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IS CORPORATE TAXATION PRACTICE A CSR ISSUE?

IS CORPORATE TAXATION PRACTICE A CSR ISSUE?. Prem Sikka Centre for Global Accountability University of Essex (prems@essex.ac.uk) Association for Accountancy & Business Affairs ( www.aabaglobal.org ) ESRC Research Seminar Series York Management School, 25 March 2009.

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IS CORPORATE TAXATION PRACTICE A CSR ISSUE?

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  1. IS CORPORATE TAXATION PRACTICE A CSR ISSUE? Prem Sikka Centre for Global Accountability University of Essex (prems@essex.ac.uk) Association for Accountancy & Business Affairs (www.aabaglobal.org) ESRC Research Seminar Series York Management School, 25 March 2009

  2. Corporate Social Responsibility and Tax Avoidance • Corporate Social Responsibility (CSR): A Relationship between power, responsibility and accountability. • Variety of theoretically grounded approaches. Most approaches suggest that Corporations - • should make a positive impact on society and the environment • take responsibility for the impact of their conduct on a variety of stakeholders. • behave ethically, fairly, improve economic/social development, quality of life. • CSR not constrained by legal requirements

  3. Corporate Social Responsibility and Tax Avoidance • Some Problems: • Can companies ever be socially responsible? • Shareholder v Social interests • Legal requirement to prioritise shareholder interests • Directors owe a ‘duty of care’ to the company. Stakeholders? • Markets exert pressures to increase profits • Executive rewards related to published profits • Regulatory capture or dilution? • Power and politics of accountability, responsibility, enforcement? • Globalisation: Corporate Power and the Race-to-the-Bottom.

  4. Corporate Social Responsibility and Tax Avoidance • Companies attempt to build CSR legitimacy • Corporate Philanthropy: McDonalds • Sponsorship of Awards: Reebok Human Rights Awards • Cause related marketing: Tesco and school computers • Social and Environmental Reporting • Eco Efficiency • Community Investment; Ethical Investment • Codes of Conduct: Voluntary? • Can they buck the systemic requirement to increase shareholder wealth? • How about paying taxes?

  5. Corporate Social Responsibility and Tax Avoidance • Tax Revenues are essential for functioning of the state and society • Redistribute wealth • Alleviate Poverty • Investment in social infrastructure • Finance public goods: healthcare, education, transport • Support Capitalism • Social development

  6. Corporate Social Responsibility and Tax Avoidance • Organised Tax Avoidance is widespread • US loses over $345 billion of tax revenues each year. • 1998-2005: 66% of the domestic and 68% of foreign corporations did not pay any federal corporate taxes • 1996-2000: 61% percent of the US domiciled corporations paid no federal income taxes • 1996-2000: 38% of the large companies paid no taxes during the five-year period. • Major US companies also avoid paying state taxes

  7. Corporate Social Responsibility and Tax Avoidance • UK loses between £97 billion - £150 billion of tax revenues each year. • NAO Study: Of the 700 biggest companies - 220 companies paid no corporation tax in 2005-2006. • A further 210 paid less than £10m each in 2005-2006 • Almost 70 per cent of all UK corporation tax in the 2005/6 financial year was paid by just 50 companies. • ONS – Massive icnrease inc orporate profits. • Corporate tax take is around 3.2% of the UK GDP. • Tax burden shifted to labour and consumption and savings.

  8. Corporate Social Responsibility and Tax Avoidance • Developing Countries- illicitoutflows to developed countries - $1 trillion • Tax revenues lost - $500 billion each year? • Third World annual debt repayments = $340 billion to service a $2.2 trillion debt. • The Millennium Development Goals (MDGs): targets (by 2015) to eradicate extreme poverty and hunger, achieve universal primary education, environmental stability, reduce child mortality, improve health, gender equality and combat diseases. • Overseas Development Aid is about $100 billion. • G8 do not force western companies to pay their taxes • Crackdown on tax havens. Agreement with OECD countries – no mention of developing countries.

