Last weekend, news broke of a legal opinion which suggested – contrary to what companies say – that there is no legal duty to minimise the tax they pay. Here, the opinion’s author, David Quentin, explains why
Last weekend, news broke of a legal opinion which suggested – contrary to what companies say – that there is no legal duty to minimise the tax they pay. Here, the opinion's author, David Quentin, explains why
Unlike the study of life on Earth, the field of economics is not beset by a creationist fringe. Whatever your view of capitalism, it is unlikely that you believe it was intelligently designed out of a primordial economic void by a benevolent creator. Its machinery and complexity, like the machinery and complexity of life itself, is emergent; self-willed; undesigned.
And if this analogy between economics and biology holds true, then deep within the mitochondrial DNA of capitalism lies a bundle of obligations known as 'fiduciary duties'. In their pure, strict form fiduciary duties give effect to the principle that a person who looks after assets or affairs for someone else should not do so in such a way as to profit him or herself.
Fiduciary duties keep the cells and organelles in the body of modern corporate capitalism – companies, board-level executives, unit trusts, law firms, hedge funds, pension trustees and the rest – all performing their proper roles in relation to each other’s assets and affairs in a formalised abnegation of self-interest. Fiduciary duties keep the cells of capitalism from becoming, as it were, cancerous.
The logic of the job
Clearly as well as abnegating self-interest a person acting in a 'fiduciary' capacity has to do his or her actual job as well, and it is in connection with that aspect of 'fiduciary' duties that there is said to be a 'fiduciary' duty to avoid tax.
The job of being a company director is generally considered to involve maximising profits, or maximising returns on shareholder capital, and so, the logic goes, company directors have a duty springing from their role as 'fiduciaries' to ensure that the company pays as little tax as possible.
Pictured above: Companies accused of tax avoidance
As a proposition of law this is howling nonsense, but that does not seem to prevent it being regularly deployed in defence of corporate tax avoidance, even by people who really should know better. For example it was once advanced to me informally at a conference by a tax partner at a major finance-oriented law firm. It is of course repeatedly advanced by the companies themselves as a mainstay of their public message in this area.
This being the case, it comes as something of a relief that Farrer & Co have issued a formal legal opinion (mostly drafted by me, I should disclose) vitiating this intellectually dishonest abuse of legal jargon. 'It is not possible to construe a director’s duty to promote the success of the company,' the opinion announces, 'as constituting a positive duty to avoid tax.'
This is something that tax justice campaigners and academics (and, increasingly, mainstream commentators) already know, but a formal legal opinion is something more: it is authoritative. It is Farrer & Co's business to know about the law, and having worked there I can vouchsafe that they take that business very seriously indeed. Their view is quite unequivocal: there is no fiduciary duty to avoid tax.
Farrer & Co's opinion leaves open two rather interesting further questions however. The first question is about what (if not a legally enforceable duty) is really driving the current radical imbalance between, on the one hand, companies' distributions of profits to their shareholders and, on the other hand, their distributions of profits to the public as stakeholder in the form of tax.
By way of answer the opinion broadly hints that the source of the problem might be the same Anglo-American corporate governance culture that is now widely being identified by mainstream academics and commentators as a major contributory factor in the financial crisis. The emerging analysis appears to be that deliberately aligning management and shareholder interests has counter-intuitively damaging results including price volatility, risk-taking and (so it would appear) irresponsible tax conduct. But that corporate governance culture is not a matter of law, and so the opinion does not pursue the point.
What is a matter of law, however, is the sheer scope of a director's discretion within his or her 'fiduciary' duties, and this leads to the second and perhaps more radical question which the opinion raises.
The relevant legislation expressly and unreservedly protects directors from criticism where they take decisions, not in pursuit of profit or return on investment, but having regard instead to such matters as long-term risk, the interests of employees, the community and the environment, and the company's reputation, relationships and standards of business conduct. Since all of these factors militate against tax avoidance, director's duties in fact serve as a statutory mandate for deliberately not avoiding tax.
A whole new world
This being the case, the opinion goes on to say that it would be legally possible for UK-based multinational groups to reverse their existing policy of structuring so as to concentrate group profitability into tax-haven-resident hubs, and structure instead so as to allocate profitability equitably around the group having regard to, for example, headcount and sales volumes on a jurisdiction-by-jurisdiction basis.
If multinational groups were to adopt such a policy it would amount to a voluntary implementation of the said-to-be-unachievable international tax goal of unitary corporate taxation, where corporate groups are taxed on total group profits apportioned between jurisdictions on a formulary basis and not by reference to artificial internal group structuring.
On a practical level this is an unlikely development, particularly given that concern for the public good is, unlike 'fiduciary' concern for the assets and affairs of specific other persons, decidedly not written into the DNA of capitalism.
What Farrer & Co appear to be saying however is that, at least as regards the strict legal position, there is no impediment to cells in the body capital genetically re-engineering themselves so as to be better at distributing a share of the profits of their activities back out here to us in the real biosphere.