Triumphing on Tax – Tax as a Moral Issue

Triumph on Tax: Tax as a Moral issue

Companies that only consider the legal aspects of tax are missing opportunities to secure the brand and revenues of their businesses in the long-term. Considering their moral position on taxation is a part of a long-sighted taxation strategy.

Tax is Legal and Moral

SustainAbility published the diagram below in 2006 in its publication Taxing Issues, and it’s useful to understand the moral nature of tax payment. On the left hand end is entirely illegal behaviour and on the right, legal and welcome mitigation of taxation.

evasion to mitigation

Tax spectrum from SustainAbility’s publication Taxing Issues

There is nothing stopping companies from sailing as close to the wind as possible (in this case the boundary between legal and illegal). But within the spectrum of legally permissible activity, there is a range of responses to tax legislation that raise moral questions. Included within such moral questions are those that revolve around Fairness (one of Adam Smith’s fundamental principles of taxation) and the implied social contract between organisations and individuals in society. Adam Smith was probably the first to identify the principle of Proportionality and Fairness when it comes to design of taxation, and his ideas haven’t died. Those same ideas motivate consumers and irate MPs to protest against legal tax avoiders like Amazon, Starbucks and Google.

It’s also no small point that since tax stories broke about those companies that they have been under fire for all sorts off issues, including the latest legally permissible but morally questionable scandal – zero hours contracts. So it would seem that morally questionable behaviour in one area flows over into other areas of the business.

All of which comes at a cost to those companies. The takeaway is that if a company is to pursue a strategy that seeks to avoid tax, then it needs to significantly increase costs in other areas such as legal fees, public relations activities and reactive defenses to media stories.

There is no question that companies are able to take advantage of legal loop-holes, and indeed some very fine folk make a living out of helping them to minimise the amount of tax they pay. And fair enough: companies should be able to minimise certain amounts of tax that they pay. But it seems obvious enough to say that if companies everywhere keep reducing the amount of tax they pay, eventually extra tax needs to be paid somewhere else in the system or we are all somewhat worse off.

It remains open for people to conclude that legal tax arrangements are not moral or not in the interests of society generally. Google’s pride in its tax avoidance structures could be seen as the smartest people putting their brains into paying the absolutely minimum amount of tax. It could also be legitimately seen as arrogantly taking value from Nations that provide them with safe and profitable operating environments (education, infrastructure and social stability included) and not providing all that much value to those nations. Extended to its ridiculous conclusion, the defence that “We provide jobs” would mean that there would be jobs for all if we didn’t make companies pay tax, but no education with which to provide the skills needed and no safe roads to travel to and from work. The argument looks about as clever as Rick Santorum’s argument against climate change, especially when contrasted with national companies that pay their fair share of taxation in addition to the jobs they provide.

But Wait … Tax is the Purview of Governments

But I’m also a bit weary of companies being the only ones on the hook for the amount of tax they pay. Governments set the rules, and could certainly do more to tighten up regulation around one of the biggest loopholes, transfer pricing. That’s a tricky issue to think about, let alone legislate for, as detailed in a recent UK Institute of Directors publication on taxing multinationals. If you want to know more, you might also look at the Guardian’s article on Vodafone, which helps to explain the issues. But let’s not forget that some governments (like the UK) have legislative control over some tax havens but haven’t acted to change their low tax status.

Which is why, when David Cameron says that companies have morally gone too far, it’s certainly worth paying attention to.

David Cameron quote

“David Cameron begins tour of India with shot over bows of tax avoiders”, The Guardian, 18 February 2013.

And it seems he is serious about doing something on the issue of corporate tax avoidance, having taken the issue of tax havens to the G20 and written to all 10 British territories that are low-tax jurisdictions (yes that’s right, 10), although the outcomes are less than crystal clear.

One of the likely blockers to such a crackdown among the G20 is the USA, whose high-profile low-tax trio of Google, Starbucks and Amazon all significantly benefit from tax havens, although they seem to pay more taxes than Apple, which has been accused by US Senators of using a ‘highly questionable’ tax scheme to virtually avoid paying taxes at all. On the other side of the USA business community, a very large number have petitioned Barack Obama to act to close loopholes, and stop anti-competitive behaviour for US-based business.

Another blocker is the perception of the UK as a pariah and hypocrite on the issue, especially as it cut corporate tax to 20% – well below the G20 average and continues to offer deals that seem designed to attract business to put their headquarters in London, specifically on the basis of favourable tax treatment. It’s also not clear that the OECD will be motivated to act.

Whatever the result, and in spite of some progress, it seems as though everyone now agrees that it is quite a difficult thing to reform the tax avoidance measures. Of course, the more cynical readers among you will recognise that some countries could go from a deficit budget to surplus if they could convince all companies to pay the amount of corporation tax on income effectively earned in their country, at least if the tax justice network has its figures correct. Such countries apparently include the UK (with 98 of the FTSE 100 using one or more tax havens, including my usual example of brilliance in other areas, Marks & Spencer) and the USA (where, according to Reuters, more than 40% of the S&P 500 have subsidiaries in Ireland, the majority of which are minimal operationally but take advantage of Ireland’s 12.5% company tax rate).

14.01.13-Effective-tax-rate-chart-1In any case the amount of tax that FTSE 100 companies are paying continues to fall, even as companies return to profit following the lean years of 2009 and 2010 and at rates higher than the slowly reducing corporate tax rates. And low tax rates can get quite addictive. The real point to be made here is that any changes like the ones mentioned above are likely to result in increased costs and, for companies that are operating on low margins, increased taxes and any costs incurred in defending their position may put significant pressure on their bottom line.

Corporate Influence on Tax Policy

It’s also important to understand that companies can and do have influence over tax policy. Some are even prepared to put their head above the parapet to complain about the unfair advantage being gained by some companies. Companies like Sainsburys, John Lewis, Costa, Mothercare, Dixons and Lush are all prepared to publicly criticise companies that avoid paying local taxes and do so unashamedly as a business and/or moral issue. The Institute of Business Ethics also encourages companies to think about tax as an ethical issue. You can certainly expect to see ‘fairness’ and ‘equal playing field’ used in that context. Of course, if a company is going to lobby, it should do so carefully and heed Toby Webb’s advice on getting involved in global politics.

To act like a non-moral actor has consequences in societies full of moral actors, particularly when those moral actors are paying more tax than you! Of course, smarter companies will see the moral conversation as an opportunity to legitimately discuss the morality (or otherwise) of having governments providing certain services. In short, companies are moral actors (sorry, Joel Bakan, much as I like your film, the corporation CAN be moral).

Next week I’ll look at the business case for paying more tax than a company possibly could.

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This is part Three of a Four part series on Tax. Other parts are available below:

Part 1     Part 2     Part 3     Part 4

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