A question of judgement

Sir Martin Sorrell once said that the amount of corporation tax a company pays was really “a question of judgement.” However, the tipping point will come when international players such as Google and Amazon decide it is purely in their corporate interest to avoid the social stigma attached to highly artificial forms of tax avoidance, says Raymond Snoddy.

For Benjamin Franklin there were, of course, only two great certainties.

But now there is really only one. Scientists are still hard at work on the death thing, but as for taxes, if you are big enough and international enough, then paying some taxes can become akin to a goodwill gesture whatever business you are in.

It can be only be a matter of time before paying corporation tax turns into a corporate social responsibility issue – a charge that comes out of the marketing and public relations budget; something similar to doing good works for the environment.

Or as Sir Martin Sorrell, chief executive of WPP, put it earlier this year with admirable honesty, the amount of corporation tax a company pays was really “a question of judgement.”

Sir Martin, a frequent adviser to governments at the highest level, knows what he is talking about. He marched his corporate entity off to Dublin when threatened with what he saw as unreasonable levels of corporate taxation and recently marched WPP back again to London when the worst threat had abated.

Still, the right action on corporation tax, Sir Martin suggested, was “you make a contribution” as if it was almost a charitable donation.

Starbucks clearly started to see it as a reputational issue of some importance when, in the face of a potential consumer boycott, the company almost insisted that HM Revenue and Customs relieve the company of the odd £20 million in extra taxation.

And from coffee companies to media giants. Google have certainly got to the cutting edge of the current debate.

MPs have demanded that the information and media company should be fully investigated for what politicians on the House of Commons Public Accounts Committee (PAC) described recently as “highly contrived” tax arrangements.

Once again the island of Ireland – home to this week’s G8 discussions, although on the northern side of the border – is at the centre of the debate.

The Committee’s chairwoman Margaret Hodge is, to say the least, unimpressed by what she sees as Google’s “brazen” behaviour. Some will think that Google’s perfectly legal approach even borders on the edge of operatic implausibility.

You have to be rather “bold,” as the Irish like to say, to defend without blinking the ratio between the £11.6 billion Google is estimated to have raised in revenue in the UK between 2006 and 2011 and the £10 million the company is believed to have paid in corporation tax over the same period.

This is a particularly impressive, although entirely legal achievement, given that the main rate of corporation tax during the period in question was in the 26 per cent to 30 per cent range.
The wheeze involved the claim by Google that its sales of advertising space to UK clients actually took place in Ireland because that is where the bills came from.

The PAC decided it was quite clear “that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax.”

Fighting talk from the Committee but in a world of footloose corporations, whether from the world of the international media or elsewhere, it is not entirely obvious what can be done.

Ironically, The Times, which has been getting the bit between its teeth on such taxation issues, has been able to trace its own tax heritage back to News Corp’s “haven” in Delaware. Things could be about to change as News Corp limbers up to perform its historic split.

On the Government side of the fence it is far from clear what David Cameron or anyone else can actually do about creative – though legal – tax avoidance.

The Prime Minister can have some influence over the Crown dependencies such as Jersey or the Cayman Islands. But any goodwill at the G8 will then have to move on to the G20 group of countries before heading for the The Organisation for Economic Co-operation and Development (OECD) in September.

Getting everyone in line will be, to say the least, challenging.

Despite the difficulties, these harsh economic times may turn out to be the best possible moment to make a difference.

The contrast between the “little people” and the little domestic companies who have no particular way of avoiding corporation tax and the international players may turn out to be unacceptably great. In the end the killer app may turn out to be a rather old fashioned question of basic fairness.

There is more than a little irony in the fact that it may be some of the new companies in the social media realm who might be tempted by imaginative tax schemes who are the very organisations whose users and subscribers will be empowered to lead the charge for reform.

It could be about reputation and how companies are perceived that will make the difference.

Never forget that it was a social networking site that, wisely or otherwise, managed to close the News of the World because of the phone-hacking scandal by advocating an advertising boycott.

The tipping point will come when international players such as Google and Amazon decide it is purely in their corporate interest to avoid the social stigma attached to highly artificial forms of tax avoidance.

It is clearly an important mission for the newspaper industry to perform whatever the behaviour of its own parent companies should be.

Never underestimate the power of exposure and ridicule, particularly in an age when it can traverse the globe in micro-seconds.

Ultimately, Sir Martin Sorrell is right. Paying some taxes is a matter of judgement – but good corporate discretion should lead to the voluntary abandoning of the sort of artificial schemes that bring only ridicule or reputational damage.

But as Margaret Mitchell, author of Gone With The Wind, realised: “death and taxes and childbirth. There’s never any convenient time for any of them.”