Tax Justice?

A report of UNRISD's conference on CSR, published in July, quoted Eddie Rich, of the UK Department for International Development, on corporate tax management. The "biggest contribution that business can make to development is through taxation... You have companies spending a lot of time developing codes...[while at the same time] employing an army of accountants to try and avoid paying their full social and economic duty in the places where they operate... [T]axation is the way that the government and the private sector can start engaging properly - that is the mechanism for partnership.101

Reports in the Financial Times in August suggested that tax was not just a problem for developing countries. Their investigation of companies in various sectors, such as automobiles, pharmaceuticals, retail and banking, suggested that transfer pricing, and moving debts and savings between different countries, is dramatically reducing government tax yields from corporations.102 For example, the most profitable investment bank in London, Goldman Sachs Group Holdings (UK), whose Directors include Lord Browne of Madingley, showed a tax credit of $7m on pre-tax profits of $665m. Some might wonder why in Russia the senior management of companies that do not pay tax are threatened with prison, whereas in the UK, they are rewarded with a peerage. The FT argued that declining tax revenues from corporations, "is an inexorable consequence of growing foreign direct investment, which produces increased potential for companies to reap the benefits of international tax arbitrage."103 This challenges the assumption that FDI is good for economic development and that pursuing it is, by itself, an expression of good corporate citizenship.

In September economist John Christensen, coordinator of the new Tax Justice Network, argued that "curiously the CSR debate, which has touched on virtually every other area of corporate engagement with broader society, has only recently begun to question companies in the area where their corporate citizenship is most tangible and most important - the payment of tax".104 The Network was conceived at the European Social Forum in Florence, November 2002, by a coalition of NGOs, academics, professionals and faith groups, who seek to campaign against aggressive tax practices and harmful tax competition. The Network is engaging with stakeholders in the CSR debate "to advocate for global policy measures to overcome the systemic faults", says Christensen, that allow transnational corporations to "run rings around nationally based tax regimes." The implications for corporate citizenship are clear. "Unless directors acknowledge that paying taxes is the core of good citizenship they risk losing public confidence in their commitment to CSR and will undermine initiatives to tackle global poverty", says Christensen. CSR standards should therefore evolve in this area, to cover such things as "the publication of all necessary accounting information and the use of profits-laundering vehicles that operate without substantial economic purpose." He continues that CSR reports should list the countries in which the company trades, how much profit is derived from activities in each of these countries, and where these profits are booked for tax purposes, indicating any special purpose vehicles that are used, and the extent of tax avoidance arising from the use of 'novel tax planning ideas.'

This would mark a major conceptual shift within the business and accounting worlds. Compelled by the desire for profit maximization and by a legal principle which asserts that tax payers may organise their affairs so as to pay the least possible tax under the law, tax advisers currently regard tax as a cost of doing business. This resonates with the philosophy of management put forward by the Chicago School. Addressing the issue of anti-competition violations, Professors Frank Easterbrook and Daniel Fischel wrote in the 1980s that company directors should violate rules in pursuit of profit. They argued that rule violations can be seen as 'externalities' and paying the associated fines and penalties is a normal cost of doing business. Evidence from recent US Senate enquiries show that staff in major accounting firms such as KPMG apply this logic to the tax avoidance products they market to clients. In a series of emails released to the enquiry, a senior tax practitioner told colleagues that even if regulators acted against them, the potential profits greatly exceeded the possible penalties. 'Our average deal would result in KPMG fees of US$360,000 with a maximum penalty exposure of only $31,000' said one email.105 If the corporate citizenship agenda does not move on this issue, then there may be the political will for government action. The United Nations General Assembly agreed in December 2003 to start the process of forming an inter-governmental commission involving its 191 member countries in developing new anti-avoidance measures.