A Brief on Tax and Corporate Responsibility

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A brief on tax and corporate responsibility

June 2012


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Table of Contents

1. Introduction 3

2. Understanding tax as a CR issue 3

3. The business perspective 5

4. Principles for Corporate Responsibility on Tax 6

5. How to work responsibly with tax? 8

6. Summing up 10

Sources 11

This brief has been prepared by GLOBAL CSR for IBIS as an input for the discussion at the conference Tax and Corpo-rate Responsibility An Emerging Agenda in Copenhagen, June 21st, 2012


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1. IntroductionRevenues from taxes constitute the backbone for nancing education, health and socialdevelopment in any country. Establishing a stable tax base is the only sustainable long termnancing mechanism for funding development in rich and poor countries. Particularly in re-source rich economic developing countries the corporate tax base has a huge potential for

nancing development.

This brief explores the issue of tax from a corporate responsibility1 (CR) angle. It argues thattax can and should be understood as a CR issue; however no international norm has yetemerged to give corporations adequate guidance on what responsible tax behaviour entails.Drawing on recent and crucial developments within the CR agenda, this brief contributes tothe ongoing discussions on tax and CR.

The rst section outlines how tax can be understood in the context of CR. The second sectiondeals with the corporate perspective, and describes the possible business case in viewing tax

as a CR issue. In lack of international norms on responsible tax behaviour, section three pro-poses possible principles for responsible tax behaviour developed by IBIS and Christian Aid.In other words, this section covers what responsible tax behaviour could entail. The last sec-tion seeks to outline how corporations can work responsibly with tax, and suggests relevantprocesses based on the UN Guiding Principles on Business and Human Rights2 (UNGPs) tobring the agenda from principles to practice.

2. Understanding tax as a CR issueIn order to discuss how and where tax ts in the CR agenda, CR needs dening. A challengefor the CR discourse is the many connotations that the concept may carry. Dening CRmay vary from country to country and from corporation to corporation. However, a grow-ing convergence in dening the concept has been emerging over the past decade. The UNGlobal Compact3, a strategic policy initiative launched in the year 2000, has enabled suchconvergence. Today the UN Global Compact is the worlds largest CR initiative and has ineffect helped shape the agenda and how we understand CR across countries, sectors andcorporations.

For a long time the predominant understanding of CR was centred on the voluntary actionsof corporations only. Such denition led to a strong focus on donations and philanthropy.Dening CR as only the voluntary activities that corporations undertake would also lead toa situation where tax as a CR issue would be ill-tted, since corporate tax payments are well

regulated in most jurisdictions and would as such fall outside the denition of the voluntaryCR. Over the years the argument evolved that the limitation of CR to voluntary actions onlywould poorly reect the actual issues that are being dealt with under CR; i.e. human rights,including core labour rights, the environment and anti-corruption. These issues are all cov-ered by law in most jurisdictions and would, if one was to stick to the voluntary understand-ing of CR, then be considered non-CR issues - similar to tax payments.

Globalisation and companies vast amount of transnational relations combined with the ex-ponential evolution of information- and communication technologies created a need to es-tablish a global reference point for the development of CR; a global management discourse.

Which responsibilities should corporations address in relation to the societies that enablethem to operate and create a prot? An expectation has emerged that corporations con-sider and improve their impacts on sustainable development; social, environmental andeconomic sustainability.

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The internationally agreed principles for sustainable development have proven idealfor such convergence and constitute the backbone of CR today. These principles arealso reected in the UN Global Compact. Six of the ten Global Compact principles re -late to companies social responsibilities, three principles to companies environmentalresponsibilities and one - UN Global Compact principle 10 to economic responsi-bilities. These principles form the core of CR; principles that cannot be disregarded bycorporations.

Corporations can however both contribute to the realisation and disregard of these in-ternational principles for sustainable development. Thus the responsible company canno longer choose between more or less arbitrary contributions to the realisation of theprinciples alone; they need also to avoid adverse impacts on the principles. Today, CRis understood by most as a double-sided concept, which covers how corporations takeresponsibility for contributing to, while not becoming a barrier for, social, environmen-tal and economic sustainable development4.

