Are Insurance Companies in the UK Avoiding Taxes? Historical Tax Payments over the Last Five Years

Table of contents

List of abbreviations

List of figures

List of tables

1 Introduction

2 Literature research
2.1 Study on tax practice
2.2 Tax havens

3 Methodology
3.1 Tax and profitability ratios
3.2 Linear regression analysis
3.3 Limitations

4 Results and discussion.
4.1 Subsidiaries in tax havens
4.2 Tax and profitability ratios analysis
4.3 Linear regression analysis

5 Conclusion

6 References

Appendix

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of figures

Fig. 1: Return on Sales ratio of 10 companies

Fig. 2: Return on Average Equity ratio of 10 companies

List of tables

Table 1 & 2. Linear regression analysis TOR and ROS

Table 3 & 4. Linear regression analysis TOR and ROAE

1 Introduction

In the current age of expanding globalisation and increasing international integration, large corporations and individuals may hold stream of incomes and expenses in multiple countries with different legislation all around the globe. As a result, the matter of tax practices become more and more complicated. In the case of insurance companies, the issue becomes even more complicated due to the nature and characteristics of the streams of income and expense in this industry. In spite of advanced complicated tax legislation in developed nations and reports by specialists, the concern for whether companies such as insurance companies are avoiding taxes or not is growing. (Sikka, 2016) criticise PwC report on taxes by banks and insurance companies. The report indicate that the financial sector paid about £28.8bn of corporate tax, national insurance and business rates. However, Sikka argued that these figures cannot be verified from the companies’ reports as there is little information about the taxes they paid in the UK or elsewhere.

The insurance industry in the UK is the fourth largest in the World and the largest in the Euro with about one-fourth of insurance premium in the whole Euro area generated in the country. The industry, in 2014, contribute to around £12bn in taxes to the UK government (ABI, 2015). In this analysis, historical tax payment in the last five years (from 2011 to 2015) of 10 insurance companies in the UK would be investigated and analyses thoroughly to answer this question. These companies are among the top 14 insurance companies in the UK in term of assets (Relbanks, 2017) (Appendix 1).

2 Literature research

2.1 Study on tax practice

According to Institute of Business Ethics (2013), companies minimise their tax payment by “tax planning”, making the most of legal tools including all allowances, deductions, rebates, exemption, etc. These are considered as compliant behaviour. Companies can engage with tax avoidance which refers to bending the rule of the tax system, although legitimate, to obtain tax result not intended by the government. Company directors often argue that they are responsible for maximising shareholder’s value, including keeping tax cost as low as possible under legislation. In a study of tax planning effects, (Ifada & Wulandari (2015) stated earning management can take advantage of tax rate by shifting profit before changes in corporate tax rates to a year after the change takes place. Under accounting rule, this follows the principal of accrual basis (revenues are reported in income statement when they are earned, whereas under cash basis, revenues are reported when cash is received).

Although tax avoidance is different from tax evasion, which is illegally reducing tax liabilities by falsely reporting income or expenditure (Hall, 2015), it is considered as unethical. Paying a fair amount of taxes is sociable responsibilities of companies, as it provided fund for public service such as education, healthcare and public infrastructure. Avoiding taxes can detriment company’s image and sociality’s trust in them. Her majesty's Revenue and Customs (2016) estimated that there was £3.7bn of corporate tax gap for 2014-2015 period (£3.3 billion in 2013-2014), which is the different between the amount should be collected, in theory, by HMRC and the actual collected amount. This represents 10% of the overall tax gap. Companies such as Google, Starbucks and Amazon faced negative criticism for tax avoidance and lack of transparency (Barford & Holt, 2013). In 2011, Google’s UK unit made a profit of £395m but pay only £6 million of tax. Starbucks paid almost no corporation tax while making £400m of profit. Amazon paid £1.8m over £3.35bn of return. Despite these small tax payment on return, all of these companies business activities are legal.

Which income of a company is taxable? According to Sayari & Muğan (2014), financial income (book income) is income reported in financial statement for the use by shareholders, investors or business to make appropriate financial judgements. On the other hand, taxable income reporting is prepared for tax authorities to calculate a company’s tax liabilities. Different objectives give lead to different principles and rules. Some revenues and expenses are included in financial income but not in taxable income and vice versa. For instant, municipal bond interest is included in financial income but excluded in tax income. Timing of recognition of incomes and expenses also cause the difference.

[...]