Regulatory environment and public policy
Alcohol is one of the most regulated industries in the world. Our ability to create a more valuable role for alcohol in society depends to a great extent on a balanced regulatory framework that provides a strong foundation for our programmes.
Virtually every aspect of our operations is regulated: production, product liability, distribution, importation, marketing, promotion, sales, pricing, labelling, packaging, advertising, labour, pensions, compliance and control systems and environmental issues. In some markets, such as the United States, much of this regulation is layered at multiple levels of government.
An opportunity for ethical companies
A highly regulated environment can be an advantage for companies with good corporate governance and the right approach to business ethics. This regulation must be balanced to promote economic growth, and, in the case of alcohol, allow the industry to play a positive role in society. It is towards these goals that we pursue our work with governments around the world to develop proportionate, effective regulation.
We believe that the most effective policies to reduce alcohol misuse are those based on the best evidence that account for drinking patterns, that target specific at-risk populations, that treat all forms of alcohol equitably, and that involve all stakeholders working towards a common goal. Therefore, Diageo actively supports effective and targeted alcohol policies at both global and local levels.
Government policymaking is a dynamic process which engages a wide range of stakeholders and interests in the formulation of positions, regulations and legislation. Effective policies are made when they are based on good evidence and when the measures they set out are proportionate to the desired outcomes. This is particularly relevant to our industry since alcohol is a highly regulated sector, and at any one time there is always a wide range of issues to do with alcohol consumption and misuse being debated around the world.
Diageo engages fully with policy makers and other stakeholders, either directly or through industry trade associations, on all alcohol-related issues. We firmly believe that policy and intervention should focus on dealing with the minority of people who misuse alcohol, rather than penalising the law-abiding, responsible-drinking majority.
We are therefore committed to evidence-based, balanced policymaking and we aim to ensure our engagement with governments and regulatory bodies is always professional, expert and ethical – and governed by our Code of Business Conduct. As well as our own experts, we retain external specialists as consultants or advisors to advise us on appropriate responses to and positions on policy issues. We try to be consistent in our views and positions wherever we operate around the world.
Every year, our tax contribution accounts for a significant proportion of the value we contribute to economies around the world. Our aim is to manage our tax affairs in a manner which ensures compliance with all fiscal obligations and which maximises shareholder value. Our approach to tax is based on three key principles:
- We are committed to paying tax in accordance with all relevant laws and regulations in the territories in which we operate
- We are committed to the effective, sustainable and active management of our tax affairs in support of outstanding business performance in the territories in which we operate
- We work hard to develop and sustain good and honest working relationships with tax authorities and to encourage the representation of our views on the formulation of tax laws either directly or through trade associations or similar bodies.
Our tax footprint is made up of direct and indirect tax payments. Direct taxes include corporation tax, local business taxes and excise duties on our sales, as well as other sales taxes such as VAT. Indirect taxes include, for example, the payment of income and corporate taxes by our employees and suppliers.
We make decisions on where to locate our operations based on a combination of market factors, commercial strategy, business implications, environmental impacts and taxation. Transactions between Diageo subsidiaries are priced on an arm’s-length basis in accordance with the OECD Model Tax Convention.
Developments during the year
The impact of weak economic conditions in some countries has increased the pressure by some governments for higher tax revenues from the alcohol sector. During the year, we worked to promote reasonable and non-distortionary excise duties – considering how duties could affect demand between different types of alcohol beverages, and how they could affect where consumers buy them. We believe it is important to help ensure consumers are not encouraged to turn to unregulated and illicit alcohol alternatives.
As well as seeking to raise revenue, some European countries are proposing minimum unit pricing as a means to reduce alcohol-related harm. In Scotland, the government passed legislation to introduce minimum pricing. We argue against this approach because we do not believe the evidence shows that it will in fact affect heavy drinkers, who are more immune to price increases, and instead will penalise the majority of responsible drinkers. Read more about our views on minimum pricing in the alcohol in society section.
During the year, Diageo was contacted by a small number of NGOs who are researching the impact of tax incentives on development, and examining tax planning by multinational corporations in emerging markets. We engaged with these NGOs to listen to their issues and answer their queries.
Looking ahead to emerging markets
Diageo’s focus is increasingly shifting towards emerging markets, which represent our biggest growth opportunities in the future. Our challenge in new markets will be to develop the kind of relationships we have spent years building with governments and other industry stakeholders in our traditional markets. By doing so we hope to develop a fair and competitive business environment in which value can be created for many stakeholders. To support this work we have trained over 100 of our corporate relations employees, mainly in emerging markets, on the principles of good tax policy, particularly excise, and on how to promote best practice structures and rates which are effective, fair and non-discriminatory.
While we believe good tax policies can create value for a wide range of stakeholders, and play a part in contributing to sustainable development, in certain countries we see barriers to this, such as corruption and bribery. As a result, we have started partnering with others to find solutions to this challenging issue. In Cameroon last year we launched the Business Coalition against Corruption where we, together with more than 60 other companies, NGOs and government bodies, discussed ways of tackling corruption and signed up to an anti-corruption pact. And this year in Nigeria, Guinness signed up to the Convention on Business Integrity to object publicly to corruption and to pledge to uphold governance standards in the country. Read more in our case study.