Companies that are the most proactive on CSR have been the least transparent on their tax affairs according to one US study. Post-Panama Papers, this is set to change
The unprecedented scale of the so-called Panama Papers leak, along with other recent high-profile reports of multinational companies resorting to tax avoidance and artificial tax structures, have brought the question over the morality of corporate tax conduct into sharp focus.
Public and stakeholder pressure for decisive action on the issue has increased, amid a sense that multinational enterprises (MNEs) are able to get away with the unfair advantage that reduced effective tax rates (ETRs) give them. This includes a legal claim against Amazon and the government of Luxembourg that the online giant's aggressive tax planning constituted illegal state aid and was contributing to the decline of traditional booksellers, while the UK's business secretary, Sajid Javid, has said that the controversial “sweetheart deal” between the UK government and Google had fuelled a sense of injustice.
This poses the question: does poor conduct (or, at the very least, morally questionable behaviour) on tax undermine a company's reputation as a responsible business with a strong corporate social responsibility record? And should firms be giving the same level of attention to tax transparency as they do to traditional ESG topics?
CSR v ETR?
According to a recent study of US public corporations by the American Accounting Association, a leading community of accountants in academia, firms that scored higher on social responsibility indices were found to go to greater lengths to reduce their ETR, while also spending more on tax lobbying activities. These findings, the paper's authors claim, could suggest that businesses view CSR and taxes as "substitutes rather than complements".
Another report, released by Oxfam a couple of weeks after the Panama Papers leak brought tax avoidance into the spotlight, revealed that the biggest 50 US companies have more than $1tn stashed in offshore tax havens, and between 2008 and 2014 received $27 in government support (via tax breaks or subsidies) for every $1 paid in federal taxes. The report also cited a 2015 Gallup poll that found that 69% of US citizens believe corporations pay too little in tax.
The arguments that tax avoidance undermines a company's commitment to social responsibility and sustainable development in the countries it operates in are hard to deny. As a joint report from several leading NGOs including Oxfam points out: "Corporate behaviour that jeopardises revenue collection may deprive governments of the funds they need to realise the fundamental rights of their citizens." Those rights included access to basic public services including health, education and security. This is particularly so in developing countries, where resource-starved governments depend more heavily on corporate tax revenues.
Corporate tax avoidance may be unacceptably widespread and deeply unpopular with the public, but does getting caught out have such an impact on a company's reputation as to hit its bottom line? That was arguably the case in 2012, when coffee chain Starbucks was found to have avoided large amounts of corporate tax from its UK operations. A before-and-after survey found that, following the negative press that the company received for its actions, consumers were more likely to choose a rival (namely UK chain Costa Coffee) over Starbucks outlets, which hit the US firm's revenues while boosting those of Costa.
Headlines nobody wants
Tim Law, a tax risk and transparency expert and director of Engaged Consulting, told Ethical Corporation that it is still difficult to discern whether or not instances of tax-related negative PR have a tangible impact on a company's financial results. Nevertheless, he says, "there is no CFO who wants to see their business on the front page of the newspapers about tax issues", even if such a move on the part of the business has saved it millions in tax payments. "That's indicative of the way that businesses perceive this as a business risk issue."
Alex Cobham, director of research at Tax Justice Network, says tax has become an issue for full board discussion, rather than simply something to be managed efficiently at a lower level and only considered by senior management if a company was paying a higher ETR than its competitors.
This goes some way towards answering the question of whether businesses are beginning to realise the risk that poor tax conduct can bring to their business, and whether they are acting on this. Elena Gaita, policy officer on corporate transparency at Transparency International EU, says: "We believe that increased transparency would limit these questionable tax-planning schemes and behaviour, simply because companies would know that they face reputational damage."
Law says responsible tax conduct is on the same development path that traditional ESG topics have been on for the past 10 to 15 years, albeit somewhat behind the curve when compared with core CSR issues such as environmental responsibility or supply chain transparency.
There are some companies, and specific industries, where more progress appears to have been made. While in some cases this is down to stricter sector-specific regulations – for example on country-by-country reporting of tax payments in the extractives and banking sectors – for others it could be down to a growing recognition that transparency around corporate tax strategy is, as Law puts it, "not just part of their sustainable development reporting, but actually part of the wider CSR remit."
Fair trade of tax
Vodafone is one example where standard-setting openness about its tax arrangements may have served to help address debate around the company’s reputation on tax. The telecommunications giant has come in for public criticism in recent years, but the company now publishes a long and detailed tax report that doesn't just talk about its tax policy, but also tries to explain aspects of how tax works to a wider range of stakeholders.
Another example can be seen through the reporting of the utilities giant SSE, which in 2014 became the first FTSE 100 firm to receive the Fair Tax Mark, a standard that "offers businesses that know they are good taxpayers the opportunity to proudly display this to their customers", as the Fair Tax Mark website puts it. The scheme, which is used by firms including the Co-operative Group, Go Ahead and Lush Cosmetics, has been described as the "fair trade" of tax, allowing consumers to make informed choices about whether to base their purchasing decisions on the issue of corporate tax responsibility.
Other business indices and guidelines have included the issue of tax transparency for some time. The Global Reporting Initiative (GRI) says it has sought to promote corporate disclosure on tax payments by country since 2006, and that it believes "transparency in tax payments reflect a company's overall contribution and responsibility to the larger economic and social communities which depend on them". The Dow Jones Sustainability Index (DJSI) has also seen the addition of a new criterion, Tax Strategy, in order to "address the growing risks relating to aggressive taxation policies", especially as these can pose "financial, operational and reputational risks" for MNEs.
Businesses can still do a lot more, though, and the key is not just to attempt to communicate your tax strategy, but to do this in a way that engages and satisfies as many stakeholders as possible. Whereas before, companies would only be expected to report to the relevant tax authorities, now with the increasing role that social media has played in driving debate about tax and exposing any lack of transparency, tax stakeholders including a variety of NGOs are "more diverse, well informed and well connected", as Law puts it.
Keep it simple
A report on corporate tax strategy from management consultancy firm Corporate Citizenship argues that companies looking to articulate their tax strategy to a wider audience need to be able to convince these stakeholders that they are playing fair by using clear and honest language. "The temptation is to hide behind a veil of complexity and assume that because tax is poorly understood, opaque communication will cause criticism to go away," the report states. "The opposite is true. Companies that fail to communicate on tax in a way that ordinary people can understand will not only fail to get their point across, they will be seen as having something to hide.”
While companies are to be encouraged to go further in voluntary efforts to be transparent about their tax arrangements, continuous work from the Organisation for Economic Co-operation and Development (OECD) and the European Commission – which has only gained momentum in the wake of the Panama Papers revelations – may force their hands in any case. In April the European Commission unveiled plans to impose public country-by-country reporting on any EU-based corporation about their tax affairs in each EU member state as well as in any of the jurisdictions that will appear on a Commission-specified list of tax havens (or “non-cooperative jurisdictions”).
Political leaders were quick to hail this move as a positive step in closing corporate tax loopholes, but campaigners have slammed the proposals for not going far enough. Criticism has centred mainly on the issue of which tax havens are to be included on the blacklist, as it may be open to dispute and leave the door open for non-compliant firms to shift profits to any low-tax jurisdiction that is left off the list.
Blacklists and grey areas
Gaita at Transparency International points out that EU member states' own blacklists vary wildly, from Portugal (which defines as many as 75 jurisdictions as tax havens) to Germany (which doesn't include any). She also cites the case of Bermuda's initial inclusion in an EC-specified blacklist, only for the UK government to lobby, successfully, for it to be taken off. "It would be much easier to extend this [country-by-country reporting] requirement for multinationals' operations in all countries, instead of limiting it to the 28 EU member states plus a selected group of blacklisted countries," she says. That this hasn't occurred with the European Commission’s proposals has nothing to do with the limits of its powers – the EU has already succeeded in passing legislation on global public country-by-country reporting for the banking and extractives sectors, requiring them to report on their tax payments in all countries and jurisdictions.
"The EC proposal goes a little towards making the data public, but they have fundamentally misunderstood the value of this reporting," says the Tax Justice Network’s Cobham. "There is no half-measure for transparency, there is simply transparency or there is not, and the EC measure is not an effective transparency measure".
Engaged Consulting’s Law questions why the longstanding work on this issue carried out by the OECD was left aside in favour of limited country-by-country reporting. "One of the key successes of the OECD's work is that it has come up with proposals that can be adopted globally," he says, "and therefore maintain a level playing field." The EU proposals fail to do this, he argues, because they would have little or no impact on businesses that aren't based in or have a presence in the EU, such as US-based multinationals.
Nevertheless, the upshot of all this is that progress does seem to be coming, however gradually or imperfectly. Law believes that there will be more transparency around corporate tax strategies over the next few years, especially as new requirements mandate this. "What will be interesting is to see if businesses go beyond the bare minimum," he says. "Businesses need to get better at telling their story with respect to tax. If they don't, the risk is that someone else will."tax stakeholders government CSR sustainable development transparency international Environment GRI sustainability NGO commission