Tax Analysts Blog

Can You Distinguish a Tax from a Ransom Payment?

Posted on Jan 8, 2013

This weekend I noticed the following blurb on the BBC web site. Sir Martin Sorrell, CEO of the global advertising group WWP, said the amount of tax a multinational enterprise should pay is "a matter of judgment" as opposed to a matter of law. Thus we observe the CEO of a major international business declaring that corporate taxation has taken on a quasi-discretionary character.

The BBC interview focused on the recent tax protests. In case you missed it, Starbucks managed to legally pay no income tax in the U.K. over the course of several years, despite operating more than 700 thriving coffee shops across Britain. All its taxable income (yes, every penny) had been shifted to related entities in other countries. That caused the activist group U.K. Uncut to organize a series of sit-ins. Starbucks eventually promised to voluntarily transfer funds to the British tax authorities above what it legally owes — which is zero — but only because the protests drove away clientele resulting in empty stores.

The response from headquarters had nothing to do with tax compliance. Starbucks owed no back tax. In fact, the envisioned payments are not a tax at all; they more closely resemble a ransom paid to shut up the activists. And the ransom worked; the activists went away and customers returned to the coffee shops.

This should come as no surprise. As previously discussed, the corporate tax is premised on antiquated concepts of residence and source that no longer fit the modern world. Corporate residence is wherever a firm wants it to be for tax purposes. Corporate earnings are sourced wherever the tax department wants them to appear. The tax code permits these outcomes. No moral judgment is cast on whether the results are malignant or benign. Just calling it as we see it.

By way of background, WWP, was founded in Britain but expatriated to Ireland a few years ago for tax reasons. The Irish corporate rate is 12.5%, which at the time of the move was less than half the prevailing U.K. rate of 28%. The U.K. has since reduced the rate to 24% and plans to reduce it even further. Parliament also recently adopted a territorial regime that exempts foreign income and a patent box that significantly reduces taxes on royalty income. These U.K. tax reforms inspired WWP to ditch Dublin and move back to London. A perfect illustration of tax competition at work. [Note: American policymakers are paying careful attention to the U.K. tax system these days because it's commonly offered as a prototype for possible U.S. tax reform.]

Sir Martin explained to the BBC how Starbucks' unilateral promise to throw money at HMRC, regardless of its actual tax liability, was rooted in a sense of "corporate social responsibility." "Doing good is good business," he added. In other words, paying tax has been reduced to a proverbial 'good deed' akin to sponsoring the neighborhood softball team. (I suppose in Britain it would be a cricket team.)

Is it troubling to anyone else that taxation — by definition a mandatory payment to the state — is being confused with discretionary contributions to the public fisc? I take no issue with the notion of social responsibility as a general matter. But vague philosophical constructs are no substitute for a rule-based system. The tax that a commercial enterprise pays to the government should be determined by the law, not by some abstract notion of what feels good.

And what are the implications for corporations that engage in identical tax strategies but fly under the radar because their operations are less visible? Should the corporate tax be paid only by retailers that are easy targets for activist groups? Say the taxpayer were a pharmaceutical or a high-tech firm that doesn't have storefronts on every other block in our major cities. Would it then be free to shift all of its earnings to Luxembourg without repercussion, while other taxpayers aren't so fortunate?

Something tells me that's no way to design a tax system. What say you?

Read Comments (1)

Peter MillerJan 8, 2013

Perhaps taxing authorities can follow the lead of U.K. Uncut by publicly
acknowledging corporate "good guys" who pay their "fair share." Showcasing
"socially responsible" corporations could effectively leverage goodwill, a
desirable commodity in the private sector these days. Of course, corporations
could also brag for themselves instead of relying on the tax collectors to do
it for them. In doing so, they could claim the mantle of self-righteousness at
the expense of their callous, heartless, non-taxpaying competitors.

Yes, it's a dubious path from the shareholders' point of view, but if corporate
taxpayers have to pay up, they might as well try to make lemonade out of
lemons.

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