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The government contract used to be the holy grail for an IT supplier. The work was always huge, complex and seemingly never-ending, as new ministers took over the brief and changed the specs agreed to by the previous government. Supplying a government agency was almost a licence to print money, if you could tolerate the endless meetings with uncomprehending civil servants.
No more, it seems, at least in Britain. According to a report in the Financial Times, the U.K.'s Treasury is exploring whether it can bar from future tenders, companies which it deems pay insufficient tax on big government contracts. The FT report notes that several big U.S. companies including Microsoft and Dell have, it is alleged, funnelled hundreds of millions of pounds in sales through Ireland where corporate tax rates are a small fraction of those prevailing in the U.K. . In more prosperous times, theTreasury tolerated such arrangements but cross-border tax planning is now the target of huge public outrage.
The Public Accounts Committee is said to be interested in interviewing big companies that supply the government in order to ask them about their tax affairs. When the PAC questioned Starbucks last year, the American coffee shop chain was sufficiently embarassed to elicit from it a commitment to pay more tax, even though Starbuck's fiscal arrangements were perfectly legal.
The new focus on government suppliers is even more dangerous for multinationals because it is not just about naming and shaming. Danny Alexander, the Treasury Secretary, made it clear at the Liberal Democrat party conference last year that he was going after public suppliers who avoided tax. "It is not fair and I am determined it comes to an end," he said. The problem is that discriminating against non-taxpayers is illegal in the EU if they have not committed an offence, and is likely to run into huge problems with World Trade Organisation rules on public procurement.
Moreover, it will make negotiations between governments and suppliers more difficult. Companies will not just negotiate prices, volumes and return on investment; the potential tax take on the profit in any public procurement deal will become part of the horse-trading. It will require companies to assume not just an overall return but an actual profit on which tax might be assessed.
Mr. Alexander may find friends among other cash-strapped Western governments. The OECD is preparing an action plan to agree on measures to prevent profit shifting by multinationals from one jurisdiction to another. There is a new impetus for collaboration between governments in making sure that international companies cannot park lumpy profits in the lowest tax jurisdiction. But in this world of weak revenue growth and thinning margins, it is hard to believe that governments will find it easy to divvy up a multinational tax pie.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished