Tax Analysts Blog

The Most Important Intangible Asset: Reputation

Posted on Dec 7, 2012
    "The main point is not that accusations are often unjustified, but the fact that they are made at all. Tax has news value now and, although often unfounded, 'naming and shaming' attacks on alleged tax avoiders can damage their reputations in the eyes of important stakeholders, which can lead to sharp short-term share price falls and the unwelcome attention of more than one tax authority."

The above quote is from a 2005 KPMG Report entitled "Tax in the Boardroom" (no longer on-line). Seven years later it is clear the report turned out to be exactly right. All the aggressive tax planning in the news is legal tax avoidance and not illegal tax evasion. But corporations--especially those that sell consumer products or depend on government contracts--need to be careful not to incur the wrath of the public who do not understand that CFOs are just trying to fulfill their obligations to shareholders.

Three stories in this morning's papers relate to this point.

First, the revelation that Starbucks paid little UK tax spurred a massive public outcry against the company. This is no surprise to tax attorneys. (One of whom jokingly told me that UK international tax rules are so pliable that paying tax in the UK should be considered "malpractice.") But with heightened public awareness of little tax being paid by profitable companies, no trendy retailer can afford offending the sensibility of customers that are willing to wait in line to pay $5 for a cup of coffee. So Starbucks has announced it will voluntarily pay more tax.

Second, largely as a result of this episode the UK government--even though it is giving high priority to being "open for business"--is promising to clamp down on aggressive tax planning.

Third, Apple announced it will start manufacturing some of its devices in the United States. I strongly suspect this move was motivated not by the pure economics but also by the fact it will help repair the damage to its reputation caused by revelations it pays low taxes.

It would be better for everybody if Congress tightened the rules on aggressive tax planning. This would raise much needed revenue, tamp down public concerns about the unfairness of the tax system, and get corporations out of the impossible situation of weighing tangible tax reduction that directly benefits shareholders against the loss of good standing with the general public.

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