THE BLOG
05/06/2015 06:29 BST | Updated 04/06/2016 06:59 BST

Dear Ambassador - The 'Duty' of Company Directors to Avoid Tax Is a Myth

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Photo credit: Phillip Ingham

As a member of the European Union (EU) Delegation for relations with the United States, last month in Strasbourg I attended a discussion with US Ambassador to the EU, Anthony Gardner. This was the third time I had heard him speak and, as on the previous occasions, I found his talk informative and challenging, with responses to questions offered with honesty and clarity.

I was particularly interested in his response to a question posed by my Socialists & Democrats colleague, Eugen Freund MEP, regarding tax avoidance in companies.

It was clear to those of us attending the meeting that Mr Gardner has many years' worth of experience at the highest level in the world of business. His suggestion that company directors not only have a legal right to avoid tax but are obliged to do so is one that has been broadly accepted as fact within the business world.

However his definition of directors' so-called fiduciary duty, to maximise profits in part by minimising tax receipts, supports a myth, or at least a misinterpretation of the rules governing the tax conduct of businesses.

British law states that it is the duty of directors to act with consideration of the effect of their decisions on the long-term success of a company. This includes their impact on the community, environment, company reputation and on its relationship with suppliers and customers. Decisions must take into account all members of a company, not simply its shareholders.

Directors are therefore, as John Kay of the Financial Times has pointed out, neither entitled nor required to avoid tax in order to increase share prices. When directors do engage in such behaviours, they do so "in spite of, not because of the law". This is supported by a legal opinion offered by the reputed London law firm Farrer & Co, which concludes that it is impossible to construe a director's statutory duty to promote the success of a company as constituting a positive duty to avoid tax.

When Ms Judith Knott, HMRC Director, Corporation Tax International Anti-Avoidance, appeared before the House of Lords Economics Affairs Committee, she said:

"...legitimate tax planning is tax planning that is very much in line with Parliament's intentions when it passed the rules. A good example would be putting cash into an ISA account. That is legitimate and what Parliament intended to happen. Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that Parliament did not intend. It is often accompanied by artificial transactions--trying to seek a result that was not intended".

United States law is less sympathetic to shareholder interests than in the UK. In 2012 the Chancery Court of Delaware, considered the most influential state for jurisprudence relating to corporate governance and home to many Fortune 500 companies, found that, "There is no separate duty to minimise taxes, and a failure to do so is not automatically a waste of corporate assets".

Increasingly tax avoidance can seriously damage the reputation of a company (and hence its value), as recent criticism of multinationals including Google, Amazon and Apple has shown.

Billions of euros worth of tax revenue in the European Union is lost each year to tax avoidance, depriving governments of money that could be spent on public services such as schools, hospitals and welfare. With many European citizens struggling to cope with the pressures of austerity this has become a bigger and bigger issue, with public opinion clearly set against aggressive tax avoidance.

As Mr Gardner enters his second year as US Ambassador to the EU I hope he will reconsider his views on this controversial issue and use his influence positively to encourage companies to act in the wider interests of society as a whole by moving away from aggressive tax avoidance. I have sent a letter and email to the Ambassador outlining my concerns, with my fellow members of the EU-US Delegation copied in, and look forward to his response with anticipation.

Paul Brannen is Labour MEP for the North East of England