Developing a Competitive Advantage Through Tax Shaming
Author: Elizabeth Hazzard
In recent years, governments have begun tax shaming large multinational corporations—claiming they’re not paying an appropriate amount of corporate tax in their respective countries of operations. For example, in 2013, the U.S. Senate held public hearings that shined a spotlight on the complex international tax strategies of Google, Apple, Microsoft and other U.S.-based companies that allowed them to have low global effective tax rates. These public hearings implied these companies were not paying their “fair share” of U.S. taxes.
A new trend has raised tax shaming to another level: competitors openly shaming each other for not paying their “fair share” of corporate tax. Recently, Australia-based retailer Wesfarmers tax shamed its foreign competitor, the Germany-based grocery chain Aldi. In an article by Eli Greenblat, “Come clean on tax, Coles boss tells Aldi,” published in The Australian on June 23, 2015, Wesfarmers CEO Richard Goyder inquired whether Aldi was paying its fair share of tax in Australia or if it used transfer pricing arrangements with related-party affiliates in low-tax countries to erode its Australian taxable income base. Wesfarmers owns Coles, the second-largest grocer in Australia, while Aldi is a relatively new entrant. Aldi opened its first store in 2000 and has since captured approximately 11 percent of the Australian grocery market with 350 stores. Goyder stated that because Aldi is a private company and does not disclose its financial information, it’s hard to know how much Aldi is paying in Australian taxes. His address to the American Chamber of Commerce in Australia intimated Aldi was gaining market share through low prices facilitated by not paying enough in corporate taxes in Australia relative to other grocers, such as Wesfarmers. Goyder stated Aldi’s tax position should be investigated and Aldi’s financial information should be disclosed. As a result of Goyder’s allegations, Aldi was forced to run advertisements in Australia defending its tax position and publicly disclosing its financial information, which actually showed Aldi paid a significant amount of corporate taxes and had a de minimis amount of intercompany payments.
Tax Strategy = Competitive Advantage
Will tax shaming become a common marketing strategy with companies trying to bruise each other’s reputations in a public forum? Goyder did concede a good tax strategy can be used as a competitive advantage. Multinational companies, such as Aldi, can use legitimate transfer pricing strategies and other international tax instruments to lower their global effective tax rate. While a well-planned tax strategy can provide a competitive advantage in many industries by helping to decrease a company’s tax expense, the public doesn’t always have adequate knowledge of the corporate tax system to recognize that legitimate tax planning is acceptable and actually may be used to lower prices for consumers. This means tax shaming by one’s competitors can damage a company’s corporate reputation even if the target is complying with all tax rules.
To guard against tax shaming by one’s competitors, it becomes more critical to comply with all local country transfer pricing requirements, such as having proper transfer pricing documentation. Transfer pricing documentation needs to be included as part of any business’s international tax strategy, as it serves to prove the arm’s-length nature of a multinational corporation’s intercompany transactions. The arm’s-length principle demonstrates that transfer prices are economically sound and profits were not undeservedly pushed to one tax jurisdiction. This documentation only will increase in importance as tax authorities and the public become more critical of international tax structures and the associated compliance. Tax shaming—and ultimately adjustments by tax authorities during an examination—can be tempered through validation of intercompany prices with acceptable documentation.
As businesses become more global, it’s important to be aware of new tax regulations and the increasing scrutiny of tax authorities. As demonstrated in Australia, your competition may seek to steal customers by casting you as an unpatriotic company. If you’d like to discuss your company’s transfer pricing documentation needs, please contact a BKD transfer pricing advisor.