csr, Tax and Development

Abstract

This article explores and critically examines the connections between tax and development on the one hand and tax and corporate social responsibility (csr) on the other. It does so because, while there is increasing recognition of the importance of taxation to efforts to resource the state and to finance ways of tackling poverty, there is a surprising lack of attention to tax avoidance and evasion as a csr issue for transnational corporations operating in the South, even among those companies that pride themselves on being csr leaders. We review evidence of these trends, provide an empirical analysis of how leading firms deal with tax in their corporate reporting and make the case for including taxation as a new frontier in progressive csr.

Notes

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24 oecd, Co-Chairs’ Statement, Joint Meeting on Tax and Development between the Committee on Fiscal Affairs and the Development Assistance Committee, 27 January 2010.

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28 Palan, ‘Tax havens and the commercialisation of sovereignty’.

29 It is ironic that at the same time that companies have increasingly emphasised their social responsibility through the adoption of codes of conduct and the publication of csr reports, there has also been a growing reliance on complex strategies to limit corporate tax liabilities.

30 There is a growing literature on tax havens and the role that they play. See, for example, R Palan, R Murphy & C Chavagneux, Tax Havens: How Globalization Really Works, Ithaca, NY: Cornell University Press, 2010; JG Gravelle, Tax Havens: International Tax Avoidance and Evasion, CRS Report for Congress R40623, Washington, DC: Congressional Research Services, 2009; and Norwegian Government Commission on Capital Flight from Poor Countries, Tax Havens and Development: Status, Analyses and Measures, Preliminary Report, June 2009.

31 Quoted in G Benari, ‘Tricky tax: two tax avoidance schemes explained’, mimeo, 2009, p 4.

32 hmrc, quoted in J Frecknall Hughes & K Glaister, ‘Taxation and corporate social responsibility: evidence from UK firms’, presentation to the esrc Seminar Series, ‘Seminar 2: Is Corporate Taxation Practice a csr Issue?’, 25 March 2009, Slide 15.

33 Tax Justice Network, Tax Us if You can, London: Tax Justice Network Briefing Paper, 2005, p 66.

34 ‘Tax glossary’, The Guardian, at http://www.guardian.co.uk/business/2009/feb/01/tax-gap, accessed 11 February 2009.

35 Fuest & Riedel, ‘Tax evasion, tax avoidance and tax expenditures in developing countries’; Fuest & Riedel, ‘Tax evasion and tax avoidance: the role of international profit shifting’, in P Reuter (ed), Draining Development? Controlling Flows of Illicit Funds from Developing Countries, Washington, DC: World Bank; 2012; C Leite, ‘The role of transfer pricing in illicit flows’, in Reuter, Draining Development? and V Nitsch, ‘Trade mispricing and illicit flows’, in Reuter, Draining Development?

36 Fuest & Riedel, ‘Tax evasion, tax avoidance and tax expenditures in developing countries’, p vi.

37 R Murphy, ‘Accounting for the missing billions’, in Reuter, Draining Development?; and A Cobham, ‘Tax havens and illicit flows’, in Reuter, Draining Development?

38 Gravelle, Tax Havens.

39 tuc, The Missing Billions: The UK Tax Gap, London: tuc Publications, 2008. hmrc has a lower estimate of tax avoidance of £5–7 billion. See A Seeley, Tax Avoidance: A General Anti-avoidance Rule, House of Commons Library, Standard Note SN06265, 2012.

40 Benari, ‘Tricky tax’, p 4.

41 For a more detailed breakdown of the different ways in which companies reduce their tax bills, see Tax Justice Network, Closing the Floodgates: Collecting Tax to Pay for Development, Report prepared for the Norwegian Ministry of Foreign Affairs, 2007, ch 4; and Gravelle, Tax Havens.

42 L Eden, ‘Transfer price manipulation’, in Reuter, Draining Development? p 206.

43 P Dicken, Global Shift: Mapping the Changing Contours of the World Economy, London: Sage, 2011, p 20.

44 For a review of these studies, see Eden, ‘Transfer price manipulation’.

45 In 2006 Glaxo Smith Kline agreed to pay $3.1 billion to the US tax authorities in order to settle a long-running transfer pricing dispute. For other examples, see P Sikka & H Willmott, ‘The dark side of transfer pricing: its role in tax avoidance and wealth retentiveness’, Critical Perspectives on Accounting, 21(4), 2010, pp 342–356.

