Tuesday, October 16, 2012

Starbucks scandal: company directors do not have a duty to avoid tax

Large sections of the British population are justifiably outraged that the US multinational Starbucks has been taking all the benefits from the UK's economy and society, then refusing to pay its share of the costs. This purveyor of what the Mirror newspaper calls "Detaxinated Coffee" has been using  tax havens, of course, in a classic transfer pricing game blasted open by a superb piece of reporting by Reuters journalist Tom Bergin. It's complicated (of course), but that hasn't stopped it from getting a truly massive reaction in Britain.

There has been outraged in the newspaper and the start of boycotts, probably none of which express the basic issues quite so crisply as this one, from Northern Ireland:
“The retail and private sector service sector has been particularly badly hit during this recession. Hundreds of small businesses and thousands of workers in shops, bars, hairdressers and cafes have lost their jobs as over a quarter of retail spaces in Belfast and across Northern Ireland lie empty.
. . .
“But there is another reason why locally-owned small businesses are going under – they are being forced out of the game by the unfair competition from multinational corporations such as Starbucks who use tax avoiding scams which are perfectly legal but fundamentally immoral.
That is essential to understand, always. But here is something that is, as yet, not so well understood. We will cut and paste this blog from Tax Research wholesale, because it's so important.
"I’m told that someone from the Chartered Institute of Tax has been claiming today on BBC News 24 that companies have a duty to their shareholders to avoid tax.

I really do wish people who should know better would not put forward arguments that are factually untrue. There is absolutely no such implicit or explicit obligation imposed upon the directors of any company, public or otherwise in the UK.  Section 172 of the Companies Act 2006 lays out the duties directors have to their shareholders and to other parties. That section actually says:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

There is, as you will note, nothing absolute about that at all. The exercise of judgment is required, and the exercise of good faith is essential. There is of course a duty of care to the shareholders, but remember that they have no way of enforcing it: they cannot sue the director if he or she fails in their opinion to maximise profit or minimise tax. No shareholder has that right. As a result it is very clear that there is no absolute guidance to behaviour in company law.

More than that, company law explicitly suggests that companies may take into account the impact of tax avoidance on their relations with customers, tax authorities, the community and more besides. In other words - you can explicitly decide, very legally, not to tax avoid.

So might I suggest the profession stop telling mighty porkies on this issue?"
One thing we would add: the citizens of the UK mustn't forget the Facebook tax scandal, the Google tax scandal, the Apple tax scandal, and all the rest.

The whole system is rotten to the core. And it's time to change it. Picture Hat tip: Daily Mirror.


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