Corporate tax avoidance – the pendulum swings back

Corporate tax avoidance has been a common and growing phenomenon these last few years. The OECD estimates that governments worldwide are missing out on anything between four and ten percent of global corporate income tax revenue every year, or US$100–$240 billion. No matter how one does the math, there has been a growing pushback from populations, smaller businesses, and now governments, against what is seen as an unacceptable level of corporate tax avoidance,

Tax avoidance has become easier and more common in the new world of work. The digital economy expands firm boundaries. Physical presence is no longer a prerequisite to doing business: digital platforms generate income from the capital of others; companies provide online services from abroad or profit from intangible assets such as software and intellectual property; and identifying where value is created is not always straightforward. It has become easier for companies to place assets and company headquarters (and subsequently profits) in tax havens.

The blowback now is that because billion- and trillion-dollar companies siphon off large portions of their profits to reduce their tax burden, this is causing a moral problem for many citizens and institutions. Public acceptance of the situation is waning. Governments are taking action.

Global firms such as Starbucks, Google and Amazon have been coming under fire for avoiding paying appropriate taxes in countries where revenue is generated. There is a growing culture of populous action. Tax-avoiding firms are seen as not playing fair and being immoral. Companies argue that everything they are doing is legal; they are merely creatively avoiding tax within the law, and not evading tax.

But the tide of public opinion has turned. Momentum has been growing for the last few years, into a growing phenomenon called „tax shaming“. This tax avoidance is not a victimless crime, and countries too are aware they are deprived of tax revenues that have to be made up elsewhere – like on individual or local small company tax, which adds to the resentment against selected multinationals.

There is a growing sense of outrage the public feels with the inequity of the current „avoidance“ system of the companies mentioned above.

Discussions of the ethics of tax avoidance are now everywhere; there have even been sit-down protests in front of company offices & outlets. Journalists and newspapers are on the side of equity and voters are pushing their governments to be "more aggressive and assertive in confronting corporate tax avoidance".

Branding experts now fear reputational and brand damage to the huge global multinationals, and though hard to measure the consequence of direct impact of tax shaming on sales and profit. There are also growing groups of individuals that are boycotting these brands.

What is more dangerous for companies is social media, because a small number of people can activate and ferment dissent among another group.

And just recently, Countries belonging to the G20 and OECD – influenced by the backlash against for example, Starbucks, Google and Amazon - are pushing for changes in corporate taxation rules to capture a larger share of taxes of multinationals based in tax-friendly destinations like Switzerland. They want companies to pay taxes where they generate their sales and not just where they are located. They also want all firms to be subject to minimum taxation.

Switzerland stands to lose up to CHF10 billion ($10.2 billion) in tax revenues as a consequence of this, according to calculations by Switzerland’s leading newspaper NZZ.  NZZ sees the impact of these reforms impacting all the way down to the cantonal and municipal levels. Many Swiss multinational companies pay tax locally in Switzerland on all their revenue, though most of their revenues are generated outside Switzerland.

Thus Swiss multinationals will bleed if these new initiatives are pushed through, having to pay considerably more in taxes than they do now.

Switzerland has reached out to other countries with preferential corporate tax structures like Holland, Ireland, Luxembourg and the Scandinavian states, Canada and Singapore to discuss the situation and seek alternative solutions.

How corporations avoid Tax

• Locating factories, service and distribution hubs and regional HQs in low-tax jurisdictions
• Starbucks, for example, sources its European coffee from a wholesale trading subsidiary in Switzerland
• And Google operates in Bermuda and Ireland
• Use of Transfer pricing - when a division of a multinational in one country charges a division in another country for a product or a service
• This means artificially high charges can be levied internally, to siphon money from a high-tax country to a low-tax one