January 23, 2014 Mind the gap
Remember the days when all a company director had to worry about was how much profit the business was making for its shareholders? Well in truth life was never that simple, it just seemed like it sometimes when financial journals judged everything in terms of ratios and made recommendations accordingly. But nowadays running a business is so much more than simply producing and selling goods or services. Today’s business is expected to be sustainable, to embrace employee engagement, to put customer needs and satisfaction before profit, to look to the ethics of care….oh yes, and also to pay its fair share of taxes.
With this last point in mind the ICAEW has put together a paper entitled “Taxing corporate Profits: Hard Choices.” With a sub-heading of “towards a better tax system initiative” the paper draws on the ICAEW’s Tax work in exploring “major public policy issues around tax in order to inform and educate decision makers and the broader public on the way tax systems are designed and operated.”
Starting with a quick look at profits and taxes the paper explores the way in which governments may use tax collection and incentives to influence company behaviour before moving on to consider the tax dilemmas which may be thrown up by these incentives. The paper acknowledges that the current climate has forced businesses to make some hard choices in respect of tax. Essentially if a company takes advantage of a tax incentive it may benefit the company and the economy in the long run but this could come at the expense of negative publicity amid accusations of tax avoidance. Conversely, if a business fails to take up tax incentives for fear of reputational repercussions then this may result in the company and local economy failing to reach their true potential.
This dilemma is particularly acute in international organisations. The paper suggests that businesses which operate internationally face a “complex series of overlapping and competing incentives” which can “erode the tax base and undermine trust.” Part of the answer may be to embrace transparency; seeking to explain the gap between taxable profit and other measures of profit. However, the paper argues that such disclosures can only go so far with both commentators and the general public finding it difficult to grasp tax complexities and deferred taxation calculations which bridge the perceived gap between corporation tax liabilities and reported profits. Accordingly the paper calls for an open well-informed debate about “why there are tensions between government responsibilities for the management of economies and for perceptions of fairness in taxing corporate profits.”