The climate for what is considered acceptable in tax planning has shifted considerably over recent years. For at least a couple decades, the concept of ‘aggressive’ tax planning was considered the norm. Today, it is under scrutiny from the media, politicians, activists and NGOs.
Technology firms – especially large multinationals – have suffered their fair share of this criticism. Negative PR can hurt technology giants, but it has an even greater impact on firms still expanding and building their reputations. Even benefit corporations, whose mission is as much about helping society as it is about making a financial profit, have faced heightened scrutiny.
As global attitudes towards tax change, tech companies need to future-proof their tax practices to stand up to enhanced scrutiny. Any inconsistencies could result in serious damage to reputation, competitiveness or income. The way a growing company markets and sells its services can have a significant impact on its tax bill. Different countries treat different categories of products and services in different ways for tax purposes, making income characterisation a vital consideration. Major international tax reform is inevitable. For high-growth technology firms, the key is to recognise where the rules are heading and plan accordingly.
Golden rulebook
For tech companies, the regulatory environment is tougher now than ever before. As a way to protect the national interest, governments use compliance to restrict companies that could potentially disrupt established industries. The knock-on effect of this is that the tech industry as a whole is coming under extreme scrutiny and is facing a higher level of financial and reputational damage as a result. Rapidly expanding companies also face a wider range of individual regulations as they expand into new territories. Be it employment law, taxation, product safety or licensing.
“Rapidly expanding companies face a wider range of individual regulations as they expand into new territories. Be it employment law, taxation, product safety or licensing”
Today, many of the most pressing compliance issues come down to data anxiety. As citizens become increasingly uncomfortable about threats to their personal data and privacy, governments are cracking down on the companies responsible for hosting that data and keeping it secure.
Another concern that regulators have about global tech companies is the relative lack of control they have over them. By their nature, tech companies do not have to keep their servers in every country in which they are selling their services. For regulators, this can lead to a lack of trust. Tech companies that anticipate and respond to this potential distrust from the outset can avoid excessive regulatory scrutiny. By building stronger relationships with regulators, they will likely find it easier to build their presence overseas.
Day one global
Business-minded technologists have always hatched grand plans for global business empires. It used to take decades before they could grow their businesses on the international stage. Today, it can be more or less instantaneous, and this creates a host of new threats and opportunities.
One reason that tech companies are so keen to grow globally is through fear of coming second. Being first to a tech niche can be critical to success. Often, users will not switch to a late-arriving competitor. Spotify users, for example, create libraries and playlists of their favourite music, which they would lose if they switch. Twitter’s lead over its rivals became unassailable almost the moment it created the micro-blogging niche. With the numerous sources of finance available and the ease to which a start-up can scale, it has become a case where if you are not global on day one, then failure is very likely. An important consideration at the first stage comes down to the platform that the tech company is using.
Fergus Condon is head of Technology Group at Grant Thornton
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