  9. Corporate Social Responsibility and Tax Avoidance • Vehicles/Tactics for Tax Avoidance/Evasion • Complex Corporate Structures: Enron, WorldCom • Tax Holidays: Footloose capital. • Power of Corporations: Tax Sweeteners • Income Shifting: Tax Havens • Transfer (Mis)Pricing: Royalties, interest payments, management charges, costs, logos, trademarks. 60% of the global trade in internal to corporations. • Re-invoicing • Special Purpose Vehicles • Charitable Trusts • Shell Companies

  10. Corporate Social Responsibility and Tax Avoidance • Del Monte Fresh Produce UK, Chiquita UK and Dole’s UK business, JP Fresh, report combined sales in the UK of over £400m in their 2006 annual accounts. • Combined UK tax = £128,000. • Transfer Pricing - £1 of Sale split as follows: • Home country 13 p= 1.5p labour+10.5 p costs+1p profit • 8p to Cayman for use of the ‘purchasing network’; • 8p to Luxembourg for use of ‘financial services’; • 4p to Ireland for ‘use of the brand’; • 4p to the Isle of Man for insurance; • 6p to Jersey for management services; • 17p to Bermuda for ‘use of the distribution network’; • Retailer margin 39 p; • Corporate profit in the UK = 1p; Tax havens 47p.

  11. Corporate Social Responsibility and Tax Avoidance • The Problem: • Bakan (2004) argues that a • “corporation can neither recognize nor act upon moral reasons to refrain from harming others. Nothing in its legal makeup limits what it can do to others in pursuit of selfish ends, and it is compelled to cause harm when the benefits of doing so outweigh the costs. Only pragmatic concern for its own interests and the laws of the land constrain the corporation’s predatory instincts, and often that is not enough to stop it from destroying lives, damaging communities, and endangering the planet as a whole” (p. 60).

  12. Corporate Social Responsibility and Tax Avoidance • The role of the state? • Neoliberal state sponsor of capitalism • Globalisation is a key factor • Reliance of voluntary codes of governance • The role of accounting technologies. • Tax is portrayed as a ‘cost’ rather than return on ‘social capital’. • Offshore world and its opaqueness. • Capital can make soothing commitments but has no commitment to any product, place or country.

  13. Corporate Social Responsibility and Tax Avoidance • Tax Avoidance/Evasion Industry • Accountants; Lawyers; Finance Industry • A partner from a medium-size firm: “No matter what legislation is in place, the accountants and lawyers will find a way around it. Rules are rules, but rules are meant to be broken” (The Guardian, 18 March 2004). • No consideration of social consequences • Tax Avoidance schemes not disclosed to the public • Litigation can last for years. Questions about quality of earnings • Poor public accountability • Limits to what the law can achieve.

  14. Corporate Social Responsibility and Tax Avoidance • Enron Code of Ethics: “officers and employees of the company are responsible for conducting the business affairs of the Company in accordance with all applicable laws and in a moral and honest manner. … Employees of Enron Corp, its subsidiaries and its affiliated companies [collectively the Company] are charged with conducting their business affairs in accordance with the highest ethical standards. … moral and legal obligations will be fulfilled openly, promptly and in a manner which will reflect pride on the Company’s name” . • But rampant tax avoidance

  15. Corporate Social Responsibility and Tax Avoidance • UBS: “The ultimate purpose of all UBS activities is to increase client satisfaction … UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards” (p 57) … UBS takes its responsibility to preserve the integrity of the financial system … The firm has developed extensive policies intended to prevent, detect and report money laundering, corruption (p. 62).

  16. Corporate Social Responsibility and Tax Avoidance • In in February 2009, UBS was fined $780 million by the US authorities for “helping US taxpayers hide their bank accounts and taxable income from tax authorities”. • … helped United States taxpayers open new UBS accounts in the names of nominees and/or sham entities • … bankers routinely traveled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade United States income taxes.

  17. Corporate Social Responsibility and Tax Avoidance • KPMG: “quality and integrity of our people and our work is paramount to everything we do at KPMG. Above all, we recognize that we operate in the public interest and we must be open and transparent in our operations and policies … We believe quality and integrity start with culture. That’s why we place so much emphasis on bringing our shared values alive within member firms … Independence, integrity, ethics, and objectivity—these are all vital to the way we work … It is the responsibility of each person working within a member firm to maintain their integrity and objectivity … Their actions are guided and monitored through a set of consistent standards, processes and procedures …”

  18. Corporate Social Responsibility and Tax Avoidance • KPMG fined $456 million for “criminal wrongdoing” • … senior tax professionals urged the firm to knowingly, purposefully, and willfully violate the federal tax shelter law. • “KPMG tax professionals calculated the penalties for noncompliance - “Based upon our analysis of the applicable penalty sections, we conclude that the penalties would be no greater than $14,000 per $100,000 in KPMG fees. ... For example, our average …deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000.” • KPMG part of an established network for facilitating tax avoidance and evasion.

