Recently UK development agencies changed their strategy of lobbying governments and international bodies on the harmful effects of tax avoidance by multinationals in the developing world, to targeting the companies themselves. In November 2010 ActionAid, a UK development agency, issued a report titled “Calling Time: Why SABMiller should stop dodging taxes in Africa” in which it takes the company to task for allegedly exploiting loopholes to cut their tax bills. At the same time Christian Aid, another UK development agency is focusing a similar campaign on FTSE companies Vodafone, Unilever, Intercontinental Hotel Group and TUI Travel.

Although pursuing different strategies, both of these agencies are taking to task multinationals on the morality of the international tax planning strategies. Essentially the stance of the agencies is that tax planning policies should form part of the overall social responsibility programmes of a company and that companies should develop “fair tax planning policies” rather than policies that optimise tax efficiency within the legal framework of the relevant country’s tax legislation. The agencies contend that whilst certain tax planning strategies might be legally within the bounds of tax the respective countries’ legislation they are morally indefensible as these deprives developing countries of much-needed capital that could be used for education and healthcare of millions of people in these countries. ActionAid specifically addresses the issue of registering valuable trademarks of African beers in Europe rather than in the country of origin and then extracting royalties from the developing countries for the right of use of the marks. This results in depletion of the African countries’ tax base and is labelled as unacceptable transfer pricing policies.

The development agencies target public perception of global tax planning policies in an attempt to create “tax justice”. Martin Hearson, is ActionAid’s tax analyst and co-author of their report. He also sits on the board of the Tax Justice Network and the OECD’s task force on tax and development. Hearson is quoted in International Tax Review as saying that “if you look at the corporate social responsibility side of things, tax justice is an issue that’s decades behind other areas such as Labour and the environment. In the next few years we can get to a point where certain tax practices have become as dirty in the public perception as child labour”.

This international trend reverberated closer to home last week, when Logan Wort, an executive secretary of the African Tax Administration Forum (ATAF) raised the issue and Action Aid’s report publicly. He indicated that South Africa, Zambia, Tanzania, Ghana and Mauritius (all of these countries have bilateral treaties) would cooperate in investigating the tax and transfer pricing policies of SABMiller in Africa. He indicated that resultant action would be taken by individual countries.

This development clearly announces a number of important messages for South African multinationals, in particular those operating in Africa. It is clear that ATAF (which currently has 29 member countries) intends cooperating on a pan African basis to attack pricing policies and aggressive tax planning strategies on a coordinated basis. This clearly signal the need for a more sophisticated ability by companies to defend their tax planning policies on a pan-African basis, based on sound and internationally accepted legal and commercial principles. Future challenges to multinational tax planning will not only be on a tax technical level in relation to the provisions of tax legislation but will also be levelled at reputational level. In meeting these multi-dimensional challenges multinationals need to develop multifaceted defence strategies that will not only be able to deal with any challenge when it arises but that will also be able to prevent or mitigate any risk of a challenge in advance. It is essential that legal advice forms part of the development of any strategy or policy, in order to ensure that it has the required resilience to withstand any legal challenge or litigation process. This must be augmented by the ability to proactively manage reputational risk in circumstances where this might be susceptible to attack. The basis of this defensive strategy has to be proactive communication with governments and other stakeholders with a view to managing perception and mitigating the risk of attack.

The changing environment will in future require multinationals to develop 360 tax strategies that extend beyond the ability to legally defend the principle.