Aim Of The Blog
This Blog is not about whether effective tax planning is right or wrong, but raises the question whether besides evaluating tax risks (level of tolerance) also reputational risks of the company as part of tax risk management should be determined and managed accordingly.
I don’t necessary agree with the content of various public statements below. For management purposes the objective is to predict the mindset of the public opinion.
- Is the public opinion important for tax planning and the company’s business objectives?
- Has that changed due to economic climate?
- What drives public opinion?
- What is the impact on the reputation of the tax professional if planning is implemented and becomes unforeseen public knowledge?
- How important is the reputation of the tax professional to establish company’s tax objectives such as tax controversy (‘enhanced relationships’ with tax authorities).
- I quoted recent news stories that might influence public opinion overall. What would the opinion be if this is read by someone not in the tax profession?
Tax specialists.. Are You Conscious Of Your Reputation?
How about the perception of integrity of the tax profession?
Some quotes of a blog I recently read.
“The Chief Political Commentator of the Telegraph, Peter Osborne, recently wrote one of the most damning verdicts. He stated ‘there are few more worthless specimens of humanity than tax accountants and tax lawyers’.”
“Mark Robertson, representing the investment research service Eiris, highlighted how ‘significant reputational damage in the form of negative publicity arising from aggressive tax evasion’ can create financial risks for organizations.”
“Joe Stead from Christian Aid noted that ‘becoming known as a tax dodger can damage a company’s reputation and lead to costly penalties’.
The Changing World From An Adviser Perspective
A tax professional should contribute and give guidance to achieve that taxpayers do not pay more tax than necessary. Every opportunity has to be considered and because of the different and highly competitive market in the past aggressive indirect tax planning structures were proposes and implemented.
I shared my view of ‘The Changing World From An Adviser Perspective’ in ‘One Man’s Weakness Is Another Man’s Strength: Let’s Team Up ‘.
In the indirect tax field, especially value added tax, this kind of aggressive structures were for a long time often approved by case law. That has changed when the European Court of Justice ruled a couple of years ago that such behavior had to be punished and the tax advantage was revoked or denied.
The tax profession had to change as well and reposition itself to ‘manage the numbers of indirect tax’ (focus more on risk management) and because of new trends relationships with tax authorities became (more) important to realize the associated taxpayer’s tax objectives.
A New trend: Open Dialogue Between Revenue Bodies, Taxpayers And Tax Intermediaries
The new trend is to have an open dialogue between revenue bodies, taxpayers and tax intermediaries based on mutual trust. I refer to OECD promotion of ‘enhanced relationship’ (OECD Report: Study Into The Role of Tax Intermediaries).
In 2005, the Netherlands Tax and Customs Administration (TCA) initiated a pilot ‘horizontal monitoring’ programme involving 20 of the country’s largest corporate taxpayers. At the core of the programme is a concerted effort by the TCA to build greater trust with this taxpayer constituency as a means of encouraging greater disclosure of tax uncertainties and risks.
Even if the authorities have not embraced such an approach (yet), a proactive mode can not only safe time and money but result in a good relationship.
Read more in: ‘Audit Defense: Key Considerations‘.
Is What Apple Did Wrong?
“Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains. California’s corporate tax rate is 8.84 percent. Nevada’s? Zero. Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year.
As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.
Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any American business. Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan.”
VAT Rate Increase Results In Extra Saving by Richard Cornelisse:
“As resident of Europe if you buy services from Apple via the iTunes store no local VAT is due unless you are a resident of Luxembourg. The supply is subject to Luxembourg VAT. No surprise that Apple and Microsoft and many others run both their European operations from Luxembourg.”
In Hungary the standard VAT rate is 27%. The standard VAT rate in Luxembourg is still 15%. That means at least a VAT saving of 12% per transaction.
About Change And Competencies
The contribution of a tax professional is nowadays not only on not paying more tax than necessary and evaluating associated tax risks when implementing (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company.
What is the impact if the tax planning becomes public knowledge? What are the consequences if a newspaper or politician picks it up to make statements about lack of ‘tax morale’ and the company is used as case study?
Think about the taxpayer’s customers, suppliers, employees, external auditors, financial institutions, the taxpayer’s credit rating.
Some examples of news briefings that could influence people’s mindset:
Political Double Dealing by James Green:
“On his 2008 Presidential campaign trail, Barack Obama made his hostility toward “offshore” jurisdictions very clear: “There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”
Is China Bad For The U.S. Job Market? by Kenneth Rapoza
“Is China displacing U.S. jobs?” asks Scott Paul, executive director at the Alliance for American Manufacturers, a trade lobby. “No question about it. A lot the job losses have come from innovative states like Massachusetts, North Carolina, Texas and California, where they do all the innovating, but China does all the manufacturing for them. The problem with that model is that manufacturing and production is where the middle class jobs are. China has had a huge impact on the U.S. economy,” Paul says.
