We asked leading commentators from across the international finance industry: Can and should morality be applied to corporate tax planning? To respond to any of the comments made in The Big Debate email firstname.lastname@example.org
"The standard argument on tax avoidance is that companies have a duty to minimise tax bills in order to boost returns to shareholders at all cost. Regardless of the fact that this article of faith isn’t reflected in UK company law, how does it square with the extensive and costly corporate social responsibility programmes of most businesses? "
Dr Stephen Barber, Reader in Public Policy, London South Bank University
"Corporations will usually pay the taxes legally required and so it is the law, transparency and international cooperation which should be the priority of policy makers."
"Those who seek to allude to morality as a basis for revenue collection fail to comprehend that by definition, insofar as it exists, morality is not a universal standard but accords to any one or more of a particular philosophy, religion, or culture, sometimes all three."
"Corporate tax planning always involves moral judgements. It is impossible to take a neutral position. Like all professions that require complex case-by-case decisions, there exists no complete set of regulations or guidelines that prescribes how to approach tax planning."
"Corporate tax planning is not a standalone activity.
Companies are active in a social environment that is conceived of responsible individuals who each have a commitment to their community, whether it be large or small."
Google’s ‘don’t be evil’ motto is probably the most well-known corporate responsibility statement in the world. But does this apply to their tax affairs?
The British MP Margaret Hodge certainly thinks so, branding their tax machinations ‘evil’ in a recent parliamentary hearing. The public mood has shifted in recent years, with polls revealing that just 15 per cent think it is acceptable for large businesses to take advantage of legal loopholes to minimise their tax bills. Even business leaders appear to concur, with 50 per cent of FTSE 100 bosses agreeing that the public anger at tax avoidance is justified.
However, Google CEO Eric Schmidt is unmoved. Instead he argues that his company’s behaviour is legal, and that it is up to governments to change the law if they don’t agree with its consequences.
It’s certainly true that current international tax rules provide an array of opportunities for moving assets and income across borders in ways that often cancel out tax liabilities. This is a big issue for tax revenue bases not just in rich countries, but also in the world’s poorest. From civil society campaigners, to governments and indeed many businesses (including Google), there is broad consensus that these rules are no longer fit for purpose and require a radical rethink.
Yet with international tax reform notorious for proceeding at a glacial pace while corporate tax planners are famously fleet of foot, do companies have a moral duty to reject complex and artificial tax avoidance schemes? If the corporate responsibility statements of most large companies are to be believed, then surely the answer is yes.
The standard argument on tax avoidance is that companies have a duty to minimise tax bills in order to boost returns to shareholders at all cost. Regardless of the fact that this article of faith isn’t reflected in UK company law, how does it square with the extensive and costly corporate social responsibility programmes of most businesses?
Like many areas of corporate behaviour, from guaranteeing labour standards to paying a living wage, most companies engage in a range of activities that, taken in isolation, reduce their profits. While there is no question that corporations should not employ child labour or perpetrate environmental destruction to maximise profit some still argue that tax practices should be judged by different, purely legalistic criteria. The truth is that companies have a choice in how aggressively they structure their tax affairs and considerable latitude to seek out technically legal loopholes, which were never intended by legislators.
Indeed the reputational damage being suffered by companies caught up in tax avoidance scandals, increasingly undermines positive perceptions of the contributions they make in generating investment and jobs. There’s a real opportunity for responsible companies to take the lead on this issue and protect their brands from public outrage and additional scrutiny from tax officials.
The announcement that Starbucks would make a ‘voluntary contribution’ of £20 million in UK corporation tax was an attempt to mitigate a PR disaster, but was poorly received by those on all sides of the debate. Nobody believes tax should be a voluntary measure. In order to insure themselves against criticism companies must address their corporate structures and tax practices. Indeed, Lloyds Bank has recently committed to close down any tax haven operations that don’t have a sound business reason (not motivated by tax avoidance), to reduce reputational risk.
The obvious reason why tax avoidance by multinational companies has become such a high profile issue is the continued economic fallout of the global financial crisis. While public services are cut and living standards decline in many countries, the public, media and politicians are increasingly unwilling to turn a blind eye to profitable companies that are not paying their fair share where they do business.
Many businesses overlook the societal impact of tax avoidance, seeing tax purely as a cost. The Confederation of British Industry’s recently published tax principles acknowledges this is short sighted and that “efficient working of the tax system [is required] to fund public services and promote sustainable growth.”
Ultimately the costs of tax avoidance to public revenues have to be assessed against their impact. While tax avoidance in established economies is considered increasingly unsavoury, the same practices in the poor countries are having a devastating impact.
In most of the world’s developing nations, the public finances that employ teachers, doctors, build roads and invest in infrastructure are more fragile than in the developed world. Corporate tax revenues also make up a much more significant proportion of the revenue base in poor countries than in the rich world. While investment from multinational companies can bring real benefits to developing countries, this can’t exempt them from contributing a fair share in tax.
