Friday, August 26, 2011

Law Street in The Economic Times (August 2011)

Dear Readers,


It appears that governments world over and trying to adopt ways and means to have corporate entities to cough up some extra dough, whether directly or indirectly. Recently, a bill has been passed in France, which requires corporate entities (well, most of them) to pay a bonus to employees when they declare dividends. This sure is tantamount to interference in business policy. Read on, for this new revolutionary bill!
As always, by clicking here, you can get to the online edition of The Economic Times, else scroll below.
Have a nice weekend.


Law Street/Lubna Kably (August 26)

Corporate caretaker

•France now requires companies to pay mandatory employee bonus on dividend distribution
•Ideally, governments should not interfere with company’s internal affairs
•This legislation is expected to push up purchasing power and boost the economy

Dilbert is one of Zenobia Aunt’s favourite comic strips. In fact, she reads this comic strip first, before turning over to the front page and of this newspaper.

Not so long ago, Scott Adams, creator of the Dilbert comic strip in his blog has mentioned that tax policy has two purposes. One is to collect money to enable the government machinery to function. The other is to promote public policy. For instance, he cites: mortgage deductions are meant to encourage home ownership. Or as Zenobia Aunty adds, back home, stiff taxes on tobacco are expected to deter tobacco chewing or smoking.
Scott Adams wonders, whether we could have a tax on stupidity and thereby reduce its prevalence over time. One big obstacle to taxing stupidity is identifying it. But he has quite a few suggestions which include a general knowledge test running thousands of questions long. And it would be entirely optional. If you choose to not take the test, you can simply pay a stupidity tax instead. If you take the test, and score 100%, you pay no stupidity taxes at all; else the tax paid would be dependent on your score. Unlimited chances would be available to improve your score.

He is curious on whether tax policy could make a huge difference in the effectiveness of society by directly taxing stupidity. Unfortunately, Scott Adams admits it is an impractical idea and no government would buy it. But perhaps he may, some day, on some island create his own kingdom, design this tax mechanism from scratch and introduce it. Zenobia Aunty would love to be a resident of this island, maybe she could help in preparing the questionnaire and thereby get an exemption from the tax.
Some tax laws can be stupid, to put it mildly. Other legislations are equally insane. Several months ago, there was a hue and cry, in Corporate India, when the government in India had proposed to make Corporate Social Responsibility (CSR) mandatory – in other words companies would have to contribute a certain percentage of their profits towards CSR. The reasons were many. Those opposing it felt that the main duty of corporate sector was to earn returns and dividends were a way of paying back to the shareholders. Since corporate entities paid tax, there was no need to contribute separately towards CSR, it was the government job to work for society’s welfare from the taxes collected. Fortunately for those opposing the move, such CSR contribution is not mandatory.

But, it seem that the French government has also adopted a similar stand, that corporate entities need to pay back!!!. To improve purchasing power of the hoi polloi and put some punch back in the economy, it has not eased the tax burden on individual tax payers but wants the corporate entities to pay a bonus to its employees, if they declare a higher bonus.
Oracle, as this columnist’s boss is often referred to, because of his in-depth insight into ever changing and complex global tax laws, persuaded Zenobia Aunty to cover this topic. Venting her ire, only against the draftsmen in India, was discriminatory, Oracle firmly stated. Zenobia Aunty meekly obeyed his orders, as does this columnist.
Last month, the French Parliament adopted a wide sweeping bill, which requires companies to pay a bonus to all the employees when the dividend per share distributed to the shareholders is higher than the average of the dividends per share distributed in the two previous fiscal years. These provisions apply to all companies having more than 50 employees. Those companies having a lesser number of employees can voluntarily opt for the proposed provisions. These rules apply to dividend distributions authorised as from the beginning of this calendar year and will be valid for a period of three years.

As far as the amount of the bonus to be paid is concerned, an agreement will have to be signed by the Company with employee representatives within three months starting from decision to distribute the dividends made by the ordinary general meeting of the shareholders. The agreement is subject to the modalities applicable to the signing of a profit-sharing agreement.

Failure to start the negotiations results in penalties and prosecution for the Company and its officials. The French Ministry has provided for some minor sops such as exemption a bonus up to EUR 1,200 per employee and per year, from certain social security contributions.

The moot issue is: Can the government really expect the corporate sector to step into its shoes. In the Indian scenario, the government wanted the society to benefit by ensuring that a certain sum was spent on social welfare (it is a different matter altogether that CSR activities were not defined). Now the French government, to boost the sagging economy has decided to burden companies that are earning profits and want to share it with the rightful segment – the shareholders! Market forces would automatically ensure that any company’s pay to its employees is at parity with that of its competitors.

But, as economies continue to stagnate and governments can ill afford to reduce taxes further, perhaps additional burdens, in myriad forms will fall on the corporate sector. Stay tuned…

Source of the photograph

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