tests to tax planning:
· The company’s tax planning must comply with the law.
· It must have a reasonable probability of success, consistent with the costs of implementing the planning.
· The planning should not unduly impede the company’s ability to do business.
· The company must make full disclosure. Tax planning should never rely upon hiding things from tax authorities.
· The planning undertaken should not excessively alienate customers of the ice cream division compared with the tax saved. (Customers of the tractor couplings division will not care what is done).
This example demonstrates my view that the obligation of citizens is to pay the tax that the law requires and no more. Morality requires that individuals tells the truth when disclosing profits to the government but the law determines what tax must be paid. If one can find ways of reducing the amount taken in a manner that complies with the law (for example it may involve locking it away in tax privileged arrangements such as pensions) then that is entirely right, based on convenience and practicality.