FT.com / Comment / Analysis – Tax: Trouble to avoid

    • Tax: Trouble to avoid

    • Protesters wielding loudspeakers and leaflets railed against alleged tax-dodging by big companies at a time when the nation was facing as much as £80bn ($129bn) in public spending cuts.

    • “They have to do something about tax avoidance.”

    • The idea that spending cuts would be unnecessary if only everyone paid their taxes is “incredibly naive”, according to David Gauke, a Treasury minister.

    • a failure by companies to explain their strategies: “It is very hard to explain a tax structure without looking guilty

    • Such large-scale public protests against corporate tax avoidance – which many businesses prefer to call effective tax planning – are, for the moment, unique to Britain

    • it has become evident that globalisation has wrested control of multinationals’ tax affairs from the state’s hands, allowing companies unprecedented scope.

    • On Friday, Angela Merkel, German chancellor, gave new impetus to proposals to narrow Europe-wide differences in corporate tax, demonstrating the extent to which the debate is now entwined with questions over the future of the eurozone

    • In December, Japanese officials talked of a “strong sense of crisis” as they unveiled rate cuts and special tax breaks to improve competitivenes

    • Its tax bills fell drastically after a highly leveraged £11bn takeover in 2007, which marked the peak of the private equity boom. What caught the eye of UK Uncut was the subsequent registration of its holding company in Zug, capital of the low-tax Swiss canton of the same name. The move is likely to keep tax bills low even when the company has paid off the debt and no longer has a big tax-deductible interest bill.

    • Alliance Boots – which operates in more than 20 countries, including Russia and China – brushes off criticism, saying the Swiss holding company “will better reflect the increasingly international nature of our wider group”. It adds: “If we had registered in Switzerland purely for tax reasons there are many other countries that we could have considered.”

    • Located between mountains and an alpine lake, this picturesque backwater (population 25,000) today boasts nearly as many companies as people.

    • The complaints of Switzerland’s neighbours led to a European Commission accusation four years ago that low-tax cantons offered “unfair tax advantages” to foreign companies in breach of a 35-year-old free trade accord.

    • “In the longer run it will be difficult to defend the fact that foreign companies are paying less tax than Swiss companies.”

    • The dispute lingers. “I deeply respect the independence of our Irish friends and we have done everything to help them,” President Nicolas Sarkozy of France said in January. “But they cannot continue to ask us to come and help us while keeping a tax on company profits that is half [what other countries have].”

    • large multinationals have increasingly moved their “intangible” assets – such as patents, brands, treasury operations, all of which account for a big share of taxable profits – to low-tax countries. Switzerland, Ireland and Singapore are the favoured destinations, accounting together for at least 20 per cent of US intangibles, according to the OECD.

    • An OECD attempt to orchestrate a new approach to international rules on intangibles has so far failed. Multinationals successfully argued that the centralisation and relocation of operations such as brand management were business decisions that could not be attacked as tax-motivated.

    • Mike Devereux, a professor at Oxford university, says companies are well aware of the potential costs – in terms of reputational damage, more intrusive audits and uncertainty – to companies that produce a much lower tax bill than their rivals. “If you are a large business, you don’t want to get too far out of line.”

    • As multinationals increase their global reach, loyalty to their home country declines.

    • Directors feel obliged to consider measures to drive down tax, which is often their second largest cost after labour.

    • In March, the European Commission will unveil a blueprint for a bloc-wide tax base for companies. European tax revenues would be divided up according to sales, assets and employees in each member state. As well as cutting businesses’ compliance burden – its stated aim – the proposal would reduce the scope for tax planning. However, it is unlikely to be taken up by all members.

    • A better approach to taxing profits would, he says, be a form of value added tax.

    • The message is a challenging one for governments. Their struggle to improve competitiveness is likely to exacerbate grievances among voters about the unfairness of the system. Tax protests are a symptom of a concern that is unlikely to go away.

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