International Investment invited me to write a piece on my opinion of the view that the investor should take on future trends in corporation tax given the latest OCED tax deal looks likely to progress. Since the piece was not paid for I share it here.
The last twenty years have been tumultuous for the understanding of tax in the accounts of multinational companies. The investor in this sector has been on a roller coaster ride if they have sought to interpret the tax due by those companies whose shares they have owned, says Richard Murphy.
The two decades can be split into three periods. The first was until 2012. Effectively this era was a free for all for companies. They were in the driving seat on lobbying. Tax rates fell quickly, around the world. Concessions on the tax base, which reorientated quite heavily towards territorial taxation, helped those seeking to avoid tax. The tax profession was more than willing to assist that goal. Tax avoidance was considered meritorious by both tax professionals and their clients.
Although it was not immediately apparent, the global financial crisis was a game-changer on international tax matters. The world's politicians wanted someone to blame for that crisis, and tax justice campaigners gave them their answer in the form of tax havens. From Nicolas Sarkozy to Barack Obama, they seized the moment to point the finger at tax havens.
So did others, and the pressure from the media on companies like Google, Amazon and Starbucks grew. Dame Margaret Hodge MP delivered the blow that ended this era when she had those three companies squirm when giving evidence to her committee in the UK House of Commons in 2012. Most tax directors had one reaction: absolutely no one wanted to be sitting in the chairs where those companies had sat.
The mood changed. The OECD was tasked by the G8 with tackling corporate tax abuse using tax havens and the transfer mispricing that was apparent. The effort expended by business at the OECD to prevent restrictions being imposed on them up to 2105 was considerable, but civil society won this argument.
The accounting system that I had created called country-by-country reporting (CBCR) gained OECD approval and is now the law in ninety countries. The aim was simple: to identify those companies that were over-allocating profit to tax havens. Business was suddenly on the back foot, with one literal Trump card still to play. With the Republicans running the USA further tax reform was off the agenda.
President Biden changed that. He has provided the go-ahead for a new global tax deal. It could not have happened otherwise. It looks likely that a deal will be delivered. That said, it is deeply flawed. At 15% the minimum tax rate is too low. The opt outs leave gaping holes for tax planners to exploit. And developing countries have every reason to be annoyed because the deal is biased against them, and it took much effort to persuade them to sign. This is a stop gap arrangement.
So what is to come that the savvy investor needs to be aware of with regard to tax now?
First, it is very unlikely that investigations into the abuses that CBCR has revealed have progressed far as yet. There are likely to be some big surprises to come, which is why investors should be looking for companies confident enough in their tax positions to disclose them and should avoid those seeking to hide them from view.
Second, the number of unhappy countries means another round of global talks is inevitable. A better deal will emerge in the coming years.
Third, the drive to public CBCR in the EU and beyond will inevitably deliver it. There is much more tax data on the horizon, I suspect. Wise companies will be adapting now.
Fourth, the combination of Covid and the climate crisis makes it increasingly hard for investors to find sustainable returns. Tax uncertainty is going to have a big impact on corporate valuation in that.
What this means is that this journey is not yet over So what does the investor look for now?
Firstly, they should look for comprehensive disclosure on tax. That indicates three things, which are good governance, confidence in the company's tax position, and willingness to be accountable. All indicate risk that is under control.
Second, a company should be willing to explain its tax rate, using data. That will require country-by-country disclosure. Little indicates awareness of the trend in tax better than voluntary disclosure in this area: the early movers should be rewarded.
And third, because tax can now be hidden in so many parts of the accounts it really is time that a comprehensive reconciliation of tax disclosure to prove just what tax has been paid (and, ideally, where) should be included in all accounts. No one should be left in the dark on this issue, as is too often the case now, as my research is showing.
My message is simple in that case. If a company is not willing to put its tax dealings face up on the table, walk away. Tax now represents a bigger corporate risk than ever. Only transparency can mitigate that for the investor.
The wise will, I hope, invest where the tax facts are known. I am, however, aware that getting the right data is, at present, quite hard. The Corporate Accountability Network, which I direct, knows this and are now researching what an accounting standard on tax disclosure should look like. Our intention is to publish an exposure draft for debate. Comment and support from those with an interest in this issue would be appreciated.
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If companies choose to not be transparent then the presumption must be that they have something to hide. Either they are ashamed of their behaviour or worse.
The key is “what is ‘shameful’ behaviour”?…. and here the ground is shifting quite quickly helped by your work. Most investors, when presented with a clear case, will not invest in dubious activities and we have seen the rise of “ethical” investing. The move away from arms manufacturers and tobacco has extended further and perhaps we are on the cusp of “tax avoiders” being included in the list of unwholesome companies.
The problem is that as mainstream investors shun them and they become cheap there are always “vultures” waiting in the wings for a bargain. And it IS a bargain as equity owners have no liability beyond the cash they invest; activities are financed by debt. What needs to happen is for banks to be forced to fully recognise the risks they take when lending to these companies. If that were to happen, these companies would be forced to finance things with equity meaning that shareholders were no longer playing with “other people’s money” and that all losses incurred would be theirs.
Banking and insurance regulators are alert to the risks that banks take in these areas…. particularly on climate change but they need to move more quickly.
In short, perhaps Global Banking standards setters in Basel should be the target of your article.
I have links – I will get it to them
Good stuff Richard, really very good work
Isn’t it a bit hypocritical to demand transparency from companies when your own LLP is totally opaque?
You could easily be aviding tax through the structure. And there are definitely questions to ask about why you’ve got funding from charities that strictly don’t fund individuals, yet have funded TRUK – where it is totally obvious that you are the only active member.
