Governments not going to give businesses a break

Benjamin Franklin once quipped there were just two certainties in life: one was death and the other taxes. To many around the world Franklin’s pearl of wisdom rings all too true.

Yet, as the current uproar surrounding taxation has shown, for an awful lot of — often awfully rich — people only half of his statement applies. Tax has become the latest hot-button issue for austerity-weary nations. And indeed their indignation is perfectly understandable.

Few would disagree that international tax reform is long overdue. But you can’t help feeling the man on main street is being manipulated on this one.

After all, since when was tax so exciting? So pressing an issue to top the agenda at both an EU Summit and the upcoming G8?

Prime Ministers usually shy away from the complexities of this kind of stuff. Fresh from one of the longest recessions in recent memory, Western leaders have been looking for a new way to distract their electorates from the fact that growth is not forthcoming. And tax might just have provided them with a convenient smokescreen.

Tech titans

Now that the bankers have been bashed, it’s the turn of the tech titans to face public ire amid revelations that Google, Apple and Amazon have been crafty enough to use overseas operations to lower their tax liabilities.

But here’s the thing: in their opportunism, politicians have confused a few key issues and blurred the lines between one’s legal and moral obligations to pay tax.

Avoidance ‑ be it by booking some sales offshore like Google or transferring one’s intellectual property like the band U2 — is legal in many countries whereas evasion — by failing to declare income on assets held abroad — is not.

A report this year by the US Congressional Research Service said individuals were more likely to evade tax whilst businesses just avoided it where they could. And more to the point, as any CEO will tell you, firms are duty bound to make money for shareholders — not the government.

By hoping to pressure companies to do the ‘right thing’ instead of re-writing the rotten rules, lawmakers are being tempted to take the easy way out.

It would be naive to assume that a firm like Google, with more users than the population of many a G8 country, would offer up a slice of their legally obtained savings just because a parliamentary committee deemed them devious.

If the rules were changed, then companies would have to abide by those rules, even if they did so reluctantly. Google is a young enterprise; as its tax arrangements have shown, it can be flexible.

The UK PM David Cameron hopes to use his current presidency of the G8 to clinch a multilateral framework to tackle tax treaties. To create a level playing field, as he calls it.

Tough talk on tax

However, this clashes with the fact that the UK — like some other countries spearheading the tough talk on tax — is home to a number of ‘fiscal paradises’ itself, such as the British Virgin Islands and the Channel Islands. Removing their tax perks would leave such far flung territories with little else in the way of a viable economy.

So what’s the solution? A combination of tougher penalties, income withholding and incentives for information sharing between countries should certainly play a role in any future, successful deal on evasion.

And steps to curb transfer pricing and profit shifting would draw a boundary for companies tempted to avoid paying their fair share. But all this will take time and pages of complex legal work.

For that reason, even if Franklin was only half right on the tax bit, what is certain is the issue will be revisited time and again.

— The writer is the host of CNN International’s ‘World Business Today’.