Abstract
M.Comm. (International Accounting)
Recently, there has been a spate of reported cases of large corporate entities
paying very little, or no income tax, despite the appearance of being profitable.
Enron conducted a lot of business through special purpose vehicle (SPV)
companies that were structured specifically for the purpose of paying very little, if
any, corporate tax, without having to reduce reported book net profits to achieve
this. A study in October 2012 of Starbucks by Reuters found that the company
had reported no profits and had paid no income tax for the previous 3 financial
years in the United Kingdom despite sales of 1.2 billion pounds. By comparison,
McDonalds had to pay tax of 80 million pounds based on a turnover of 3.6 billion
pounds, and KFC paid 36 million pounds in taxes on 1.1 billion pounds turnover in
the United Kingdom. Another company highlighted for paying no tax is the giant
Internet company, Ebay. In its latest financial period the company paid 1 million
pounds in tax, on a turnover of 800 million pounds. Again complicated tax
structures are at the centre of the tax computation.
Consideration has to be given to the role played by the accounting standards, if
any, in this scenario, and the extent of the role played by accounting treatments.
One has to question if accounting treatments are enabling companies to
consistently pay lower rates of tax than is statutorily required, through
mechanisms like the raising of deferred tax, or whether it is simply a question of
the relevant tax legislation being formulated in a way that allows taxable income
to be lower than accounting income.
The extent of this book-tax gap and the amount of tax actually paid by companies
have been researched to a limited degree. Several studies have been conducted
on the financial results from the 1990s, where a consistent decline in the collection
of tax by authorities, despite the economic boom that was in existence at that
time, has been shown. Research in the 2000s tends to confirm the continuance of
this trend of an ever-increasing book-tax gap. The general consensus from the
literature review conducted is that the divergence between book income and
taxable income is a growing trend, and taxes actually paid by corporates are
declining and are on average lower than statutory tax rates.