Should a company engage in tax avoidance schemes?

The debate surrounding tax avoidance is an ongoing issue for firms to consider. Google’s chairman Eric Schmidt recently stated publically ‘I’m very proud of our tax avoidance scheme,’ demonstrating how some firms actively seek to avoid tax in the most efficient ways. However whilst this reduces tax and in turn increases profits and therefore shareholders wealth, it can be viewed as unethical by consumers who tend to believe companies should pay the correct level of taxes. So what actually is tax avoidance? Well, in its simplest form, Clausing (2009) explains “tax avoidance takes the form of income shifting” going on to state how “financial responses to corporate taxation include efforts to shift income to more lightly taxed locations.” Therefore tax avoidance is essentially the legal, yet unethical shifting of profits to areas with low tax rates in order to reduce their taxation bill. There are a vast number of ways companies can do this from changing the location of assets and employment to altering the structure of affiliate finance or changing transfer prices between different divisions of the company and therefore different countries. I have chosen to discuss this topic this week focussing on Starbucks, due to its recent media limelight in late 2012 surrounding tax avoidance.

To give some background, Starbucks reportedly paid minimal taxes on profits due to transferring profits to tax ‘tax haven’s,’ therefore ensuring that profits arise in countries which have very low tax rates. Starbucks did this is numerous ways, primarily through transfer pricing between divisions in different countries with examples including charging high licensing fees to the UK branch to reduce profits in this area along with purchasing coffee beans for high prices from Dutch branches to increase profits where corporation tax is low. On the outset this may appear unethical, as the organisation is essentially avoiding paying taxes to the UK government. However, Starbucks is a publically listed business and will ultimately want to generate maximum profits, a view likely to be shared by stakeholders such as shareholders and employees. Tax avoidance is a way in which profits can be maximised, therefore resulting in potential benefits such as higher shareholder equity and increased job security for employees for example. When looking further into ethically theory, Crane and Matten (2010) describe that “according to utilitarianism, an action is morally right if it results in the greatest amount of good for the greatest amount of people affected.” Therefore it could be argued that if a great number of stakeholders benefit from this tax avoidance, which is legal, there is a reasonable argument to justify it.

The issue of tax avoidance will have both positive and negative implications for companies as it did in the case of Starbucks. Whilst they are not breaking any laws, transferring profits to lowly taxed areas and therefore away from the UK is likely to be viewed unfavourably by UK citizens. It is difficult to trace to an extent as they are manipulating the system in complex ways, however when it becomes public as it did in October 2012, this can have a negative effect on the business. The ‘Press Association’ (2012) stated “the owner of coffee chain Costa has revealed a surge in sales as rivals Starbucks were criticised for their tax arrangements.” This report suggests that after the tax avoidance became public, customers moved to competing firms which shows how Starbucks lost out. However there is no tangible figure to suggest the impact of this compared the reward in terms of tax saved over the years.

When looking back at Google, it is reported that Google legally avoided $2 billion in worldwide income taxes in 2011, mainly through sheltering its revenues in Bermuda. As a company, Google are simply exploiting legal loopholes to maximise profits and therefore maximise shareholder wealth. They are simply using tax avoidance schemes to bend the rules in the most strategic, tax efficient way, not break them. Whilst consumers may view this as an arrogant, unethical approach taken by Google, will they stop using the service Google offers? I don’t believe they will, or at least I do not believe enough people will change avoid Google to make it beneficial to not exploit such advantages. I also believe as mentioned that their approach to the situation is one which will be strongly shared by shareholders, thus essentially justifying Google’s stance on the matter.

So after looking at the examples of Starbucks and Google in terms of their views and experiences of tax avoidance, should companies engage in such tax avoidance practices and therefore exploit the system in a legal yet unethical manner? I personally believe Google’s approach to their situation is the correct one. If I was a shareholder in Google, I would want the company to maximise my wealth and if this can be done in legal ways, even if these may be viewed as unethical, I would actively encourage this. I also believe that their open stance on the matter is the correct one to take, as they are not ‘covering up’ their tax avoidance practices which avoids reputational issues in the event they are discovered such as the situation at Starbucks. Also stakeholders in the business such as shareholders and employees know where they stand and therefore it is essentially their choice to engage with and be part of the business. The ultimate question would be along the lines of, ‘Why would a company choose to pay more taxes when it doesn’t need to?’ An argument for this may be to improve the overall image of the company, however as a shareholder, I would much rather a highly profitable company which maximises my personal wealth, rather than a ‘nice’ company which acts ethically.

References within this blog

Crane, A and Matten, D (2010) Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization. Third Edition, Oxford University Press.

The Press Association (2012) Tax row perks up Costa coffee sales. Aol Money. Available at: http://money.aol.co.uk/2012/12/11/tax-row-perks-up-costa-coffee-sales/ (accessed 24/02/13)