World: Getting the true picture
11 December 2014
Posted by: Author: James Gavin
Author: James Gavin (EY Tax Insights)
Corporate tax rates are only the most visible of all the forms of taxation incurred by companies. There is now a move to document the many ways in which companies contribute financially and otherwise to the countries in which they operate, known as the total tax picture.
Tax justice advocates are increasingly targeting companies and focusing on the amount of corporate tax they pay. Unfavorable news media coverage has tended to ignore or omit the fact that the corporate tax figures are but a fraction of the broader tax contribution made by businesses.
While economists will argue that all taxes paid by businesses are ultimately borne by individuals, whether shareholders, employees, customers or suppliers, many still see the benefit of looking at "business taxes” as a category. Corporate income tax accounts for just 21.8% of total business taxes in OECD countries, according to EY research. This is lower than property taxes, which account for 26.3%, and VAT and sales taxes, for 38.4%.
Consequently, farsighted companies are going beyond simply reporting corporate income taxes paid at the back of their income statements to regulators and are beginning to highlight their total tax picture in an effort to put in proper context all of the liabilities that companies incur globally in the 21st century.
Companies are opening up their tax books. The mobile telephony giant Vodafone is one, noting that corporate tax is only one of almost 50 different types of taxation paid by its operating businesses every year.
The full range of taxes can include royalties, indirect taxes (such as VAT), payroll taxes, withholding tax and stamp duties. Some of these taxes are collected by businesses on behalf of governments, which involves costs to these corporate "tax collectors”. VAT is a case in point. An overall increased focus on compliance and enforcement means additional compliance and administrative burdens for businesses.
The direct tax contribution can be significantly outweighed by the total cash contribution a company makes. Where Vodafone in 2013 paid £275 million (US$471 million, €350 million) in direct taxes to the UK exchequer, it said its total cash contribution to the Government was more than £1.8 billion (US$3.09 billion, €2.29 billion).
Tina Gill, a UK-based partner at EY, highlights how traditional tax reporting methodologies are missing out the broader economic contribution that companies make to the economies in which they operate. "There are tax rules that state if you make certain types of investment — whether capital investment or in research and development — tax relief is available that recognizes the capital outlay. Yet these costs do not necessarily get directly charged against profits in the accounts,” she says.
In some jurisdictions, corporate tax rates have been reduced in recent years in an effort to make the country’s economy more competitive for business. Statutory corporate income tax rates in OECD member countries dropped on average 7.2 percentage points between 2000 and 2011, to an average 25.4%. Of the 61 countries surveyed in EY’s 2014 annual Tax Policy Outlook around the world,
10 have announced reductions in their statutory corporate income tax rate for the year ahead, three of them from the Nordic countries. Finland saw a reduction from 24.5% to 20% that year, the largest drop among surveyed countries.
Mirroring governments’ attempts to adjust tax rates in order to attract investors, subnational jurisdictions are also competing to reduce tax burdens. This is evident in the US, where states have, for example, negotiated incentives and tax credits with firms in order to encourage them to locate their headquarters there. According to US aircraft manufacturer Boeing, 22 states submitted incentive packages for 54 prospective sites where the company would build the 777X aircraft. Lawmakers in the states of Florida, Louisiana, Nebraska and North Carolina have seriously considered outright repeal of the state corporate income tax. The goal is to generate a positive return on that investment, whether through other types of tax revenue or broader economic growth.
At the same time, other forms of tax have been increasing. "In the UK, national insurance forms a high percentage of total tax paid, and there are a number of indirect taxes that you will not see reflected in the tax charge line — employee taxes, indirect taxes, levies and stamp duties,” says Gill.
For this reason, companies need to take a holistic view of tax, setting it in the wider context of the company’s overall contribution to society. Andrew D. Phillips, from Quantitative Economics & statistics (QUEST) at EY in the US, says, "One issue that many companies are trying to answer is whether or not the tax that they pay is fair. But often they are doing this without a complete understanding of how much tax they actually pay — in terms of direct corporate tax, plus the indirect taxes, and then all the other contributions they make in terms of GDP, jobs and to social causes.” Lower tax rates and more incentives highlight a broader aim: to encourage companies to generate much more value than just that provided in remitted tax revenues.
In 2012—13, Vodafone says it contributed more than £13.5 billion (US$22 billion, €17 billion) in cash to the public finances in their countries of operation, which, the company says, shows there are other mechanisms to derive revenues from business activities, including a wide range of licensing regimes, revenue or production-sharing agreements and, for communications companies, radio spectrum fees and auction proceeds.
As Vodafone notes in its tax and total economic contribution statement, "These additional sources of government revenue are often substantial — sometimes exceeding the monies raised through taxation
— and represent a critically important contribution to public finances. It is therefore essential to take those government revenue-raising mechanisms -into account when assessing the extent to which a company is playing its part in funding wider civil society.”
Other companies are more guarded about detailing the overall tax picture. NTT Data, Japan’s largest telephony company, says it discloses only corporation tax in its annual report — in accordance with Japanese standards of disclosure.
If companies are to obtain a full picture of the economic contribution they make, then they need to embark on a data-gathering exercise that evaluates contributions related to the supply chain and consumption spending by their employees, which ties into the public value that companies provide.
"We are finding that a number of companies are gathering information for their own purposes, but not necessarily always for the purpose of publishing it externally,” Gill says. "For example, they might be asked questions by the board about what their tax profile is and that will include a view on total taxes paid rather than just the tax rate you see in the financial statement.”
As yet, only a minority of companies are taking that information and publishing it externally. When they do, it tends to form part of their corporate social responsibility (CSR) reporting.
Instead, she says, "Companies need to build a narrative around the bare numbers, which on their own don’t provide a total picture.” Yet, businesses should understand the significant time and effort it takes to assemble this type of information.
Tina Gill adds, "If a company is asked about its total tax picture in a situation where it needs to respond quickly, because the contribution goes beyond corporate tax payments into areas like payroll, procurement and real estate, it greatly benefits companies in being proactive in pulling this type of information together.”
There are also significant gains to be had from this process, such as better internal understanding of the issue and the elimination of certain inefficiencies. A total tax picture can create a framework for understanding a company’s activities and dispel some of the myths that have been created about the share of taxes paid by global companies.
This article first appeared on taxinsights.ey.com.