Recent developments in corporate governance policies and practices
Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:
The notion of aggressive tax avoidance, in which corporate groups generating profits around the world transfer profits made in high tax regimes to low-tax havens, was addressed in case 15.2 (3E, p404). This topic has continued to excite interest.
In the UK, Facebook was criticised for paying less than £5,000 in tax, despite having UK sales of more than £100 million. Facebook (UK) channels profits to its international headquarters in Ireland, which then moves them to the Cayman Islands, avoiding corporation tax. Google, Apple, and other multinational groups were also criticised for using tax avoidance devices, such as charging intellectual property and brand image rights to their subsidiaries in high tax countries, transferring the proceeds to regimes with low or no corporate taxes.
Companies resident in the USA are taxed on their global profits at relatively high rates. Some US-based companies, generating taxable profits around the world, have sought opportunities, often through M&A activity, to shift their headquarters and their tax domicile to other countries which have less demanding tax rules. Known as ‘tax inversion,’ international groups re-organize to reduce their exposure to tax. Though strictly legal, such manoeuvres are, predictably, frowned upon in the US.
Tax avoidance that exploits loop holes in the international tax system are typically compliant with local tax law, but considered by many to raise ethical questions. However, for anti-tax avoidance measures to work, nations need to cooperate. In October 2015, the G20 and the OECD, institutions representing developed nations, published a set of new measures in an attempt to stop companies exploiting tax avoidance opportunities. The OECD’s ‘base-erosion and profit-shifting project’ tries to bind multi-nationals with a set of global tax rules. Sceptics, though, wonder whether nations will be prepared to harmonize their tax laws. For example, the UK introduced a scheme in 2013, which taxed the transfer of intellectual property rights, such as patents, at a substantially lower rate. Ireland and the Netherlands have similar, but different schemes. See www.oecd.org/ctp/first-steps-towards-implementation-of-oecd-g20-efforts-against-tax-avoidance-by-multinationals.htm
The European Union has also produced a blacklist of tax haven countries, but the rather arbitrary grounds on which countries have been included has been challenged.
Bob Tricker, January 2016