Lutz Preuss Senior Lecturer in International Business Policy CSR and Taxation: A Business Ethics Perspective

1. Lutz PreussSenior Lecturer in International Business PolicyCSR and Taxation: A Business Ethics Perspective

2. Issues raised by the papers “Is there any guidance as to when tax avoidance slips into tax evasion? ... [if yes, then] counter ... the Duke of Westminster’s principle ” (Morris, pages 7 and 26) A typical CSR definition: going beyond the law, but how to apply this to taxation? (Frecknall Hughes and Glaister, page 4) Societal discourse: “Increasingly campaigners and pressure groups are sceptical of corporate power and are concerned about the harms that they can inflict on people (Sikka, page 1)

3.   The nature of taxation “taxation within a company ... reflects the wider conflict innate in the role of taxation in society, in terms of any state’s right to take compulsorily a portion of its citizens’ goods, profits, income or gains as taxation” (Frecknall Hughes and Glaister, page 6) Taxation as precondition for being allowed to engage in business; akin to health and safety “If it is assumed that their aim is maximisation of corporate profits, then the directors have a duty to minimise tax.” (Frecknall Hughes and Glaister, page 5) “ ... then the directors have a duty to minimise health and safety expenditure.”

4. Ethical evaluation: Kant the Duke of Westminster’s principle Immanuel Kant (1724-1804), the Categorical Imperative “I ought never to act except in such a way that I could also will that my maxim should become a universal law” operationalisation in two stages through: • a consistency principle: whether the maxim, i.e. the principle upon which a person is to act, can be imagined without contradiction, and • a human dignity principle: whether a moral agent would want to live in the resulting world.

5. Ethical evaluation: Kant human dignity principle “disable democratically elected governments and limit their capacity to alleviate poverty, invest in education, pensions, healthcare, security ...” (Sikka, page 4) consistency principle - Duke of Westminster versus PAYE employee - share incentivised executive versus salaried manager - MNC versus domestic firm or SME = the Duke of Westminster’s principle is likely to violate both

6. Ethical evaluation: Kant The categorical imperative represents “an action as necessary of itself without reference to another end, i.e. as objectively necessary” Humans are capable of determining what a Categorical Imperative is, since we have the “faculty to choose that only which reason independent of inclination recognises as practically necessary” Hence moral value can be ascribed to actions where humans act out of their duty rather than follow their inclinations or where duty coincides with an inclination to undertake the action = ethical evaluation focuses on the motive

7. Ethical evaluation: Kant Tax avoidance is immoral to the extent that the underlying activity was carried out to reduce the company’s tax burden rather than for operational reasons related to the goods or services the company offers Example WalMArt, presiding judge: “there is no evidence that the rent transaction, taken as a whole, has any real economic substance, other than reducing Wal-Mart's taxes” (Sikka, page 21) “Tax is never the driver for any strategic decision, although we try to minimise tax legitimately within a risk adverse environment” (Frecknall Hughes and Glaister, page 21, Respondent 74)

8. Ethical evaluation: Utilitarianism Jeremy Bentham (1748-1832), John Stuart Mill (1806-1873) “Utility, or the Greatest Happiness Principle holds that actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness.” • identify all affected individuals, • (2) measure the amount of utility and disutility an act generates for them and then • (3) select the alternative that creates the greatest utility for the greatest number

9. Ethical evaluation: Utilitarianism Evidence of utilitarian thinking KPMG tax professional: “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” (Sikka, page 13) But: Should include all affected parties

10. Ethical evaluation: Utilitarianism Tax avoidance: Gain in utility • companies with tax management • their directors and shareholders • Offshore Finance Centres: additional income Tax avoidance: Loss in utility • governments and other tax payers • shareholders: reduced transparency, increased risk • competitors • OFCs: dependency effects

11. Ethical evaluation: Utilitarianism = likely outcome: Tax avoidance does not lead to increased utility for the greatest number and hence would be immoral Some evidence: • “There must be some value in good reputation” (Frecknall Hughes and Glaister, page13, Firm E) • “What would happen to the company if one or more of the newspapers became aware of the tax avoidance planning? In addition, prudent tax avoidance planning should always address the question, “what happens if it goes wrong, if the legislation is changed?” (Morris, page 26)

12. Conclusions Overlap between ethics and law only partial • “concern about the language now used to frame the debate on tax avoidance” (Frecknall Hughes and Glaister, page 15) Societal discourse • “the law’s the law ... and if the law is unclear you argue about it” (Frecknall Hughes and Glaister, page 16, Firm E) • “... this blurring of what is acceptable ... there is a lot of use of the moral issue to taint and to make an emotive argument out of some of these issues” (Frecknall Hughes and Glaister, page 16, Firm F)

13. Conclusions Distinction between morality and ethics (Crane and Matten, 2007) • morality: norms, values and beliefs which define right and wrong for an individual or a community  • ethics: concerned with the application of reason to elucidate specific rules and principles Here • individuals may claim that tax avoidance is amoral • but does not mean that ethical discussion in wider society ebbs away • at closer look companies very much try to influence this

14. Conclusions Call for academics from various disciplines to “expand the scope of the social responsibility literature to encompass taxation issues” (Sikka, page 2) • “CSR literature is self-congratulatory and lauds modest corporate achievements” (Sikka, page 26); consequences of tax avoidance may well wipe out benefits from corporate investment in CSR • going beyond the law in taxation? (Frecknall Hughes and Glaister, page 4), need for a more robust definition of CSR