You’re a consumer with a conscience. In the morning, you don a sweatshop-free outfit, hop into your gas-conserving hybrid, and drive to the local shop for some “fair trade” coffee.
One day, will you be able to invest only in corporations certified to be good taxpayers? “Fair share” companies, perhaps?
That’s the (admittedly far-fetched) idea a few accountants and economists entertained last week during a panel on morality and taxes at a conference held at the University of San Diego School of Law.
The idea comes as tax planning, especially on the international corporate side, is under a harsh and sometimes unwelcome microscope. Companies are finding themselves on the front pages for elaborate tax structures that save them billions of dollars—and which, critics claim, flout the spirit (though not the letter) of international law. In response to the outrages—and to declining state revenue—the G-20 and the Organization for Economic Cooperation and Development launched their sweeping Action Plan on Base Erosion and Profit Shifting to overhaul the current global norms on tax allocation.
Almost everyone agrees that the rules need fixing. But during the years, or decades, before reforms are enacted, should companies take it upon themselves to ensure they pay their morally correct “fair share?”
It’s a lot more difficult than it sounds, the panelists agreed.
After all, fair for whom? Most multinational companies do business in dozens of countries, and all of those countries can have very different ideas of how much in taxes should be paid for them. That, in essence, is why transfer pricing exists. It’s a universally agreed method for sorting out which corporate profits should be allocated where.
Steven Wrappe of KPMG LLP in Washington, D.C., one of the panelists at the conference, noted the difference between “one-time interactions” like buying environmentally sustainable resources, or fair trade-certified ingredients, and a relationship between two taxing jurisdictions.
“You’ve got a balancing act,” Wrappe said. “Transfer pricing doesn’t present a clean approach to satisfying both sides.”
The controversies you see today come from how tax principles are applied. Transfer pricing is based on assigning a value to assets—often, intangible ones such as intellectual property—an inherently subjective endeavor. Critics claim the current system is too good at avoiding double taxation, leaving profits lightly taxed in small jurisdictions. There’s even a legalistic name for this: double non-taxation.
Unlike the binary legal world most of us regular tax filers live in—something’s normally either allowed by the IRS or it’s not—international corporate taxation is mostly determined by ranges or estimates. A U.S. company will sell an important patent to its foreign subsidiary, creating taxable income in the U.S. Was the price correct? Good attorneys can make very convincing cases that a particular piece of intellectual property is worth only half of what it’s currently valued at—or, if they want to argue the other way, three or four times more. Figuring out where the law is—and where it should be—can sometimes be impossible. (More on these issues here.)
Corporate tax planners face a somewhat tricky tightrope to walk. The high-profile cases of alleged tax avoidance may seem obviously egregious to a reader. But to accountants, what causes headlines and what doesn’t can seem mostly arbitrary. Plan too aggressively, and the corporate board could get a headache. Don’t plan aggressively enough, and if shareholders feel you are not protecting their investment, you could face a lawsuit—or a hostile takeover.
In theory, some sort of extra-legal standard promoted by the OECD or non-governmental groups could mitigate these issues. Wall Street is filled with funds that seek to invest money in a beneficial but socially conscious way regarding the environment, labor standards or health. Why not regarding taxes?
John Forry, a professor at the University of San Diego and co-organizer of the conference, compared the idea to funds that voluntarily divested from South Africa to protest its apartheid policies in the 1980s.
But what would the standard for fair taxes be? Would it be based on some sort of universal standard, or on the policies (or practices) of individual countries? Could it be maintained with a supply chain across several jurisdictions in a way that isn’t cost-prohibitive?
And, of course, there’s the issue of how to market it. The sad fact is that most socially conscious behavior from corporations also are designed to enhance their brand value. This is why fair trade coffee comes with a sticker and hybrid cars have a label.
“I can’t see a little sticker that says, ‘I pay double tax,’” Wrappe said.
The truth is companies are already thinking about these things. In any tax structure, a company will consider its risk—risk of audit, risk of adjustment, and what’s known as “reputational risk,” or the risk to the brand. As the media has begun to focus more on international taxes, corporations’ own internal scrutiny has grown, as well.
The most well-known example of this may be Starbucks Corp., which in 2013 agreed to pay taxes on disputed royalties in the United Kingdom. Ideally, though, corporations hope to create optimal tax strategies that avoid the controversy in the first place.
A global standard could help with that—if one could ever be agreed to.
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