By Emmanuel Budu Addo
Most multinational enterprises use dodge schemes to avoid payment of taxes to governments. Tax dodging schemes significantly deprive workers of their bargaining power and their fair share of the wealth they toil to create. In Ghana, where one worker provides for about ten people, the impact of tax dodging on people’s livelihood is profound. Most hardworking Ghanaians workers are deprived of their bargaining power and dignity when multinational companies adopt aggressive tax planning schemes to dodge payment of corporate taxes to government. But effective use of value added reports can help organised labour to fight this issue head-on.
Conventional financial reports, such as income statements, balance sheets and cash flow statements, provide information about the financial position of a company, income and profitability. However, they do not provide detailed information about stakeholders’ contribution to the overall wealth creation performance of the organization, and how the wealth created are distributed. This is where value added reports become important.
‘Value added’ refers to the increase in wealth as a result of the productive use of an organisation’s resources before its allocation to stakeholders. In other words, the value added is the return on capital resulting from the efforts of workers, capital providers, government, and the larger community. Value added report computes the value added and goes further to demonstrate how the value has been distributed among various stakeholders. For workers, it is reported in the form of salaries paid and for bondholders in the form of interests paid. The proportion to communities is accounted for in corporate social responsibilities (CSR) while for governments it is in the corporate taxation. In effect, the value added report demonstrates transparency in the distribution of the wealth among workers and other stakeholders. In some situations, the report is used as a justification for increased wages and salaries.
However, where a company uses aggressive tax planning schemes to avoid payment of taxes, the efforts of workers and other stakeholders are grossly undermined. The objective of aggressive tax planning schemes is to reduce tax liability or to avoid payment of corporate taxes. The procedure usually includes transfer mispricing, where the value of total input cost is artificially overstated to reduce the profit that is reported for purposes of tax. In effect total input cost is artificially overstated, and value added is also artificially understated. The company will then report artificial loss or very low profits, so that none or very low corporate taxes are paid. This can be demonstrated with the hypothetical corporate financial information below.
Value added is algebraically stated as
TO-IC = VA
Where TO represents turnover; IC represents total cost of inputs, and VA represents value added.
Giving the hypothetical information as Turnover GH¢ 40,000, and total input cost is GH¢30,000 then value added can be computed as follows:
GH¢40,000 –GH¢30,000 =GH¢10,000
As computed above, GH¢10,000 can then be assumed to have been distributed as depreciation GH¢2,500 or 25%; labour GH¢3,000 or 30%; CSR GH¢100 or 1%; interests GH¢800 or 8%; Tax GH¢900 or 9%; and profit GH¢2,700 or 27%.
With such a distribution, workers have the opportunity to analyse the fairness of the distribution and renegotiate for improvement in their working conditions.
However, with a strategy to dodge taxes, the bargaining position of labour is grossly undermined through the artificial erosion of their contribution, which leads to artificial projection of their proportion. Again, using the example of the above company’s financial information, transfer mispricing is introduced to artificially overstate total input cost by GH¢ 5,000. The revised value added computation with the introduction of transfer mispricing changes as follows.
GH¢40,000-GH¢35,000 =GH¢5,000
With this, the objective of dodging taxes will be achieved by artificially reporting a loss for which no tax is paid. Adversely, labour is also affected. The distribution then changes as follows depreciation GH¢2,500 (50%); labour GH¢3,000; CSR GH¢100 or 2%; interests GH¢800 or 16%; tax GH¢0 or 0%; and now a loss of GH¢1,400.
The two scenarios above are presented with the chart below.
From the chart, profit was originally 27% of the value distributed, and 30% to workers. However, with the introduction of transfer mispricing, the corporate tax dodging objective is achieved as corporate tax is now zero (0) but the company reported a loss of GHS 1,400. As a result, workers will have no basis for asking for increment in their conditions. Rather, they would be compelled to succumb to the harsh conditions put in place to address their conjectured poor performance.
First, the company will want to cover-up the fact that it is not paying taxes by emphasising on the losses, while justifying it with all the economic variables and negative effects of government policy. In the event, restructuring will be announced as the solution. The threat of restructuring is enough to silence workers from questioning the fairness of the value distribution. Their bargaining ability is then impaired, and can do little to argue for increased wages and salaries.
In addition, the company will introduce hash targets for workers as the next option to make the company profitable to continue in business. As far as it continues in business, the jobs of employees are secured. Meanwhile, the workplace pressure, constant stress, and harassment caused by the strict appraisal processes gradually affect the health of workers.
Again, as workers’ conditions of service stagnate because of their impaired bargaining position, their living standards deteriorate when the economic conditions of the state worsens. Workers are therefore not able to make ends meet, and their dependants equally suffer. In some cases, they have to consider secondary employment to supplement their depleted real disposable income. Undeniably, they will have no time to rest and spend quality time with family.
When workers are struggling to meet their immediate needs, savings and investment are not priority. Sometimes, their only hope for the future is their SSNIT contributions after retirement. Their financial risk increases, which also increases their overall risk profile.
To address these workers’ situations, organised labour needs to review its position on tax dodging, by actively campaigning for a change in the tax behaviour of companies. They should encourage companies to adopt efficient resource management processes to enhance profitability, welfare of workers and overall wealth creation and stop hedging their shareholder value maximisation on tax dodging.
Organised labour must also call for increased transparency in corporate financial reporting so that manipulations and irregularities can be detected and challenged. Corrupt corporate practices can also be detected.
Organised labour should also support its members to report suspected tax dodging practices for investigation. This will curb the practice and provide assurance for workers who have such information to appreciate that the bigger labour community is behind them.
The opportunity is great and the time to act is now! Civil society is campaigning for tax justice, government is denouncing aggressive tax planning, and researchers are providing more information to ensure Tax Power works for sustainable socioeconomic development. When is organised labour joining the tax justice campaign?
The author is the Head of Finance, ActionAid Ghana.
[email protected]; 0504210264
ActionAid Ghana is an affiliate of ActionAid International, an anti-poverty global movement of people working together in over 45 countries to promote human rights and eradicate poverty.