Tax needn’t be taxing

That may be HMRC’s advertising slogan, but rather a lot of companies have cause to disagree. Here’s a solution.

What a muddle we are getting into about corporate tax!

Apple CEO, Tim Smith, tells the US Congress that tax rates are too high, implying he won’t bring Apple’s cash mountain back home unless they cut the charge substantially. Congress counters by alleging Apple has created “ghost companies” not taxed under any jurisdiction.

Also in the spotlight is Google’s chairman, Eric Schmidt, who describes the international tax structure as “irrational”, although then defends the company as simply and strictly following those (presumably inadequate) rules rather than exercising any judgement.

Meanwhile even responsibility poster child, Marks & Spencer, is criticised – unfairly, in my humble opinion – for how it accounts for online sales in continental Europe.

It seems tax is proving to be taxing after all. Certainly both politicians and companies are taking chunks out of each other, generating more heat than light. The truth is that it rather suits both sides to blame the other, rather than sit down and begin the difficult job of finding common ground.

What should that common ground look like?

First, tax is about rules. Governments set them and companies must follow them. They need to be clear and simple. Second, the key rule is for tax to be levied on value creation, in the jurisdiction where it is created. Third, in a global and increasingly online economy, definitions of value creation need updating and tightening – companies should accept that and stop seeking to defend themselves behind rules no longer acceptable to many in society.

Fourth, both governments and companies must be open about how much tax they levy / pay respectively, down to country level. And fifth, in seeking to follow the rules, interpretation and intent matter crucially – so companies need to be clear what underlying principles define their behaviour on tax.

Two years ago I helped devise a ‘tax map’ to assist companies through this contested territory. It’s still available here. Our clients tell us they find it helpful. It doesn’t absolve them from scrutiny or occasional criticism. But it does allow them to give a coherent account of themselves. And for them at least, it turns out tax doesn’t need to be taxing after all.

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