Corporate Accountability

Tax is the missing element in corporate responsibility debates. Corporate responsibility should start with tax compliance.

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.

There are endless examples of where this has all gone wrong. See, for example this article, about tax avoidance by global banana multinationals; this one, about the British supermarket chain Tesco, and this one, about Dutch multinationals. 

What can be done about this kind of thing? Many things. One would be to introduce a general anti-avoidance principle into tax law. If an artificial step is added into a transaction mainly to procure a tax advantage, it can be ignored. Second, companies (astonishingly) currently are not required to break their reporting down between each country where they operate. If they were required to report their activities on a "country-by-country" basis in their annual accounts we would know where they are, what they are called there, what trade they undertake there and how much tax they pay in each place in which they trade. This would highlight the use of tax havens by large companies, which they work so hard to conceal. (See this March 2008 TJN briefing paper on Country by Country reporting.)More generally, cultural change is required in a number of areas. Politicians and civil society organizations should argue against provision of particular offshore tax reliefs to  companies (which are most ably exploited by big multinationals) because they are, in effect, straightforward state subsidies paid to them by the ordinary people which make sure that the smaller businesses have no chance of competing on a level playing field. It would require the accountancy, legal and banking professions to stop thinking it their duty to undermine the will of democratically elected governments and seek loopholes for the best off sections of society, leaving the rest of us to pay their taxes for them. 

For more details, read this comment article by TJN's Richard Murphy in the Guardian newspaper. Also read this short article on the subject of corporate responsibility. Also look at this report, Taxing Issues, by the corporate responsibility experts SustainAbility. It looks at the business case for reducing levels of "tax risk" and argues that corporate responsibility demands that companies do more than simply manage risk, and instead treat the payment of tax as a key part of their social contract. This TJN blog looks at some of the history and politics of international financial reporting standards and country-by-country reporting. Richard Murphy has also written a series of blogs on this same issue which are well worth reading. 

We will soon be producing a longer section on tax, companies and corporate social responsibility.

Further reading.

Dec 2010 - Tax and corporate integrity: an accreditation scheme

Nov 2010 - FT: Tax is now a source of reputational risk

Oct 2010 - Not being evil? Google pays 2.4% tax rate

Oct 2010 - UK financial leaders say they want to be ethical

July 2010: TJN submission to the IASB

June 2010 - Topsy-Turvy: KPMG tops corporate responsibility list

June 2010 - Corporate tax and the common good

June 2010: Christian Aid surveys top multinationals

May 2010. See Prem Sikka's paper Smoke and Mirrors: Corporate Social Responsibility and Tax Avoidance, Essex University, April 2010. See a brief summary here.

Update: May 2010: See this example, entitled "Transparently Dishonest," of an accountancy firm, PWC in this case, working directly against the interests of corporate reponsibility in the tax area, in this 2006 article by CTJ's Bob McIntyre.