  19. Corporate Social Responsibility and Tax Avoidance • Diageo Plc: “businesses have realised that there are other occupants of their world – their broader stakeholders. …This dependency on our stakeholders, communities and environment means we have a strong interest in their future. We benefit from working with our stakeholders, from the prosperity of our communities and from the stability of the environment. Contributing to these ends is an investment in our own continuing success and the sustainability of our business. … responsibility isn’t merely a bolt-on function, but an attitude which we bring to the way we do business” . • Diageo CSR report mentions taxation issues , but …

  20. Corporate Social Responsibility and Tax Avoidance • Diageo average annual profits of £2 billion. • Diageo plc, UK registered company, paid around £43 million a year, or around 2% of its overall profits in UK corporation tax. • The company had used a variety of transfer pricing practices to transfer brands, including Johnnie Walker, J&B and Gilbey's gin, and profits to a subsidiary in the Netherlands where profits accrued virtually tax-free

  21. Corporate Social Responsibility and Tax Avoidance • WPP: Its 100 page annual corporate responsibility report (WPP, 2008) acknowledges responsibility to employees, stakeholders and communities. • The company publicises its philanthropy and its efforts to promote healthcare and eradicate poverty in Africa, • Silence on its tax policies.

  22. Corporate Social Responsibility and Tax Avoidance • WPP: company threatened to move its headquarters from the UK to Ireland, a place with lower corporation tax rate and also offers considerable tax exemptions. • Chief executive, with a remuneration of £21 million, said, “We are looking at it [moving the tax domicile]. It is not about non-doms or capital gains tax it's about some arcane proposals regarding the tax deductions for foreign-controlled corporations” • “WPP average UK tax charge over the last six years, taking into account claimed reliefs, has been less than £5m, against global profits averaging £500m a year”. • Company used transfer pricing and offshore entities to reduce its tax liabilities.

  23. Corporate Social Responsibility and Tax Avoidance • Deutsche Bank: “We are dedicated to transparency in corporate governance and communication. … For us, Corporate Social Responsibility (CSR) means acting responsibly towards shareholders and customers as well as towards our employees and society as a whole. Such a holistic approach is the only way to ensure that Deutsche Bank as a company is successful in the long run”

  24. Corporate Social Responsibility and Tax Avoidance • Deutsche Bank – key player in Enron’s tax avoidance schemes. • “Deutsche Bank … provided billions of dollars in lending critical to transactions which the banks knew were tax motivated, involved little or no credit risk, and facilitated potentially abusive or illegal tax shelters” • . In an internal memo one official wrote that in “this transaction, reputation risk is tax related and we have been asked by the Tax Department not to create an audit trail in respect of the Bank’s tax affairs …” • Possibly facing a US fine of $1 billion.

  25. Corporate Social Responsibility and Tax Avoidance • Ernst & Young: • “we stand for People who demonstrate integrity, respect … People who build relationships, based on doing the right thing … We comply with laws, regulations and standards that apply to us in our professional conduct … We address questions of ethics and consult appropriately to help resolve them. We do not hide from or ignore issues … recognize the need to be honest in our competitive behaviour. We reject unethical or illegal business practices in all circumstances … We employ professional scepticism”.

  26. Corporate Social Responsibility and Tax Avoidance • In July 2003, Ernst & Young fined $15 million for failure to properly register tax shelters in 1999. • 2003: US Senate Committee found that the firm “sold generic tax products to multiple clients despite evidence that some … were potentially abusive or illegal tax shelters” . • 72 page charge sheet against “four current and former partners of Big-Four accounting firm Ernst & Young ("E&Y") with tax fraud conspiracy and related crimes arising out of tax shelters promoted by E&Y.

  27. Corporate Social Responsibility and Tax Avoidance • Wal-mart: “we believe in a philosophy of operating globally and giving back locally. We know we can make the greatest impact on our communities by supporting causes that are important to our customers right in their own neighborhoods. We’re proud to be a "store of the community" for all of the communities we serve by helping to provide financial and volunteer support to more than 100,000 charitable and community-focused organizations, and by using our locations to provide opportunities for our customers and associates to give back

  28. Corporate Social Responsibility and Tax Avoidance • Wal-Mart – with advice from Ernst Young developed elaborate structures to avoid taxes • REITs- paid rent to itself. • Judge said, “there is no evidence that the rent transaction, taken as a whole, has any real economic substance, other than reducing Wal-Mart's taxes”

  29. Corporate Social Responsibility and Tax Avoidance • Barclays Bank - “committed to ethical practices, upholding human rights and supporting the communities where Barclays has a presence. We aim to manage Barclays indirect economic, ethical, social and environmental impacts too. • “Barclays defines human rights as basic entitlements which form the foundation for freedom, justice and peace. As a global business we have clear responsibilities to support governments and civil society organisations in upholding human rights principles wherever we have a presence.

