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Wednesday, September 18, 2013

Strategic CSR - Patriotism

I find it fascinating that tax avoidance by companies is not a bigger issue among stakeholders. Particularly in countries where patriotism is an important part of society (such as the U.S. and increasingly in the UK), I would expect to see a direct link between the sense of a firm as a ‘national brand’ and its willingness to pay a reasonable level of tax. If nothing else, paying tax is a base recognition that that firm receives many benefits from the government/population (e.g., educated workers, good logistical and legal infrastructure, etc.) and that these benefits need to be funded by all sections of the community (including foreign-based firms that have a significant operating presence in the country).
Gradually, this issue is beginning to surface more regularly in the U.S., although mostly at an individual level (e.g., Mitt Romney was criticized for holding funds offshore in last year’s presidential election). In the UK, there is more of a focus on corporate tax avoidance by foreign firms through campaigns such as Uncut (
“The UK has similar problems with foreign companies operating in the country. For example, Starbucks, the Seattle-based international coffee chain, has been accused of tax avoidance in the UK. Between 1998 and 2011 the company has made £3 billion ($4.8 billion) in sales but paid out just £8.6 million ($13.75 million) in taxes on its 735 stores in the country. In the last three years Starbuck did not pay a penny in taxes in the UK. All told Her Majesty’s Revenue & Customs (HMRC) estimates a total of £32 billion ($51.2 billion) was lost to tax avoidance in the UK in 2011 alone, out of a gross domestic product of $2.5 trillion.”
The article in the url below highlights a good example of the problems associated with tax avoidance by firms operating abroad:
“Associated British Foods (ABF), a UK company that makes Silver Spoon sugar, pays almost no taxes on its profitable Zambian sugar subsidiary, according to a new ActionAid report. The authors allege ABF has avoided estimated taxes of $27 million since 2007, enough to put 48,000 Zambian children in school. … The company generates a healthy revenue of some $200 million a year and $18 million in profits.”
The company is quite innovative in its avoidance:
“One way ABF avoids taxes is by contracting out some of Zambia Sugar ‘purchasing and management’ functions to a company in Dublin, Ireland, which happens to benefit from a bilateral treaty that allows cash flows between the two countries to be tax free. ABF also contracts out ‘trade contacts with customers in the European sugar market, transportation of sugar to Europe, foreign currency management and the availability of cost effective credit terms’ to a company in Mauritius which in turn is a subsidiary of a South African company where tax rates are lower than in Zambia. Oddly enough the Irish company has no employees on paper while the company in Mauritius has only one employee. Meanwhile Zambia Sugar profits are paid out to a Dutch company which in turn allows it to pay significantly lower taxes under yet another bilateral treaty, according to ActionAid. In one particularly egregious case, Zambia Sugar borrowed money from a Zambian bank to finance an expansion, but by diverting the loan through an Irish subsidiary, was able to avoid paying taxes on the interest.”
What is clear, however, is that this example is not particularly extreme or unusual:
“‘We do not allege that any of the companies in this report have done anything illegal,’ write the authors of the ActionAid report. ‘Indeed, sadly their tax practices are not even particularly unusual. A growing litany of examples from Europe and North America suggest that the arrangements we describe here are simply ‘plain vanilla’ business practice for many multinationals.’”
Take care
David Chandler & Bill Werther
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Sweet Nothing: UK Food Giant Avoids Taxes on Zambia SugarPratap Chatterjee
February 15th, 2013