The Impact of “Tax Shaming”

Written by Chirag Shah on 16 July 2013
The Dolce and Gabbana case highlighted the recent crackdown on tax evasion schemes and the subsequent negative publicity attached to it.  It has also exposed a number of companies with complicated tax structures who have successfully managed to ‘avoid’ paying tax over a number of years.  
 
This week Starbucks announced that is has paid £5m in UK corporation tax, its first such tax payment since 2009, and would pay a further £5m later this year.  This appears a direct response from the company to the pressure from politicians and campaigners, and the recent agreement at the G8 summit to clamp down on corporate tax avoidance.  There seems to be a growing culture of naming and shaming companies, but what impact does it have and is it justifiable?
 
To clarify, everything these companies have been doing is legal.  Yet public opinion is visibly turning.  Starbucks, for example, had sales of £400m in the UK last year, but paid no corporation tax.  It transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business.  10 years ago, the news of a company minimising its corporation tax would not have threatened the front page of a newspaper. However, in our current situation of public spending cuts and austerity, public perception has changed.   As more people understand what corporate tax avoidance is, there is a clear sense of outrage. Discussions regarding the ethics of tax avoidance are occurring everywhere.  
 
How much effect ‘tax shaming’ has had on companies is difficult to ascertain.  Starbucks has made the right noises about listening to their customers and undertaking measures to make Starbucks profitable in the UK.  It is clear the reputational side of things is key as damage to a strong brand also impacts on its financial ‘value’.  The rise of social media has been even more dangerous for companies because a small number of people can activate and ferment dissent amongst others quickly.
 
This leads to the question as to whether tax shaming is justifiable.  Companies such as Amazon, Starbucks and Google are hardly unique in minimising their tax liabilities.  Individuals themselves often try and lower their own tax bill by exploiting rules in inheritance tax, or gifting to charity. The question to ask is “when does trying to be tax efficient become morally, if not legally inappropriate”?
 
It will be interesting to see if other companies follow Starbucks’ lead as the net closes in on tax avoidance schemes.  
 

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Chirag Shah
Trainee Corporate Accountant