  30. Corporate Social Responsibility and Tax Avoidance • Barclays Bank: history of being involved in tax avoidance schemes. • For example, the bank played in key role in helping Enron to avoid taxes • Using trusts to avoid VAT • £1 billion alleged tax avoidance – recently reported in The Guardian.

  31. Corporate Social Responsibility and Tax Avoidance • What we could do with tax revenues? • 969 million people live on less that $1 a day • 162 million people - “the ultra poor"—survive on less than 50 cents a day • About one-half of the world's people live on less than U.S. $2 a day • 20 percent of the world’s people lack safe water for drinking, personal hygiene and domestic use • Some 1.6 billion people, about one quarter of the world’s population, have no access to electricity. 2 billion more have only limited access.

  32. Corporate Social Responsibility and Tax Avoidance • Worldwide 774 million adults are illiterate • 64% are women • Low levels of achievement often related to: • socio-economic background; rural residence; lack of books; insufficient instructional time; inadequate physical and material resources • Pupil/teacher ratio of 100 are not uncommon. • 34 out of 84 countries decreased the share of GNP to education since 1999 • 24 out of 105 countries allocate less than 3% of GNP to education.

  33. Corporate Social Responsibility and Tax Avoidance • About 16,000 young children die every day from malnutrition - a yearly toll of almost 6 million, about the same as the population of Denmark. • 640 million children lack adequate shelter • 140 million children have never been to school • 2003: 500,000 children (under 15) died of Aids • 2.1 million children under 15 were living with HIV/Aids, mostly infected during pregnancy, birth or through breast-feeding • About 30% of young children in low- and middle-income countries are underweight – mainly in South Asia and sub-Saharan Africa.

  34. Corporate Social Responsibility and Tax Avoidance • Nearly 50% of all young children in the developing world do not receive enough iron in their diets, endangering their mental and physical health. • 10 million children die before their fifth birthday. • Infant deaths per 1,000 births – UK, 5.0; Germany, 4.1;Nigeria, 95.5; • Average life expectancy: • Swaziland is 33 years; • Botswana, 34 years; • Lesotho, 36 years

  35. Corporate Social Responsibility and Tax Avoidance • 2006: Some 2.6 billion people worldwide do not have access to proper toilet facilities. • 1.8 million people die every year from diarrheal diseases. • 90% of the fatalities are children under the age of five. • $10 billion a year could halve the proportion of people without basic toilet facilities by 2015. • This investment would net an estimated $84 billion in savings from improved public health and better living conditions

  36. Corporate Social Responsibility and Tax Avoidance • Every $100 million could fund • 3.3–10 million insecticide-treated bednets; or • treatment for over 600,000 people for one year for HIV/AIDS; or • 50-100 million dosages of treatments for malaria; or • full immunizations for 4 million children; or • water connections for some 250,000 households; or • 240 kilometres of two-lane paved road

  37. Corporate Social Responsibility and Tax Avoidance • NEARER HOME: UK • 12.7 million people live in poverty • 2006: 2.8 million children live in poverty. 3.8 million when housing costs are taken into account • Around 40,000 underweight babies (less than 2.5 kg) are born every year, almost the worst rate in the western world • Bottom of a league table or child well-being across 21 industrialised countries. • Due to poor housing and living conditions, unlike any other EU country, Tuberculosis (abbreviated as TB) is on the increase in the UK. In 2006, there were 8,171 cases compared to 5,798 in 1992

  38. Corporate Social Responsibility and Tax Avoidance • UK state pension ‘the lowest level in Europe; - equivalent to just 17% of average earnings, and well below the average of 57%. • About 30,000 pensioners die each winter from cold. • Widening income and wealth inequalities • the state manages poverty through tax/pension credits, but tax base is shrinking • tax revenues are crucial but companies avoiding taxes

  39. Corporate Social Responsibility and Tax Avoidance • Tax Avoidance • A challenge to corporate legitimacy. • Penalises the poor • Deprives developing countries of crucial developmental resources. • Thwarts the objectives assigned to elected governments. A threat to democracy. • A Race-to-the-Bottom. • 41% of all UK tax legislation comprises anti-avoidance measures designed to tackle tax avoidance schemes

  40. Corporate Social Responsibility and Tax Avoidance • Research Opportunities: • CSR and Tax – It has numbers!! • Scope for innovative theorising • Empirical work, case studies, surveys, interviews • New forms of financial reporting • The role of the state • Understand globalisation • Improve quality of life, alleviate poverty. • Improve Education • Can CSR change the nature of corporations? • There are structural limits to CSR.

  41. IS CORPORATE TAXATION PRACTICE A CSR ISSUE? THANK YOU

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