Thought leadership from ATOZ experts

Great tax paradoxes: A fair level of tax

Last year, a new voluntary certification for companies was introduced in the UK. It is known as the Fair Tax Mark and it’s a first of its kind. Companies who wish to be certified must hand over their accounts and disclose their effective tax rates each year. Companies must also pledge to stay out of tax havens and away from aggressive tax planning schemes. Some companies in the UK have already been awarded the mark including LUSH cosmetics and the energy company SSE. Simply put, this certification is a marketing tool for companies (who are under no legal obligation to pay someone else’s idea of a “Fair Tax”) and it’s a very telling illustration of which way current public opinion is heading.

When I hear the term “a fair level of tax”, I always pay close attention. It supposes that, in the view of the speaker, the legal level of tax is either too high or too low. Ideally, the use of this term can be the start of a profound debate on the societal role of taxation as a method of funding government expenditure and/or wealth redistribution. This type of discussion is worthwhile and in the current debate, timely. The outcome of such a debate can be a change in law to rebalance taxation to a level that society or their representatives think is right.

In recent times however, there is a worrying tendency to state in absolute terms that a company is not paying a fair level of tax and that it should pay more, immediately. At their most extreme, these statements are an incitement to pay levels of tax that are, simply put, illegal. Paying tax is not a neutral act– any extra tax that a company pays is taken from someone, generally the shareholders. Shareholders include people with pension and mutual funds, or retirement savings plans and maybe some of the same people that are calling for companies to pay more. In the absence of an accepted standard “fair level of tax” (I certainly haven’t found one yet), directors of a company choosing to pay more taxes are robbing Peter to pay Paul. Criticising companies or their officers because they minimise taxes legally is politically popular but, I would argue, unfair.

There is clear tension between tax as a legal obligation and tax as a moral obligation. In 2013, David Cameron included these words in his address at the World Economic Forum in Davos, “When some businesses aren’t seen to pay their taxes, that’s corrosive to the public trust…”. The key here is the phrase “seen to”, an indication of the subjectivity at hand. By definition, taxation is a right of government to take part of the assets of its citizens or residents in order to fund the needs of the State. Taxation must be strictly circumscribed by law, as taxation that is imposed other than by law is a form of expropriation, or less politely, State-sanctioned theft.

To those who exhort companies to pay more tax than they legally owe, because they judge the level of tax to not be high enough, they need to follow their argument through to its logical conclusion. If in your opinion, companies should pay more tax than what is legitimately due, you cannot reasonably condemn those who seek to minimise their burden because they judge it to be too high. Until an objective “fair tax rate” has been established, each side is not only entitled to their own opinion, but also to act, legally, in their best economic interests.

 Keith O’Donnell
Keith O’Donnell, Managing Partner - International & Corporate Tax

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