46 Ibid, p 352.

47 C Vaitsos, Inter-Country Income Distribution and Transnational Enterprises, Oxford: Clarendon Press, 1974.

48 R Jenkins, Transnational Corporations and Uneven Development, London: Methuen, 1987, pp 114–120.

49 Eden, ‘Transfer price manipulation’, pp 224–117.

50 F Lawrence, ‘Argentina accuses world’s largest grain traders of huge tax evasion’, The Guardian, 1 June 2011.

51 A Hollingshead, The Implied Tax Revenue Loss from Trade Mispricing, Washington, DC: Global Financial Integrity, 2010.

52 H Grubert, quoted in Gravelle, Tax Havens, p 8.

53 I Griffiths & F Lawrence, ‘Bananas to UK via the Channel islands? It pays for tax reasons’, The Guardian, 6 November 2007, pp 6–7.

54 ‘Offshore drift’, The Guardian, 3 February 2009, pp 14–15.

55 Action Aid, Calling Time: Why sab Miller Should Stop Dodging Taxes in Africa, London: Action Aid, 2012.

56 Action Aid, Sweet Nothings; The Human Cost of a British Sugar Giant Avoiding Taxes in Southern Africa, London: Action Aid, 2013.

57 ‘Low-tax, low-cost flight to Dublin’, The Guardian, 10 February 2009, pp 12–13.

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59 Benari, ‘Tricky tax’.

60 ‘Going Dutch’, The Guardian, 2 February 2009, pp 16–17.

61 Tax Justice Network, Closing the Floodgates.

62 This is sometimes referred to as ‘earnings stripping’. Gravelle, Tax Havens.

63 M Riesco, G Lagos & M Lima, The ‘Pay Your Taxes’ Debate: Perspectives on Corporate Taxation and Social Responsibility in the Chilean Mining Industry, Technology Business and Society Paper 1, Geneva: unrisd, 2005, pp 14–15.

64 Action Aid, Calling Time.

65 Starbuck’s declared losses in the UK on sales of £1.2 billion over the past three years. It was claimed that the UK operation was able to avoid declaring profits in the UK through paying a 6% royalty fee to its European hq in Amsterdam for use of its ‘intellectual property’, payments for imported coffee beans from a Starbuck’s Coffee Trading Co in Switzerland, and through high interest payments (at libor + 4%) on intra-company loans. T Bergen, Special Report: How Starbucks avoids UK Taxes, Reuters, 2012.

66 C Azémar, International Corporate Taxation and US Multinationals’ Behaviour: An Integrated Approach, University of Glasgow, Department of Economics Discussion Paper, August 2008 finds evidence that countries with a low quality of law enforcement tend to have more difficulty in implementing anti-tax avoidance measures such as ‘thin capitalisation’ rules or arm’s length pricing. Quoted in C Fuest & N Riedel, 'Tax Evasion and Tax Avoidance: The Role of International Profit Shifting' in P. Reuter (ed.), Draining Development? Controlling Flows of Illicit Funds from Developing Countries, Washington DC: World Bank, 2012, p 121.

67 J Christensen & R Murphy ‘The social irresponsibility of corporate tax avoidance: taking csr to the bottom line’, Development, 47(3), 2004, pp 37–44; F Weyzig, ‘Political and economic arguments for corporate social responsibility: analysis and a proposition regarding the csr agenda’, Journal of Business Ethics, 86(4), 2009, pp 417–428; M Desai & D Dharmapala, ‘csr and taxation: the missing link’, 2006, at http://www.people.hbs.edu/mdesai/D+D_BSR.pdf; and J Freedman, ‘Tax and corporate responsibility’, Tax Journal, 695(2), 2003 pp 1–4.

68 V Houlder, quoted in A Muller & A Kolk, ‘Reponsible tax as corporate social responsibility: the case of multinational enterprises and effective tax in India, Business and Society, forthcoming.

69 Indeed, connections between corporate strategies in these parallel areas have been made. One newspaper commented: ‘The practice of only paying tax in the lowest charging country in which companies operate is mirrored in other aspects of their operations such as labour rights and environmental law where they will move around to operate in the least regulated domain in order to maximise profits’. Morning Star, 13 December 2012, p 12.

70 http://www.unicef.org.uk/enough-food-for-everyone-if/enough-food-for-everyone-if-the-issues/, accessed 13 February 2013.

71 The Guardian ran a series of articles on ‘The tax gap’ in February 2009. See also ‘The great tax heist’, Daily Mail, 17 December 2010.

