By Richard Cornelisse
Aim of the Blog
This article is not about whether effective tax planning is right or wrong, but about whether, in addition to evaluating tax risks (level of tolerance), companies should also determine and manager their reputational risks as part of tax risk management.
I do not necessarily agree with the content of various public statements below. For management purposes, the objective is to predict the mindset of the public.
- Is public opinion important for tax planning and the company’s business objectives?
- Has that changed due to the economic climate?
- What drives public opinion?
- What is the impact on the reputation of the tax professional if the planning is implemented and unexpectedly becomes public knowledge?
- How important is the reputation of the tax professional in establishing the company’s tax objectives, such as tax controversy (‘enhanced relationships’ with tax authorities).
- I have quoted recent news stories that might influence public opinion overall. What would public opinion be if this is read by someone not in the tax profession?
Tax specialists.. Are you conscious of your reputation?
What is the perception of the integrity of the tax profession?
Some quotes from 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’
By Beth Horne, Tax specialists.. Are you conscious of your reputation? – Talking Recruitment.
The Changing World from an Adviser’s Perspective
A tax professional should contribute and provide guidance in order to ensure that taxpayers do not pay more tax than necessary. Every opportunity has to be considered. As a result, in the past, as the market was very different and highly competitive, aggressive indirect tax planning structures were proposed and implemented.
I shared my view of ‘The Changing World from an Adviser’s Perspective’ in ‘One Man’s Weakness Is Another Man’s Strength: Let’s Team Up ’.
In the indirect tax field, especially concerning value added tax, these kinds of aggressive structures were for a long time often approved by case law. That changed a couple of years ago, when the European Court of Justice ruled 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). Moreover, because of new trends, relationships with tax authorities became (more) important for realizing 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 the OECD’s 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’ program involving 20 of the country’s largest corporate taxpayers. At the core of the program 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.
Read more in: ‘Audit Defense: Key Considerations‘.
Is What Apple Did Wrong?
How Apple Sidesteps Billions in Global Taxes by Charles Duhigg and David Kocieniewski:
“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.”
About Change and Competencies
Nowadays, the contribution of a tax professional not only pertains to not paying more tax than necessary and to evaluating associated tax risks when implementing planning (rate level of tolerance on a risk scale). It should also take into 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 a case study?
Think about the taxpayer’s customers, suppliers, employees, external auditors, financial institutions, and the taxpayer’s credit rating.
Some examples of such news reports 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 of 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.”
In my opinion, the management of reputational risk is a cornerstone of tax controversy. In addition, it is becoming even more important in times of tax authority scrutiny, as a method for 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 in contributing real value to the taxpayer’s tax controversy objectives, nowadays and in the future.
What Determines Our Reputation?
The Tax Controversy objective of ‘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 allocate 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? What is the impact on Apple’s reputation with respect to this kind of publicity?
Apple customers and suppliers face tax increases. At the same time, they find out that Apple does not pay taxes (highly profitable). Would those customers and suppliers have an opinion about tax morals in general and benchmark that against Apple’s tax strategy?
Public opinion is also about the perception of Apple’s ethics beyond tax. Namely, by linking all the pieces of bad press lately, such as labor conditions and outsourcing manufacturing to China.
- What is the public opinion about the company’s code of conduct?
- Has that opinion changed? What was the cause of that change? And the effect?
- Does that impact Apple’s future tax strategy?
If you focus merely on evaluating tax risk (level of tolerance), there is probably no impact. However, is such an analysis enough from a tax strategy perspective nowadays?
In Apple’s defense, many multinationals are doing the same. Changing 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 Apple’s statement below, it is likely that this risk was foreseen, considered manageable, and thus likely deemed not requiring a change in its tax strategy, at least for now. Apple’s message below highlights what was contributed. The method consisted of a counterattack by explaining – supported by facts – why such statements or public perception as mentioned above (all the questions raised) should be considered wrong.
Apple publicly stressed its code of conduct: ‘doing the right thing’ and ‘highest ethical standards, complying with applicable laws and accounting rules’. Moreover, Apple responded very quickly.
Apple’s case shows the process from start (worst case scenario) to finish (game plan), and 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 responds to tax criticism by highlighting job creation by Steven Musil
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