COMPANIE FACE THE PEOPLE´S FURY OVERTAXES / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

Companies face the people’s fury over taxes

By Michael Skapinker

Published: December 13 2010 20:30

Saturday is Pay Day. That is what activists are calling their day of action against companies they accuse of not paying their share of corporation tax. They are targeting Vodafone and Sir Philip Green’s Arcadia retailing group. On previous occasions, demonstrators have blocked store entrances and glued themselves to the windows.


People who would never join a “flash mob” or, perhaps, even know what one was, sympathise with the cause, if not with the methods. The Daily Mail, middle England’s favourite newspaper, said that while it did not condone the protesters’ actions, “we can understand why many hard-pressed Britons will share their sense of injustice”. The newspaper also accused Kraft Foods of the US of trying to “dodge the taxman” by moving some functions of Cadbury, the UK confectioner it acquired this year, to Switzerland. On the Mail’s website, readers called for a boycott of Cadbury’s products.


Are these protests justified? The activists claim Vodafone owes the UK tax authorities £6bn ($10bn). In fact, the mobile phone operator settled its argument with the Revenue & Customs in July, agreeing to pay £1.25bn. The company itself appears to think it got off lightly – it had made provision in its accounts for £2.2bn. But it has paid all outstanding amounts and not even the saintliest taxpayer feels obliged to hand over money the authorities are not demanding.


Sir Philip’s is a different case. He is a UK taxpayer, but Tina, his wife, who owns the company, lives in Monaco, which meant she paid no tax on a £1.2bn dividend she received in 2005. This is entirely legal. I would imagine most readers of (and writers for) this newspaper divide their family assets to minimise their tax liabilities. But by residing in the same country as our spouses (and having less to share), we avoid this level of hostility.


As for Kraft, it runs its European operating company out of Zurich – Switzerland being a favoured home for many companies. Kraft says it is integrating Cadbury into its European structure. It says the balance between employee numbers in the UK and Ireland (about 7,000) and Zurich (fewer than 1,000) will not change much, but then the tax base is rarely where the jobs are.


I suspect that this is what most annoys objectors to companies’ tax arrangements. It is not just that they believe companies are evading their responsibilities at a time when taxpayers face the slashing of their services. It is that it all seems so contrived. Ordinary people cannot work in Pittsburgh and pay (or not pay) tax in Bermuda, or live in Birmingham and enjoy Geneva’s tax rates. Why should companies be able to do so?


Underlying this is one of the oldest business debates. To whom do companies owe their duty? To the society in which they operate or to their shareholders? The latter view has held sway in recent decades, which is why companies have done everything possible to reduce their tax payments.


If all countries had the same corporate rates and the same approach to taxing worldwide earnings, there would be no point in moving. But as that could probably be achieved only through world government, there will often be tax advantages to locating corporate functions elsewhere.


France and Germany put pressure on Ireland to raise its unusually low corporate tax rate of 12.5 per cent as the price for a European Union bail-out. It resisted. The country has attracted not just US technology and pharmaceutical groups, but has become the official domicile of UK companies such as WPP, the advertising and communications company, and Shire, the pharmaceuticals group.


Companies sometimes succumb to pressure. When Accenture, the consulting group, decided to move its official incorporation out of Bermuda, it mentioned negative publicity from being associated with countries that did not have tax treaties with the US. It added that it feared it might struggle to win government contracts. So where did it move to? Delaware? No, Ireland.


Given the savings to be made, the pressure on companies would have to be considerable to persuade them to give up their tax arrangements. It would be easier to prise glued-on protesters from store windows than companies from their tax advisers.


A sustained consumer boycott of these companies might make a difference, but, as I have argued in previous columns, these seldom inflict any real damage. Announcing that knighthoods would go only to company bosses with headquarters in the UK would produce some interesting corporate dilemmas, but which government would be brave enough to risk the drop in political donations that might follow?


Companies will probably tough this one out. But some of their leaders are in for an uncomfortable ride from an angry populace.

Copyright The Financial Times Limited 2010