The OECD estimates that developing countries lose three times more to tax havens than they receive in aid each year. The huge loss of vital revenues means there aren’t sufficient drugs to prevent easily avoidable death, while economic development is stifled due to sub-standard education systems and poor transport links. Tax avoidance also helps to keep countries dependent on international aid, rather than being able to stand on their own two feet.
There is also a profound injustice on a very personal level. In Zambia, ActionAid has met with market traders like Caroline Muchanga, who live on the breadline, but effectively pay more corporate tax than large and profitable multinational companies operating next door to them. The lack of a level playing field for national businesses on tax puts them at a profound competitive disadvantage.
Some business leaders are starting to agree: Andy Street, CEO of UK high street retailer John Lewis, has argued that companies avoiding taxes via tax havens risk driving others out of business and that “our customers…expect a fair and level playing field.”
While government action is urgently needed to change the international tax rules, companies must take a more responsible approach, rather than employing contrived and artificial tax practices.
Putting in place tax avoidance structures isn’t a business requirement; it is a choice. Like any choice that has wide ranging social impact, it has clear moral implications – particularly in the world’s poorest countries.
During her trial for tax evasion in 1989, it was revealed Leona Helmsley had bragged to her housekeeper that ‘we don’t pay taxes. Only the little people pay taxes’. The jury was understandably riled. And it is a similar sense of injustice which is fuelling today’s public debate about corporate tax planning. It is the idea is that while ordinary people on ordinary earnings and small domestic businesses have little choice but to pay the taxes levied by the state, for those wealthy and powerful enough, tax is optional. And during times of ‘austerity’, public spending priorities have naturally come under greater scrutiny. We have harder decisions to make about the sort of societies in which we want to live and, crucially, how it will be financed. Those who enjoy the benefits of society but opt out of contributing their fair share have naturally become the target of scrutiny. Such actions are said to be immoral and it a reasonable proposition that paying one’s taxes is a social obligation.
But more fundamentally, taxation is a legal obligation. We pay taxes not out of altruism but rather under legitimate coercion. And owing to this, we pay no more than is legally required with individual tax payers taking advantage, to various degrees, of tax breaks which allow us to mitigate liabilities. Ever opened an ISA or paid into a pension? The story is similar when it comes to the corporate world only here there is competition between countries to attract international business by lowering taxation levied on profits as well as a plethora of havens.
It is difficult to argue that many of the big corporations under the spotlight are acting ‘fairly’ but there are severe limits for the Exchequer in playing the morality card. Extra contributions will be squeezed out of businesses where incensed consumers can vote with their feet but the rest will plan to minimise their obligations. Corporations will usually pay the taxes legally required and so it is the law, transparency and international cooperation which should be the priority of policy makers.
Sentenced to 16 years imprisonment, Helmsley of course broke the law by evading the taxation legally due. Paying the minimum that is legally required, there is little reason to expect corporate tax planners to apply morality to their decisions and increase their contributions. Law itself emerges from moral judgements. So if we want tax to be paid by more than the little people, we need legal rather than moral arguments.
Those who seek to allude to morality as a basis for revenue collection fail to comprehend that by definition, insofar as it exists, morality is not a universal standard but accords to any one or more of a particular philosophy, religion, or culture, sometimes all three.
Some observers, notably Celia Green, make other distinctions between tribal and territorial morality. Territorial morality is permissive, allowing the individual whatever behaviour does not interfere with the territory of another and seeks to apply rules which are universal and absolute, Kant and Geisler would agree. Green relates the development of territorial morality to the rise of the concept of private property and the ascendency of contract over status. Tribal morality on the other hand is prescriptive, imposing the norms of the collective on the individual. These norms will be arbitrary, culturally independent and entirely subjective. So which sort of morality are we talking about? And therein lies the entire basis for the rebuttal. One man’s tax avoidance is another man’s tax legitimacy but are we really to run a civilised society on the basis of tribal behaviour?
The confusion that results if we do is evident.
Mr Miliband thought that Mr Livingstone’s use of a corporate service company to reduce his personal tax liability in a highly artificial manner was ‘correct and proper’. So do numerous employees of the BBC. Mr Clegg thought Mr Romney’s perfectly correct tax payments, calculated at 15 per cent on long term capital gains and dividend income as prescribed by the IRS Code, were in some, unspecified, way wrong, apparently simply because the investment was made in a Cayman Islands entity. So too President Obama is of the view that companies operating lawfully in the Cayman Islands subject to the complete tax transparency afforded to the IRS under the 2001 Tax Information Exchange Agreement are a ‘tax scam’, although the basis for the allegation is not specified. Nor does the IRS seem motivated to enquire. On the other hand Mr Cook contends that Apple was at all times complying with applicable law and asks the Senate Subcommittee, in effect, what other test he is supposed to apply to assess the amount of tax payable.
Sir Roger Carr of the CBI says the same thing succinctly: “Mr Cameron should avoid the moral debate. Tax avoidance cannot be about morality. Tax should not be viewed as a down payment on social acceptability. Tax should be calculated in keeping with the law of the land.”
And there we have it. Tax or indeed any form of transfer of property compulsory or otherwise can only be dealt with by the law of the land. That is the cornerstone of the rule of law which underlies the concept of a civilised society and distinguishes us from the tribal behaviour to which the extreme left wing and the NGOs that speak on its behalf would have us descend.
