Food For Thought: Unitary Taxation, As If

‘Rejoice, citizens of the UK, for Starbucks has coughed up the dough and paid some corporation tax! You can now wake up to a rich-in- morality cup of Gingerbread Late!’

Yeap, you guessed it; this will be yet another article on one of my most favourite topics in the world- tax avoidance.

Now, I shan’t insult your intelligence by dwelling on the history and nature of the said concept because the media has not stopped yapping about it in the past several months.

Also, prior to diving into today’s discussion, I’d like to advise you that, as today is NOT Monday (hooray for that), I shan’t be all formal and academic and shall simply aim to provide you with some food for thought which you can munch on throughout the rest of the day.

Going back to tax avoidance, I trust that, by now, you are all familiar with my stance on the issue of

‘Boohoo, big corporations are not paying enough corporation tax as they are using legal loopholes to avoid it LEGALLY’.

Seal off the loopholes by enacting new legislation; pretty straightforward, really.

Recent commentators have, however, opined that the above can be easily avoided by introducing an ever-so-innovative (NOT) system of unitary taxation.

As am I quite certain that you are all familiar with the above, I shan’t go into any detail and will simply illustrate the concept:

What the this illustrates is that a company should pay corporation tax in the country where most of its revenue is generated and most of its workforce situated.

On the face of it, the above is a marvelous and righteous idea which will surely topple the  abominable giants.

Nevertheless, there is always a ‘BUT’.

What the above concept effectively does is assume that all subsidiary companies forming the parent multinational corporation can be viewed, for taxation purposes, as the same legal entity.

Under English law, however, such an assumption carries very little, if any, plausibility. In the case of Salomon v Salomon (1897), the court upheld the concept of separate legal personality; i.e. the company has a separate to its shareholders legal personality. The court also held that the shareholder’s liability was limited to the amount paid for their shares.

But enough legalese let us focus on some facts. Under English law, each and every subsidiary company is deemed as a separate legal entity, regardless of the percentage of shares that the parent company (or any other company) holds in it.

So, in order for unitary taxation to work in England, there must be a fair amount of ‘piercing the corporate veil’, i.e. ignoring the ‘separate legal entity principle’. Here’s how piercing the veil works:

 That’s right; it doesn’t. ‘Piercing the corporate veil’ is not an all- time favourite of the English judiciary; it will, indeed, occur very rarely, namely when:

• The companies form one single economic unit
• The subsidiary is façade or sham co.
• The subsidiary has acted as an agent of the parent company
• The subsidiary acts as n instrument for tax evasion
• The subsidiary acts as alter ego for criminal or tortious liability 
• The parent company has given a guarantee for the subsidiary’s actions

Needless to say, the burden of proof for the above is set very high.

To illustrate the above, in the Adams v Cape Industries [1990] the claimants were exposed to asbestos by NAAS, a subsidiary of Cape Industries (‘Cape’).

In Texas, a judgement for a breach of duty of care in negligence was entered against Cape. The claimants wanted to enforce that in England, where Cape was incorporated, as NAAS had insufficient assets to pay the claimants’ compensation.

The Court of Appeal refused to do and held that neither of the above requirements was satisfied and that NAAS and Cape were separate legal entities. Thus, the limited liability principle applied and Cape could not be held liable for the actions of its subsidiary, NAAS.

So, ask yourself the following question:

Is it MORALLY right to pierce the corporate veil so that companies can pay more corporation tax but NOT do so when victims of corporate torts have no access to the compensation which they are legally entitled to?