You are no better than they are, when it comes to it.
That’s an interesting claim
First, the full accounts of the LLPs I am involved in are on public record. Not abbreviated sets. The full ones. And they disclose much more information than required by law. All by choice. And all fully transparent. So your claim is wrong.
Second, do you know how LLP tax works? the profit transfers straight from its tax computation (and the only adjustment is to add back depreciation and deduct capital allowances- not exactly radical stuff) straight to my personal tax return. Tell me what tax-dodging I do on the way? I am curious to know.
And why do charities knowingly fund me this way. Because when funded like this I have governance structures in place – people who have to be consulted and who agree to be so. Either my partner (in Finance for the Future) or a nominated election of people in Tax Research UK and a board in the case of Corporate Accountability Network. They know exactly what they are doing – and it is all very open.
And, come to that, how do you know how much my wife contributes to Tax Research UK? Have you asked her? She does not recall getting your call. She gets a low profit share – we agree. But that way the tax paid is maximised – because she is retired and we don’t want anyone to accuse us of profit shifting – which we are not.
Now, what evidence have you got that I am opaque? Tell me, or apologise.
“First, the full accounts of the LLPs I am involved in are on public record.”
So what. So are all company accounts.
“Not abbreviated sets. The full ones.”
Having looked at TRUK’s accounts, the information is the bare legal minimum. Looking at those accounts you can’t tell what the business is doing at anything more than a highly superficial level.
“Second, do you know how LLP tax works?”
Yes.
“the profit transfers straight from its tax computation straight to my personal tax return. Tell me what tax-dodging I do on the way?”
And here lies the problem. Your personal tax return is not publicly available. So the amount of tax you pay is totally opaque. Charitable donations may or may not be taxable, depending on how you classify them. So how do we know you are paying the correct amount of tax? Your word isn’t good enough – you don’t have a reputation for honesty or integrity.
“And why do charities knowingly fund me this way. ”
This is a poor excuse. Several of your charity funders specifically do not fund individuals. All of the work done by TRUK is done by you. But to get around the rule, you have set up as a partnership. You are using a loophole to avoid a rule – which is no different to avoiding tax.
“They know exactly what they are doing – and it is all very open.”
Do they? Do you have any proof? Or do we have to once again just trust you. I’ll happily ask them, or just send through an FoI request.
“how do you know how much my wife contributes to Tax Research UK?”
Nothing. The partnership is a sham, as detailed above. In all the years TRUK has been running, she has not authored a single blog post or article. All the output is generated by you.
It is obvious that you have set up as an LLP rather than a Ltd or sole trader for two reasons. The first, of which I am 100% certain, is to dodge the rules your charity funders have set of not funding individuals. The second is that you could very well be avoiding tax on your grants – but because your income tax statements are not public we will never know. Unless you share them – but somehow I doubt that is likely to happen. Probably because my suspicion is correct and you are indeed enjoying the income from those grants entirely tax free.
“Now, what evidence have you got that I am opaque?”
Pretty obvious, isn’t it?
“Tell me, or apologise.”
Publish your income tax returns to prove you are paying the full tax due and publish the contracts for funding with your charity benefactors, detailing that they understand that you are a sole trader in all but name and I’ll happily apologize.
You won’t though, because transparency would expose you for being a hypocrite.
Love it! When the trolls are out you know you are on target!!
Then why hasn’t he posted my reply to him?
Probably because the points I made are true and there is no argument he can make which gets him in the clear.
The LLP he runs is a sham set up to avoid charity funding rules and/or tax, his wife does nothing for TRUK and his tax affairs are totally opaque.
Thus he is a hypocrite
I deleted your reply because it was riddled with false claims.
You said my accounts provide bare minimum information. Actually, they include a full P&L not required by law on public record and a breakdown of income not required by law. Byt you said they were opaque. False.
You claimed trusts who fund me do not know I a conning them, but you do using the data you get. Which firstly proves the data is good if you are right, but also implies that they can’t read the data that you have despite them getting it, reading this blog, getting regular reports and knowing exactly how I use their money. Of course they know exactly what is happening. And no one is being conned.
Then you claimed my wife does not work. You confuse getting a low partnership share with no work. We discussed this last night and she reckoned I had discussed partnership activity with her at least six times in the day. And she confirmed she is happy with her partnership share.
After that you claimed I do not pay tax on my grants. Please spell out how in tax law that is possible given I have pursued a trade in this area for over 15 years now? Chapter and verse please? I will be interested to know because it is not. But if you know better, say how. And then I will tell you that just as I do not shift profit to my wife to avoid tax – which you say I could – I would still pay tax on my grant income even if I did not have to do so.
And you asked for my tax return. But no one has to publish tax returns and I have never asked that they sholld. And since, in any event, they are self assessed they prove nothing anyway, except as I have already told you, I disclose all my income. But you would still not believe that.
You can only come back if you can answer the tax question on why grants are not taxable in my situation. That is a testable hypothesis – the rest is just scurrilous. If not cannot (and you will not be able to) all you are is a troll.
And I am 100% confident of that.
Steven’s argument is nonsense. For an LLP with such small turnover and net profits below the personal allowance I fail to see what gain there would be from any opaqueness. The other LLPs Richard is involved with which are on public record also have low levels of income and profit so I would hardly think there is any great transfer pricing scam into a tax haven or anything else. Even with the greatest of suspicion the amount of tax available to avoid is very small and not worth the bother. The reputational damage to someone who is a tax justice campaigner as Richard is would far outweigh the small amount of tax that could be saved. Any rational person would be able to see that.
Simon
Thanks
Trolls are not rational people
Richard