Tax is a cost. Corporations are right to seek to minimise its payment within the law

I really do wonder is any of the strident critics of transnational corporations tax avoidance have any idea what it is like to work in one of them? In modern times one of the driving imperatives in all major companies has been cost reduction. In the latter part of my long (37 years) career in Shell I was fairly often exposed to this – not least because I worked in an area that was particularly vulnerable – Brand and Communications. For many of the Engineers, Geologists and Accountants at the top of the business my area of specialism was “Discretionary expenditure” – if you cut it hard there would be no immediate effect on the bottom line – except, of course, for the cost reduction. That over time if you didn't invest in your brand your business would suffer was true – but to those with ever shorter performance timeframes (often linked to their bonuses) it was the short term that mattered. I fought my corner on this one and sometimes succeeded. But the vulnerability of my budget was obvious and sometimes I and others like me failed.

The same story applied to maintenance and safety. Preventative maintenance of physical assets helps preserve them and contributes to their safe operation. But it is a judgment call as to what level of maintenance justifies the expenditure. BP, of course, found to their cost that inadequate attention to safety was a recipe for disaster (in the Deepwater Horizon case) and there are still question marks over what they do. As there are for Shell.

The Revenue budgets of the multinationals are always in sharp focus and if a cost cannot be clearly justified then cuts will occur. As I say above in my career I noticed that this became all the more  the case as the bonus culture intensified. If one of the “Key Performance Indicators” (against which bonuses are calculated) is cost management (it always is) then the temptation to cut and trim will be enormous. Which brings me to tax!

Tax liability is unquestionably seen in the area of “bad costs”. Whereas I could try and make a case not to cut my Advertising budget (and sometimes succeeded) I never heard of anyone trying to make a case to pay more tax! Every potential tax dollar avoided adds to the bottom line. So companies like Shell employ dozens of tax lawyers and tax specialists whose sole task is to minimise tax liability. The lawyers are there because all of this must be done within the Law – otherwise we are talking “Tax evasion” which is obviously always wrong. And the clever tax accountants are there to find the ways of doing this. Let’s take one simple example. Let's say Company “A” sells raw materials to Company “B” – with both companies being part of the “Mogul” Oil Company. Let’s also say that Company “A” operates in a low tax environment but Company “B” operates in a country where taxes are much higher. Doesn't it make sense to arrange the “transfer price” for the raw materials in such a way that you minimise your tax liability where Company “B” operates?  For “A” to make profits is beneficial to the Corporation as a whole rather than for “B” to do so. The lawyers will tell you if this is legal and if it is the accountants will tell you how to do it. Common-sense is it not?

So what would I say to the Government of the Country “B” who feels that Mogul should be paying more tax in their country? Change the law is what I would say – and conclude a bilateral agreement with the Government of the country where Company “A” operates if necessary. But don't slag off Mogul because they are doing what any sensible businessman always seeks to do – avoiding incurring unnecessary costs. And at the Mogul AGM the shareholders might not be very responsive to a statement along the lines of “We didn't need to pay this tax but because we are good corporate citizens we chose to do so. Unfortunately we had to restrict your dividends as a consequence.” I’d try and vote out of office any executive who made such a dim-witted remark. Wouldn't you?