Ensuring all companies pay the right amount of corporation tax

Richard Sampson headshot

By Richard Sampson

Pillar Two requirements are top of the agenda for all multinational organisations with consolidated annual earnings over €750 million, with full calculations having to be done on accounts from December 2023. Its introduction will enforce a global minimum tax of 15 per cent, irrespective of location, so companies will no longer be able to make use of tax havens with low rates to minimise their overall tax burden.

This represents a major shift in the global tax landscape, pushing companies in the direction of responsible tax practices. The aim is to create an equal and transparent tax environment for all. This is a huge issue to tackle – currently, the global corporate tax gap is estimated to be around £75-200 billion per year from companies participating in base erosion and profit shifting practices. In the UK alone, the British entities of seven major tech companies paid only £750m of a possible £2.8bn in corporation tax in 2021.

With such a massive shortfall it’s hard to understand why the general public hasn’t objected more, and forced businesses into abandoning their tax planning strategies before it has become a legislative requirement. Surely most people believe that businesses have a responsibility to pay their fair share of corporation tax?

New research by Tax Systems, in partnership with YouGov, suggests this is the case to some degree, but is by no means universal. It found that whilst 47 per cent of the British adult population would be less likely to engage with a business minimising their corporation tax payments, a significant proportion (29%) said it didn’t matter. A further 16 per cent didn’t know if it would make any difference, and eight per cent said they were more likely to engage with those proactively reducing their tax bills.

These results are certainly interesting – do the 47 per cent of the UK working population, who prefer not to deal with companies who practise aggressive taxation planning, see payment as a legal obligation? Or are they making a direct connection between a higher amount of taxes collected and the improved services they could receive? And is it possible that the 29 per cent who don’t mind how companies handle their taxes, are those who are hit hardest by the cost of living crisis and are unable to put personal ethics over cost efficiency?

So, unless consumers across all age groups vote with their feet, businesses won’t stop being creative with their tax arrangements and are unlikely to worry unduly about potential reputational damage or revenues decreasing

Interestingly, Gen Z appears to be less worried about fair taxation than older respondents, with just 30 per cent less likely to engage with organisations minimising payments. Although it is telling that 28 per cent said they didn’t know if it would make a difference – does this indicate a lack of understanding or interest in this complicated and often highly politicised issue?

In most cases, taxation starts getting serious attention from individuals as its impact on personal finances begins to bite. Commonly, this happens as people grow older and salaries move into higher tax brackets, stamp duty affects house purchases, council tax bills arrive, and inheritance tax becomes a possibility. At this point, the percentages moved upwards, with 45-52 per cent of Gen X and Baby Boomers less likely to engage with companies minimising their tax returns. It suggests that the more mature population are more likely to switch brands if they are made aware of unethical behaviour.

Perhaps what’s missing is a compelling argument to convince younger age groups that the subject of tax is relevant to them. Spelling out more clearly how loss of tax revenue equates to cuts in budgets for hospitals, public transport, education and leisure facilities would make a difference. Highlighting these issues, and many others, could be rectified if companies simply paid the right amount of tax might sway their opinion.

Another point to consider is the evolution of the way of life these tech giants in question have brought about – cheap, highly convenient, online purchasing, immediate delivery, and fast customer services have become the norm, and inevitably part of keeping prices low means paying the lowest tax possible. This convenience comes with a cost.

So, unless consumers across all age groups vote with their feet, businesses won’t stop being creative with their tax arrangements and are unlikely to worry unduly about potential reputational damage or revenues decreasing.

Getting collective buy-in to a fairer society is paramount to influencing the behaviour of corporates. When we compare the UK to those that enjoy excellent public services as a result of higher taxation rates, there are lessons we could learn. The Nordic region exemplifies this model, where businesses and individuals accept that paying higher contributions creates a better quality of life all round.

However, many governments still find it challenging to alter public perception of corporate tax planning and why it should matter to them. Better communication is needed concerning the negative impact it has on public services and areas such as social inequality and green initiatives. Emphasising that if businesses and individuals paid the right amount tax, it would make the overall tax burden fairer and create an even playing field for everyone.

By contributing what’s due, corporations would be investing in the stability, growth, and wealth of their domestic economy. But if left unchecked, the corporate tax deficit will continue to undermine the foundation of healthy and prosperous societies globally.

 Richard Sampson, is CRO at Tax Systems