It says that there is a tension between the public’s view that the better companies are doing, the more they should pay in tax, and government policy which provides a range of tax incentives intended to boost investment and growth by offering companies the chance to reduce their tax bills.
This Catch 22 situation, according to Taxing Corporate Profits: Hard Choices, has left businesses in a quandary. “Because of possible public criticism, businesses face uncertainty as to whether to respond to incentives in the tax system that allow them to pay less tax,” it says.
Low tax morale damages public finances by reducing the overall tax that is collected
“These incentives are designed to boost investment and sustainable economic growth. Yet if businesses do not feel able to respond, there is a risk that economies will fail to reach their full potential.
“If responding to tax incentives also undermines trust in business, it will deprive economies of growth and jobs and erode the tax base on which tax is levied.”
The problem is worse internationally, the paper says, where multinationals face a complex series of overlapping and competing incentives offered by different countries. Taken together, these “erode the tax base on which tax is charged and undermine trust”.
Governments also face a dilemma because if the public believes companies are able to pay less than their fair share of tax, it undermines confidence in the tax system. “Low tax morale damages public finances by reducing the overall tax that is collected and making it more expensive to collect," the report says.
The paper also points out that politicians face difficulties with the public if their responsibility to manage the economy and public finances is seen to be in conflict with their responsibility for ensuring a fair tax system for all.
Transparency, ICAEW says, will only go so far in bridging the gap between taxable profit and other measures of profit. And while aspects of tax – such as deferred tax – remain incomprehensible to commentators and the public at large, public credibility will “continue to be tested by the gap between corporation tax liabilities and reported profits”.
The institute say is keen to stimulate an “open and well-informed” debate about how to address the tensions. It has come up with a series of questions, which include:
- Should companies pay tax on their corporate profit at all or just leave it until the profits are distributed and tax the individuals that receive them?
- Should incorporated and unincorporated businesses be taxed on a similar basis?
- Should business respond to incentives or just pay their taxes?
- Can governments maintain public confidence while providing incentives to business?
- Is disclosure the answer?
The paper concludes that it is only too easy for business and government to avoid dealing with these “hard choices” by blaming each other for public perceptions of unfairness, and it takes the accountancy profession to task for failing to grasp this particular nettle.
The paper has already caused controversy. According to Richard Murphy of Tax Research UK, it ranks highly “as an exercise in obfuscation”.
He says ICAEW has missed two major points. The first is that the issue is not to do with tax incentives but the fact that multinationals are seeking to avoid tax by shifting their profits artificially to locations “which have little or nothing to do with the substance of those transactions” but which so offer “lower tax rates than would be paid in the places where the profits really arise”.
The second is ICAEW’s argument that transparency doesn’t offer a significant solution to the problem. “This is, again, quite extraordinary,” he says. “Around the world it is now appreciated that country-by-country reporting has a major contribution to make in identifying which companies may, or may not be shifting profits into tax haven locations.”