Corporate lawyer Michael Hatchwell of Gordon Dadds considers how to approach the thorny issue of corporate taxation in the wake of the Mossack Fonseca scandal.
The issue of tax has never been as frequently discussed as over the past few weeks. The leak of the Panama Papers, the 11.5 million files held by offshore law firm Mossack Fonseca, has caused a series of media and political crises across the globe. The papers identified five heads of state or government leaders as having offshore accounts, including from Iceland, Ukraine, and the United Arab Emirates.
It has caused particular concern in the UK due to the naming of David Cameron’s father and the involvement of several British Crown Dependencies. However, the resulting furore and media firestorm has generated a good deal more heat than light. This is often the case, with the need for careful analysis about complex issues being thrust aside for the sake of some immediate headlines. There is nothing as inconvenient as the truth, after all. So it seemed a good time to take a step back and look at how we should be approaching the thorny issue of corporate taxation.
Trusting the law
Britain is a nation which is respected internationally for its adherence to the rule of law; we have our rule of law to thank for billions of pounds of inward investment. The principle of innocent until proven guilty has been paramount for centuries, helping to give people a fair hearing according to due process. Changes to the law have traditionally emanated from Parliament and have been subject to legislative scrutiny. This creates a check and balance, mitigating against knee jerk responses to complex issues. Politicians need to support rather than undermine this essential need for considered and smart legislation, rather than encouraging scapegoating and trial by media.
There is currently a great deal of anger towards large companies and individuals who are perceived to be taking part in tax evasion. It is now traditional for CEOs to be hauled in front of select committees to be questioned on their tax affairs or salary in the full glare of the media spotlight. There has also been pressure in recent weeks for public figures to release their tax returns, a number of whom have done so. However, this scapegoating risks creating a climate which is seen as hostile to enterprise, creating a ‘tipping point’ which acts as a disincentive to investment.
Most businesses are complying with a body of law which is highly complex, based on an overlay of international treaties and local laws.
The complexities of the offshore debate
Businesses have a duty to act within the framework of all relevant laws; however the onus lies on politicians rather than firms to ensure that this legislation is fit for purpose. Businesses have a responsibility to ensure a return on their investment and to keep their shareholders and stakeholders happy. Most businesses have to return money to their shareholders; without successful businesses we would not have a viable economy.
It is therefore natural that businesses wish to reduce their tax burden. The use of offshore structures is not necessarily illegal and the option legitimately to take advantage of lower tax jurisdictions is ever present. There are many good reasons for using lower tax and offshore jurisdictions; for example establishing a hedge fund.
Different mainstream jurisdictions offer different tax rates for different activities, as they aim to make themselves competitive. For example, Ireland is a full member of the EU and a frequent choice for international companies to minimise tax. The UK is introducing a corporation tax rate of 17 per cent from 1 April 2020, the lowest rate in the G7. Whilst illegal offshore arrangements are never to be condoned, many low-tax economies have benefited from the investment that their fiscal structures have brought in. They have flourished due to the jobs and capital provided by this investment, showing that a streamlined tax environment can have benefits for governments as well as corporations.
Searching for solutions
Due to the considerable disparity between different tax regimes, the answer to tackling tax evasion lies in international co-operation and harmonisation using established legislative methods. International tax law is inherently complex, particularly due to the varied tax systems and legal norms that exist in different states.
Harmonisation creates certainty and will help to eliminate some of the loopholes that currently exist within the international system. Multinational organisations will require greater resources and powers in order to oversee and enforce this and some countries which currently benefit from low-tax status may need to be incentivised to take part. This is a global issue which requires a truly global solution.
Details of illegal behaviour, as released in the Panama Papers, have rightly caused concern in recent weeks. However, it is important to respond in a manner that is proportionate and does not make the problem worse. Offshore does not mean illegal. We must absolutely adopt legal and parliamentary solutions that maintain Britain’s long tradition of promoting democracy and the rule of law.
The British Government must lead by example and show that we can react in a measured and sensible way. We must show that we understand the complexities and challenges of the business world and that we respect the rule of law rather than reacting hysterically, ignoring the rule of law and resorting to public shaming. Such activity will harm the perception of Britain’s abroad.
The solutions lie in a co-ordinated effort, working with our international partners to create a global legislative regime which is fair for businesses and for governments as well. That solution will need to be carefully balanced with the obvious competition that so clearly exists between countries (even within the EU), as they aim to become and remain the destination of choice for inward bound investment.
Michael Hatchwell is a corporate and commercial lawyer at Gordon Dadds, part of the Globalaw network.