Reuters, March 5, 2012:
“International tax evasion by multinational companies that take advantage of tax-rate disparities among countries is on the rise, according to an international study group. By claiming multiple deductions and generating fake credits, corporations can cancel out taxes owed, said the Paris-based Organization for Economic Cooperation and Development on Monday. In a 25-page report, the OECD said billions of dollars of tax revenues were at risk through aggressive tax planning techniques used by companies to exploit tax rate differentials. The report says companies exploit national differences in the tax treatment of instruments, entities or transfers to deduct the same expense in several different countries, to make income ‘disappear’ between countries or to artificially generate several tax credits for the same foreign tax.”
The management of reputational risk is in my view a corner stone of tax controversy and becoming even more important in times of tax authority scrutiny as method of governments to balance their budgets.
The reputation of a company and that of a tax professional either in-house or external are linked. The reputation of a tax professional, both current and past, is a key driver to contribute real value to the taxpayer’s tax controversy objectives nowadays and in the future.
What Determines Our Reputation?
A Tax Controversy objective ‘achieving mutual trust via ‘an ‘enhanced relationship’ is difficult to meet if the tax professional in-house or as representative of the taxpayer has a reputation of planning and implementing ‘tax’ schemes that allocates taxation to low rate countries abroad. Trust has to be earned and (mis)perceptions about ethical standards could cause real bottlenecks.
Is that also the real market danger for Apple: the mindset of the public opinion? What is the impact on Apple’s reputation with respect to this kind of stories?
Apple customers and suppliers face increase of taxes and you hear that Apple does not pay taxes (highly profitable). Would that customer have an opinion about tax morale in general and benchmark that with Apple’s tax strategy?
A public opinion is also about the perception of Apple ethics beyond tax via dotting all the pieces of bad press lately such as labor conditions and outsourcing manufacturing to China (losing US jobs).
- What is the public opinion about the company’s code of conduct?
- Has that opinion changed and what was the cause effect?
- Does that impact Apple’s future tax strategy?
If you focus only on evaluating tax risk (level of tolerance) probably not. However, is such an analysis enough from a tax strategy perspective nowadays?
In Apple’s defense lots of multinationals are doing the same and change of the tax system – as those structures are often legally allowed – is the only way to close such gaps. I refer to Obama’s quote:
“There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations.”
Management By Apple
Based on the statement below it is likely that this risk has been foreseen, considered manageable and thus likely no need necessary to change its tax strategy at least for now. Apple’s message below highlights what has been contributed. The method is counterattack by telling – supported by facts – why such statements or public perception as mentioned above (all the questions raised) should be considered wrong.
Apple stresses publicly its code of conduct: ‘doing the right thing’ and ‘highest ethical standards complying with applicable laws and acounting rules’. Apple responded also very quickly.
It shows now a process from start (worse case scenario) to finish (game plan) as it includes also how Apple manages reputational risk.
Over the past several years, we have created an incredible number of jobs in the United States. The vast majority of our global work force remains in the U.S., with more than 47,000 full-time employees in all 50 states. By focusing on innovation, we’ve created entirely new products and industries, and more than 500,000 jobs for U.S. workers — from the people who create components for our products to the people who deliver them to our customers. Apple’s international growth is creating jobs domestically since we oversee most of our operations from California. We manufacture parts in the U.S. and export them around the world, and U.S. developers create apps that we sell in over 100 countries. As a result, Apple has been among the top creators of American jobs in the past few years.
Apple also pays an enormous amount of taxes which help our local, state and federal governments. In the first half of fiscal year 2012 our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.
We have contributed to many charitable causes but have never sought publicity for doing so. Our focus has been on doing the right thing, not getting credit for it. In 2011, we dramatically expanded the number of deserving organizations we support by initiating a matching gift program for our employees.
Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules. We are incredibly proud of all of Apple’s contributions.
Apple’s Public Image Is Made Of Teflon
“When the New York Times claimed incorrectly last year that General Electric (GE) paid zero federal taxes in 2010 on worldwide profits of $14.2 billion, the company’s reputation took a steep and prolonged hit, as measured by YouGov’s BrandIndex Reputation score.
Not so Apple (AAPL).
When the same paper ran a front-page story last week detailing — again incorrectly, according to Forbes — the lengths to which Apple has gone to avoid paying taxes, the company’s consumer reputation barely budged.
In fact, based on responses to the question “Would you be proud or embarrassed to work for this brand?” Apple’s reputation score actually went up modestly a few days after the Times story broke, according to a YouGov report issued Tuesday.
The market research firm concluded that Apple’s public reputation is “virtually Teflon” — at least in terms of tax avoidance.”
The N.Y. Times’ tax-avoidance story didn’t stick to Apple By Philip Elmer-DeWitt
Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.
- How Internal Audit could contribute value in realizing indirect tax objectives? (indirecttaxtechnology.com)
- The KEY Group measures Indirect Tax Performance and improves where necessary (richardcornelisse.com)
- Taxmarc™: your best SAP solution for Indirect Tax Automation (indirecttaxtechnology.com)
- We Need A Tax Professional To Run The IRS (forbes.com)
- Merger and Acquisition – Integration And Indirect Tax: Managing the Moving Parts Before, During, And After a Transaction (indirecttaxtechnology.com)