I was sceptical about the relaunch of the 'fair tax mark' (FTM) - how can you decide whether what a company pays in tax is 'fair'? I was not impressed by the original pilot version, which seemed to be arbitrary in a number of respects, and in particular used some very odd methodology to reach an 'average' tax rate. However, I think the new version is much better - it is voluntary; it focuses much more on transparency and explanations than on raw numbers, and it sets out clearly what its criteria are. I don't agree with all of them, but I do think this is now a valid contribution to the debate.
The huge challenge will be how to apply it to multinationals, and particularly to non-UK groups. Sensibly, this first stage applies only to UK-based companies, and is aimed primarily at SMEs. Frankly, with a bit of additional disclosure, it is hard to see many SMEs failing to qualify, so it may well get a wide take-up. But why would a multinational want to bother, and how will it apply to them?
The fair trade logo, which is now 20 years old, has reached wide acceptance. Major supermarkets in particular are proud to set out their fair trade credentials, and to boast about the proportion of their bananas, chocolate or coffee which qualifies. I am less convinced that very large and complex businesses will be so enthusiastic about the fair tax mark, although if one major retailer decides to adopt it, that may well put pressure on the rest.
In many ways, the FTM disclosure requirements echo those set out in the CBI 'statement of principles' , and many companies are already providing all or most of the analysis and explanations that the FTM would expect. But the FTM expects these disclosures to be made primarily in the statutory accounts: the CBI stopped short of this, out of concerns that it would lead to disclosures that were too prescriptive, and also that it may add to expense if the disclosures are required to be formally audited. The 'model disclosures' suggested for SMEs will be hard to apply to larger groups, and I think the more flexible CBI principle of appropriate disclosure, tailored to the facts of the particular group, is better. But in turn this could make the awarding of the FTM more subjective, which will make it harder to gain consumer confidence. There is more work needed to identify what disclosures, and in what form, would be suitable for a large multinational.
The second key area is the allocation of tax to different countries worldwide. The original FTM required full country by country reporting, and I expect the new version will do the same. I have real doubts about country by country reporting, purely on cost:benefit grounds: I agree that tax authorities need sufficient information to be able to risk assess companies properly (and this is the main focus of the current OECD proposals), but I cannot see companies being prepared to invest significant sums in providing a lot of additional detail (some of which may be commercially confidential) in order to gain a small number of extra points in a FTM assessment.
The use of tax havens is a thorny area: the model tax policy proposed by the FTM would include a commitment 'not to maintain any type of connection to tax havens when this is not a legitimate trading activity with the purpose of serving the local community'. So a UK tax-resident Jersey company, perhaps used for a securitisation issue, would cause this test to be failed, as would the use of a Jersey company with a local (fully taxable) branch in an African country with unstable local corporate law? Neither example appears to me to be an 'abusive' use of a haven.
I also have some concerns about the average tax rate calculation: it is not clear from the website whether this is the total tax charge (as implied by question 7 of the company assessment form) or just the current tax, which is Richard Murphy's view. The current tax rate is very sensitive to issues such as pension contributions or capital allowances, so marks could easily be lost here - although the impact can be limited to two marks, out of the 13 required to qualify.
The issues for non-UK companies - particularly US multinationals - are more fundamental. In my view, much of the aggressive planning which is a focus of the OECD BEPS project is a result of long-standing defects in the US tax system: effectively, the US government is happy for its multinationals to reduce their tax rate on foreign operations, provided full tax is paid on the US profits. The average effective global tax rate of US multinationals is therefore often well below the US headline rate, but it is hard to see the political will in the US for making significant changes to the system. Nor can I see US companies paying much attention to a UK initiative which could cost them significant amounts of money.
Finally, is it time to do something about the supply side of tax planning, as well as the demand? In April last year, we called for a kitemark for responsible tax advisers - perhaps the fair tax mark campaign would like to take us up on this suggestion?
