Monday, October 06, 2008

Corporate responsibility - tax is back

The Economist magazine recently asked "Is tax back?" To which the reply, as of the last few weeks, is a resounding "yes!" The FT is now exploring the issue (and we're pleased to be mentioned in the story.)

It starts by looking at the case of WPP, a company that is moving its tax base to Ireland. We recently blogged about corporate inversions like this; the main point was that it is the tax bases (i.e. whether a company is asked to pay tax on its worldwide income or not) rather than tax rates that are the key factor here: (and the FT's influential Lex column subsequently agreed with us).

And today's FT story notes that

"The dilemma for businesses – particularly household names – is whether their brand could be damaged by association with tax avoidance. Setting up a “brass plate” operation in Ireland could be a public relations disaster."

Tax goes right to the core of debates on corporate responsibility. It is the elephant in the room that nobody seems to want to talk about. Company directors may feel they have a responsibility to shareholders to cut their tax bills as aggressively as they can -- but this directly contradicts their responsibilities to the societies in which they are embedded, for which this kind of activity is rightly seen as highly abusive. This is not only true for tax, but for regulation too. The current market turmoil - in large part the result of financial companies having engaged in these kinds of evasive gymnastics - will bring this question, very quickly, into sharper focus, as the FT recognises:

"When the tax burden rises in the aftermath of the financial crisis, it may become less acceptable for companies to avoid tax."

Indeed. As Richard Murphy pointed out today, others are taking note too (ACCA stands for the Association of Chartered Certified Accountants):

"Something has gone seriously wrong with corporate governance. . . . The roles of the chairman and chief executive are ultimately ones of accountability - to shareholders, to customers, to staff and, whether they like it or not, to government, the taxpayer and society at large."

Back to the FT story, It notes evidence of things that are starting to happen:

"Earlier this year, a Christian Aid report linked corporate tax avoidance with dying children in developing countries. A British union campaign two years ago against private equity tax breaks made a biblical point by parading a camel outside the church where a leading executive worshipped.
. . .
(British opposition) Liberal Democrats are angry about what Lord Oakeshott, Treasury spokesman, describes as “tax tourism”. The Trades Union Congress is arguing for legislators to intervene.

The Tax Justice Network, an international campaign group, is also focused on the issue. It argues that the taxpayers’ role in bailing out the financial system shows the “clear and unambiguous duty” on corporations to pay tax.

. . .
A campaign to persuade boards to view tax as an issue of corporate responsibility has been waged by senior officials at (UK) Revenue & Customs."

Yes, and we are well aware of all this. It is something we have quietly been pushing on for some time. See this section of our web site, and associated links, which says:

"Anti-tax lobbies seek to portray tax as a cost. This is the wrong way to see it. Tax is not a cost, but a distribution out of profits. That puts tax in the same category as a dividend - a return to the stakeholders in the enterprise. This reflects the fact that companies do not make profit merely by using investors' capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit. Moreover, tax is properly due to the state in which a company generates its profit, not to that state to which it can relocate its profit for taxation purposes."

Also look at this comment article in the Guardian newspaper, written by TJN's senior adviser Richard Murphy, which explores the issues briefly and clearly. He adds this:

"Companies are created by law, and this legal process creates an implicit licence for the company to operate. That licence carries in exchange an obligation to pay the tax that is due on its profits where they arise. . . . The outcome is simple: tax is not paid where it is due. Almost invariably that means it is not paid in the populous states of the world, which are precisely the places most in need of tax revenues. The implication is obvious: these companies do not accept their corporate social and economic responsibility to those societies that provide them with the opportunity to make profit."

Companies have long fought to keep tax out of the corporate responsibility debates. It's going to get harder. Tax is back, and with a vengeance.


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