Companies that have made major investments in strong social, environmental and human rights track records risk losing consumer support and their social license to operate unless they move toward greater transparency and action on tax responsibility.
Judy Beals is the Director of the Private Sector Department at Oxfam America.
Progress on human rights and corporate responsibility follows a familiar trajectory. Demands that once seemed outlandish become mainstream just few years later. Twenty years ago, apparel companies scoffed at the idea they had responsibility for the labor practices of their suppliers. Coffee companies didn’t see it as their business to ensure a fair price for poor farmers who grow their coffee beans. Mining companies, armed with government concessions, flat out rejected the idea that communities have the right to free, prior and informed consent. Food and beverage companies resisted the notion that they had responsibility for land grabs or climate change.
Fast forward a few years on any of these issues and the landscape is dramatically changed. Propelled by public pressure, including high profile campaigns like Make Trade Fair, the Clean Clothes Campaign, Conflict Palm Oil, mining campaigns, and Behind the Brands, the unthinkable becomes the norm. Companies who get ahead of this curve win out in the long run, building long term value and customer support.
So when it comes to corporate tax practice, how about we skip the first few scenes of the play and get to the final act?
Beyond legally defensible: tax practice as the new face of corporate responsibility
As companies and investors increasingly embrace their social, environmental and human rights obligations, the question of corporate tax behavior is a legitimate – and increasingly central – question of corporate values and corporate social responsibility. Tax laws provide the framework, but how companies respond to regulatory frameworks reflect strategy and choice – specifically the choice between seeing tax as no more than a cost to be minimized, or seeing it as a core feature of sustainability commitments, vital to the communities in which they operate, and to their own long term interests.
Corporate tax practice now sits front and center in the global development debate. Business investment is essential to achieving the UN Sustainable Development Goals – delivering vital benefits of innovation, jobs, goods and trade. As important: the responsibility of companies to pay their rightful share of tax in the communities where they do business.
Unfortunately, when it comes to practice, the track record on corporate tax behavior is abysmal. Tax dodging by multinational corporations saps an estimated $110 billion per year from the US Treasury and an additional $100 billion per year from poor countries, preventing vital investments in education, healthcare, infrastructure and other programs crucial to poverty reduction. This exacerbates inequality and poses a real threat to building the kinds of stable economies business needs to thrive.
Too often, the response to proliferating tax scandals is “it’s legal.” True, tax laws need to change – a matter Oxfam and others urgently call for. But from the corporate boardroom perspective, the “it’s legal” (or, more accurately, “it’s arguably legally defensible”) response no longer suffices. Tax laws and accounting rules are notoriously open to interpretation. A whistleblower from PricewaterhouseCooper – one of the four big accounting firms that audit more than 80 percent of the largest US companies – testified to the UK parliament that the company was willing to approve a profit-shifting scheme if there is a 25 percent chance of the scheme being upheld – meaning they are willing to approve schemes for which there is a 75 percent chance of it being ruled illegal. There is a fundamental difference between a company that practices aggressive regulatory arbitrage to avoid paying any taxes – a game of “catch me if you can” against underfunded public tax authorities — and those that recognize tax as a legitimate part of the social contract – one in which they, too, have a stake.
What Good Looks Like
There are no commonly agreed bright lines to separate responsible tax practice from irresponsible tax avoidance. But there are clear indications as to whether or not a company is trying to do the right thing. In Getting to Good: Toward Responsible Corporate Tax Behavior, Oxfam, along with ActionAid and Christian Aid identify three core principles by which tax responsible companies operate. They:
- Promote transparency of their business structure and operations, tax affairs and tax decision-making;
- Ensure taxes are paid where real economic activity takes place by, for example, avoiding the use of tax havens, profit shifting and inversions to artificially lower tax bills;
- Seek a level playing field on tax and are transparent in how they seek to influence policymakers. This includes not using their influence to seek special favors or gain access that other taxpayers lack.
Improvements can take many forms, depending on the specific company and context. “Getting to Good” offers a series of such suggestions. The point is not to create a definitive list, but to kick-start the necessary dialogue and process among CEOs who pride themselves as leaders in corporate responsibility to put their companies on the path toward tax responsibility.
The Case for Corporate Tax Responsibility
Aggressive tax avoidance practices undermine corporate social responsibility and sustainable development. They also undercut the fundamental human rights responsibilities of companies under the UN Guiding Principles for Business and Human Rights.
Beyond these concerns, aggressive tax avoidance poses financial risks. Heightened scrutiny by increasingly assertive national tax authorities means higher risk of substantial fines under existing law. Growing political for major tax reform further heightens risk, imperiling earnings derived from tax avoidance rather than genuine economic activity.
Reputation and brand risks are equally – if not more – significant. Recent studies suggest a correlation between businesses with strong CSR brand profiles and those with high levels of tax avoidance. Companies that have made major investments in strong social, environmental and human rights track records risk losing consumer support and their social license to operate unless they move toward greater transparency and action on tax responsibility.
Investors recognize these risks and are starting to ask hard questions. The “Principles for Responsible Investment’s Engagement Guidance on Corporate Tax Responsibility“ advises investors to examine disclosure and transparency, good tax governance and appropriate management of tax-related risks to achieve the right balance between risk and returns. These investors rightly see responsible tax practice as a proxy for good management, questioning whether it is in shareholders’ interests to invest in companies in which management is focused on simply minimizing tax rather than creating sustainable long term value.
Opportunity for Leadership
It’s a matter of time before hard law catches soft law norms that increasingly recognize the need for corporate actors to increase transparency and comply with both the “letter and spirit” of tax laws. If the law doesn’t catch up, the public will act with potentially devastating consequences for brands that are heavily invested in elaborate tax avoidance schemes.
Some companies aren’t waiting for the other shoe to drop. Faced with new transparency laws in the oil, gas and mining sector mining giants Rio Tinto and BHP and oil companies such as Tullow have disclosed their payments to governments on a project level basis. Outside the extractives sector, others are beginning to adopt tax principles and to now publish a summary of taxes paid by type and region.
Corporate boards that get ahead of this issue will not only have a more legitimate claim to their sustainability profile but will find themselves with competitive advantage in the emerging and developing markets that are so vital to their future success.
We know how this play will end. The only mystery is who the heroes will be.