72 There is ongoing discussion, for example, about a code of conduct on international tax cooperation governing the sharing of information between tax authorities.

73 bbc News, ‘George Osborne’s new plans to tackle tax avoidance’, 27 March 2012, at http://www.bbc.co.uk/news/business-17525977, accessed 19 December 2012.

74 ‘Davos 2013: David Cameron calls measures to tackle tax avoidance’, Daily Telegraph, 24 January 2013, athttp://www.telegraph.co.uk/finance/financetopics/davos/9823032/Davos-2013-David-Cameron-calls-measures-to-tackle-tax-avoidance.html, accessed 13 February 2013.

75 For an interesting discussion of the implications of different views of the corporation for csr and strategic tax behaviour, see Avi-Yonah, Corporate Social Responsibility and Strategic Tax Behaviour.

76 ‘csr’, The Guardian, 14 February 2009, p 41. Barclays has recently announced the closure of its Structured Capital Markets unit, which was reported to have contributed £1 billion a year to the bank’s profits through its tax avoidance schemes. F Lawrence, ‘Barclays secret tax avoidance factory that made £1 billion profit a year disbanded’, The Guardian, 11 February 2013, at http://www.guardian.co.uk/business/2013/feb/11/barclays-investment-banking-tax-avoidance, accessed 13 February 2013.

77 For a discussion of supply-chain ethics, see S Barrientos & C Dolan (eds), Ethical Sourcing in the Global Food System, London: Earthscan, 2006.

78 P Sikka, ‘Smoke and mirrors: corporate social responsibility and tax avoidance’, Accounting Forum, 34, 2010, pp 153–168.

79 J Elkington, ‘The triple bottom line for twenty-first century business’, in J Mitchell (ed), Companies in a World of Conflict, London: riia, 1998, pp 32–61.

80 Sustainability, Taxing Issues: Responsible Business and Tax, London: Sustainability, 2006.

81 D Williams, Tax and Corporate Social Responsibility, kpmg Tax Business School Discussion Paper, 2007.

82 ‘“It’s called capitalism”: Google boss says he is “proud” of the company’s multi-million pound tax avoidance scheme’, Daily Mail, 13 December 2012, at http://www.dailymail.co.uk/news/article-2247321/Google-boss-Eric-Schmidt-says-proud-companys-multi-million-pound-tax-avoidance-scheme.html, accessed 19 December 2012.

83 See, for example, R Hardyment, P Truesdale & M Tuffrey, Tax as a Corporate Responsibility Issue: The Implications for Multinationals, London: Corporate Citizenship, 2011.

84 Other companies whose tax avoidance strategies were put under the spotlight in a series of articles in The Guardian on the ‘Tax gap’ in 2009 included the pharmaceutical companies GlaxoSmithKline, AstraZeneca and Shire, PepsiCo (with Walkers Crisps), Vodafone, Lloyds TSB, Barclays and the wpp advertising group.

85 Sikka, ‘Smoke and mirrors’.

86 For example, Sustainability produced a report Taxing Issues: Responsible Business and Tax in 2006 (see note 80). The Tax Justice Network has also argued strongly that corporate responsibility should include tax issues. Tax Justice Network, Tax Us if You can, ch 5.1.

87 oecd, Codes of Corporate Conduct—An Expanded Review of their Contents, Paris: oecd Working Party of the Trade Committee, TD/TC/WP(99)56/FINAL, 2000, p 16.

88 M Kaptein, ‘Business codes of multinational firms: what do they say?’, Journal of Business Ethics, 50, 2004, Table V.

89 L Preuss, ‘Tax avoidance and corporate social responsibility: you can’t do both, or can you?’, Corporate Governance, 10(4), 2010, p 371.

90 It is ironic that the first two of these companies featured in The Guardian’s ‘Tax gap’ series of articles.

91 Diageo, Corporate Citizenship Report, 2008, p 28.

92 wpp, Corporate Responsibility Report, 2008–09.

93 Vodafone Group, Tax Code of Conduct.

94 Interestingly the last part of this statement, referring to minimising tax liabilities, has been dropped in the most recent version of the Unilever code. See www.unilever.com/sustsinability/economic/tax.

95 http://www.unilever.com/sustainable-living/betterlivelihoods/tax/, accessed 13 January 2013.

96 LJ Weber, ‘Citizenship and democracy: the ethics of corporate lobbying’, Business Ethics Quarterly, 6(2), 1996, pp 253–259.

97 Newell, ‘Managing multinationals’.