Corporate tax evasion- The arguments from both sides!

Would you pay less tax if you could get away with it?

One goal a company strives towards is reducing costs; many achieve this through tax evasion. They can use many methods to reduce the cost of taxation which contributes to their overall company objective to maximise shareholder wealth, discussed in blog post 1. When a company decides it needs to reduce costs the main question is how?  Tax is a huge cost for large corporations and while tax avoidance is illegal, evasion is perfectly within the law, whether morally correct or not! However, a large proportion of the public point out, why should we pay tax and large corporations who turnover millions of pounds evade paying towards the society they reside in?

Well one company who felt the need to evade tax is the much loved household name, Cadburys. Cadbury’s was taken over by the American firm Kraft in 2010. However with the sale of the company to Kraft, the US owners decided they wanted to move Cadburys headquarters from its historical base in the UK over the Switzerland which benefited from a 15% corporate tax, a major deduction when compared to the 28% tax Cadburys paid in the UK.  Although Kraft argues that it’s not evading tax, it’s only trying to integrate Cadbury into the Kraft Company. The public was still outraged as it believed the move was not only costing the UK $60bn but moving a well known British company from its routes:

‘The great British public will question Kraft’s commitment. The public will say this is just tax avoidance and the public will be right.’ (Daily Mail, 2010)

Yet when it comes to corporations, should it be their goal to be ethical? Or should it be to make as much money as possible, cut costs as much as they can and therefore create the competitive market that Britain has? If Cadburys wants to remain competitive they have to take advantage of this strategy, other companies do it around the world and while the government has promised to try to reduce the chance of companies doing it, while the option is there companies will continue to take advantage.

When it comes down to it, why wouldn’t Cadburys restructure to take advantage of the lower tax rate? They aim to maximise shareholder wealth and this is one way of doing that! Many countries offer tax escapes to corporations such as Ireland, the Cayman Islands and as Cadburys has proven Switzerland. Don’t companies and their managers have a responsibility to maximise shareholder wealth and if that is their role then surely tax evasion is an effective way of doing this. The main issue comes down to corporations Vs the public!

Although everyone has to pay tax including corporations, there is nothing to state that a company can’t relocate or restructure their business so that they pay less tax. Countries that offer zero or low tax rates are a major temptation for companies. Managers aim to reduce costs, in the hope of achieving positive results for their company, increasing dividends and as a result improving and securing the bonus they receive. The public on the other hand expect companies to pay tax as a social duty towards the company they reside in; therefore when a company restructures its business to a low tax country, such as the Cadbury Switzerland move, the public is outraged.

The question many people are asking when it comes to tax avoidance in this way, are the companies behaving ethically and should tax evasion be legal?

So a major question being asked, Is it ethical to evade tax? Well the answer is probably not! Corporations should contribute to the area and country they reside in, as they are not only contributing to the wider society but the tax they pay will help their employees who live in that country. However, although the public are generally outraged by British corporations avoiding tax, if they had the chance to reduce the amount they paid, would they? And if they could reduce the amount of tax they paid, they probably wouldn’t consider the ethical implications of doing this.

In the end, Cadburys move to Switzerland is costing the UK around $60bn a year; however that is $60bn that will more than likely go to one of two things. The money will either be paid out to shareholders, which are more than likely UK based, in the form of pension funds and insurance companies. The other option would be going towards investment in the company to make them more competitive; this could potentially create more jobs or reduce the prices, which again would benefit the public.

Although tax evasion is probably not the most ethical thing a company can do their goals and aims can’t all be ethical as their main responsibility is to their shareholders not to the general public. As with any business practice the question is what the most important consideration is, and usually shareholders win!

Sources used: Daily Mail, BBC News

http://www.dailymail.co.uk/news/article-1335774/Cadburys-Swiss-avoid-British-tax-cost-Treasury-60-million-year.html

http://www.bbc.co.uk/news/uk-11919248