Tax optimisation

Towards the end of the 20th century, as companies sharpened their focus on shareholder value, they stopped seeing tax as a cost of doing business and started to see their tax departments as potential profit centres that could boost their bottom line.

The result was an explosion of aggressive tax planning in which companies used artificial schemes and shelters. When tax authorities fought back, multinationals pursued a different line of attack, exploiting the growing tax competition between countries.

Companies put divisions, activities and even head offices in low-tax countries. As companies became more international, they felt less bound by national loyalties.

Tax-efficient structures allowing profits to be shifted to low-tax countries became the norm for many large multinationals.

Many scrambled to centralise their “intangible assets” – the intellectual property, brands, trademarks and know-how that account for 80 per cent of the value of big companies – in low-tax countries such as Singapore, Switzerland and the Irish Republic. As royalty payments soared – up from $2.8bn to $180bn globally between 1970 and 2009 – more taxable profits flowed out of high-tax regimes.

Governments struggled to keep up. International tax rules designed for an era that pre-dated the global, internet-enabled economy did little to stop tens of billions of earnings falling through the cracks.

The backlash was fierce. The budget crisis that followed the financial crisis focused attention on businesses not paying their “fair share”.

Austerity sharpened the public’s anger. In some countries, companies accused of tax-dodging faced intense criticism from politicians, and even consumer boycotts. Development charities blamed corporate tax avoidance for poverty in developing countries.

The changed climate has forced companies to reappraise their approach to tax planning.

There is a growing realisation that an aggressive strategy can damage a business’s reputation.

But multinationals will be reluctant to give up on minimising their corporate tax bills, potentially one of the biggest costs they face.

The tide may turn, but it has not yet done so.

Vanessa Houlder