Who’d’ve Thought It? Campaigning Against Tax Avoidance Actually Works

It feels like tax avoidance has barely left the new in the past six months.

 

Schemes like Icebreaker and Liberty along with their high profile clients – Gary Barlow, George Michael, Katie Melua – have inspired countless headlines and the tax planning practices of big corporate like Starbucks and Amazon have been vilified.

 

When it comes to the UK tax code, things are pretty complicated. To understand why tax avoidance isn’t illegal and how these companies and schemes have taken advantage of outdated and slow-acting HMRC regulations, you can read a post from John McCaffrey, a tax specialist at Manchester accountants Alexander & Co.

 

All this isn’t to say that certain corporate tax behaviour should be encouraged or permitted. Just that the papers blow things out of proportion and often get the facts wrong. Which is why it’s good to see an academic paper that discusses corporate tax behaviour.

 

Three American professors have released a paper entitled Public Pressure and Corporate Tax Behaviour, which attempts to examine whether public pressure, facilitated by organisations like ActionAid International can influence the tax practices of big business. The paper’s authors are Scott Dyreng of Duke University, Jeffrey L. Hoopes from the Department of Accounting & Management Information Systems at Ohio State University and Jaron H. Wilde from the Henry B. Tippie College of Business at the University of Iowa.

 

The abstract reads:

 

“ActionAid International, a non-profit activist group, levied public pressure on non-compliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this natural experiment to examine whether the public pressure led scrutinized firms to decrease tax avoidance and reduce the use of subsidiaries in tax haven countries relative to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.”

 

ActionAid, who are well known for campaigning against poverty, worked out the number of tax havens a FTSE100 company had and, if they had not declared them, demanded that they do so as a matter of tax legality. Needless to say, this tactic gained some traction in the press. The paper worked out that this pressure resulted in a 3.7% increase in Effective Tax Rates for the noncompliant firms.
It might seem small but that 3.7 percent amounts to a lot of money regained in lost tax income for the state. Campaigning does work after all.

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