If morality is based in philosophy, religion or culture it cannot provide sufficient certainty and certainly not a mechanism for assessing quantum. The term ‘fairness’ does not provide a satisfactory basis. Fair to whom and why?
The confusion that is inherent in the suggestion that morality is a basis of revenue collection is amplified by weak politicians who necessarily seek to appeal to the greatest number of voters. Thus the issue of ‘morality’, as determined, from time to time, by the consensus view of the inevitable focus groups may indeed determine the content of a political manifesto but at no time does it constitute a basis for corporate conduct where duties are owed by management to the company.
It is only when a moral position is held by sufficient majority of legislators and enactment results that we have sufficient certainty for assessment and enforcement. Assessment and enforcement are simply a function of the law of the land.
Somewhat regrettably with the introduction of the GAAR the position may not be as clear now as it was at the time of the admirable statement of Lord Tomlin in IRC v Duke of Westminster: “Every man is entitled,” he said, “if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure his result, then, however unappreciative the Commissioners of the Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
Furniss v Dawson and Ramsay did not alter that fundamental proposition save to say that where a transaction had prearranged artificial steps, which served no commercial purpose other than to save tax then the proper approach was to tax the effect of the transaction as a whole. In time we will know whether the GAAR will change that approach. The expressed intention - that it will negate an expressed course of action that aims to achieve a favourable result that Parliament did not ‘anticipate’ and which cannot be regarded as reasonable - hardly improves on grounds of certainty. Nevertheless it will be for the Courts to decide on any outcome. Thus does the law deal with aggressive tax avoidance.
And thus no-where in the law do we find any support for the comments of Mr Cameron and Mr Osborne, who seem strangely at ease in aligning their opinions with radical left wing groups such as the Tax Justice Network, regarding morality being a satisfactory test for the assessment of tax revenue.
If the law does not meet with the intention of the legislators they must change it. It is only when they fail or are incapable of doing so that we find the minority braying about unspecific notions of ‘morality’.
Corporate tax planning always involves moral judgements. It is impossible to take a neutral position. Like all professions that require complex case-by-case decisions, there exists no complete set of regulations or guidelines that prescribes how to approach tax planning. To the contrary, tax planning depends on the expertise, skills, and creativity of advisors. This gives tax advisors an important responsibility and not just towards their customers.
Morality is about what is the right thing to do. Some argue that company managers have a duty to the company’s shareholders to maximise profits, while respecting the law. This may seem neutral, because it leaves decisions about how companies should behave to governments, which make the law. Nonetheless, this position involves a moral judgement. It says the right thing to do is to maximise profits – but where does that imperative come from? This is as much a moral position as the notion that companies should pay a fair share of tax.
Let me illustrate that point. Suppose a global software firm wants to build a large new office in the centre of Nairobi. The investment will give a boost to the local economy. However, the designated location is currently occupied by illegal slum dwellings. The local authorities propose to bulldoze down the area, which would make hundreds of poor people even worse off. Now, who would argue that the company’s managers have a duty to destroy the illegal dwellings in order to maximise shareholder value? Clearly, their decision is not a morally neutral one.
Rarely is the effect of corporate decisions on society so direct, visible, and confronting as in this illustration. In tax planning, effects are typically very indirect, but that does not make them less real. Just like the office building, a corporate structure using international financial centres can have a positive effect on the economy, but also a negative effect on poor people. Some structures allow companies (and their owners and bondholders) to reduce their global effective tax rate to single digits, reducing government revenues. This may negatively affect poor people that would benefit from higher government spending on basic infrastructure, health care, and education.
Thus, tax planning is never neutral. As a tax advisor, you have a responsibility for its social effects as well.
Corporate tax planning is not a standalone activity.
Companies are active in a social environment that is conceived of responsible individuals who each have a commitment to their community, whether it be large or small. Globalisation is not a threat, but an opportunity to live life fully. Multinational enterprises (MNE) present themselves in the local community through their brands and products. The focus is on how MNEs deal with the concerns of the community and corporate tax planning is part of that focus, because a community must be served.
Those who think that corporate tax planning is a mere ‘technicality’ forget the impact of CTP on society and community. All citizens want each MNE to contribute a fair share to pubic budget for the benefit of all participants. Going ‘alone’ is no longer an option in this transparent world of today. Therefore morality should play a role in the attitude of MNE towards taxes. Paying its fair share of taxes is not simply at the expense of the MNE’s shareholders, but is, on the contrary a contribution to the community.
How MNEs do this depends on the specific circumstances of the entity or group. The arbiter here is not a judge with a law book at hand, but the public opinion in all its diversity. MNEs must realise that the public is also an important stakeholder and that their participation in society demands that it acts socially responsible. Who can teach that? No-one can, but understanding public perception is within the corporate communication strategy. An MNE can only function well if it understands the morality of its public. Therefore corporate tax planning is not just a technique, but a commitment to customers and the result will be judged by the public opinion. A responsible global presence requires a commitment to society and community, corporate tax planning should be subordinated to that commitment.