In the revised EU strategy on CR from October 2011, the EU Commission dened CRas the responsibility of enterprises for their impact on society5. Following this holisticdenition it is clear that the issue of tax no longer can be overlooked when debat-ing CR, as tax payment constitutes one of corporations largest economic impacts onsociety. Indeed, the EU Commission further explicitly encourages enterprises to worktowards the implementation of three principles of good tax governance transparency,exchange of information and fair tax competition6. The commission nally encouragesenterprises to disclose information related to the implementation of good tax govern-ance standards7.

Likewise, the OECD Guidelines for Multinational Enterprises states that business shouldrefrain from seeking or accepting exemptions not contemplated in the statutory orregulatory framework related to human rights, environmental, health, safety, labour,taxation, nancial incentives, or other issues8. The OECD in other words links the issueof tax to areas that were part of the CR agenda for some time. Several bodies9 withinthe OECD are actively working on the issue of responsible tax behaviour. These bod-ies have established some guidance on the issue, such as the Transfer Pricing Guide-lines for Multinational Enterprises and Tax Administrations10 and the OECD Model TaxConvention11.

It is obvious that taxation is considered and should be considered a crucial issue foreconomic sustainability. However, international norms for tax payments as those wesee emerge in OECD did not reach a global level yet. For the same reason tax cannotyet be considered a core CR issue, as is the case with human rights, including labourrights, environmental principles and anti-corruption. International norms to guide cor-porations on tax were not yet established.

The UN Global Compact principles reect the international principles that have reachedglobal support. In relation to economic sustainability this so far only encompassesprinciples on anti-corruption. However, looking ahead it likely that economic sustain-

ability will not only be made up by anti-corruption. Anti-corruption may well be joinedby principles on tax. Also international principles on anti-trust or anti-competition maybe established.

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The amount of guidance available on responsible tax issues and the number of bodies deal-ing with the issue is growing and this indicates development similar to the establishmentof anti-corruption as a core CR issue. The tenth UN Global Compact Principle on anti-cor-ruption was only added in 2004 four years after the founding of the Global Compact. Thishappened after the adoption of the United Nations Convention against Corruption

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Merida, Mexico in December 2003. The OECD Convention on Combating Bribery of ForeignPublic Ofcials in International Business Transactions13 and not least the US Foreign CorruptPractices Act14 paved the way for the adoption of the UN Convention.

The issue of responsible tax behaviour may undergo a similar stepwise integration into inter-national frameworks on CR and as illustrated with the EU and OECD examples, such devel-opment is underway. Until norms on tax are established at the global levels tax will howeverremain a secondary or non-core - CR issue; ranging on par with issues such as anti-trustand animal welfare.

Nevertheless, tax cannot be ignored as a CR issue15. It is obvious that tax is important foreconomic sustainability and furthermore corporate risk management might drive forth theagenda. It will be interesting to see to what degree corporations will seek to inuence theestablishment of global norms on corporate tax, considering corporations own interests inensuring a global level playing eld on this issue.

3. The business perspectiveCR is increasingly being fully integrated into business operations; the concept is no longeran add-on, it has become a way of doing business. Following the call from the UN GlobalCompact, corporations seek to incorporate their contributions to sustainable development

into their core business strategies, while ensuring that no functions have adverse impacts.

Paying taxes have repeatedly been highlighted by corporations as a key contribution tosocieties; however, it has seldom been recognised as part of CR. Indeed most corporationswould simply view payment of taxes as a cost issue and thus seek to reduce such cost withinthe boundaries of national laws. For example, Clive Baxter, head of Maersks tax department,recently stated that while he sees tax as a fair and necessary cost, it remains to be some-thing which needs to be managed to reduce costs and stay competitive16.

In this mainstream corporate understanding of tax, compliance with legislation is the sole re-

quirement or expectation to be met when paying taxes. Thus, aggressive tax planning will beregarded as unproblematic; insofar that tax planning observes black-letter law. Considera-tions as to how tax planning impacts economic sustainability not of the corporation butof the societies in which they operate, are less relevant.

Using tax havens, tax breaks, inter-corporate price settings i.e. transfer pricing and arange of other instruments to minimise the cost of tax may well lead to undermining theability of national and local authorities to keep the needed supporting infrastructure work-ing; and to ensure its citizens adequate protection and fullment of their basic human rights.Thus, a divide appears between the letter of the law and the spirit of the law.

The corporate understanding and treatment of tax may be changing following the changein how CR is perceived. As tax gains recognition as a CR issue it will automatically appear oncorporate risk management agendas.

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This tendency is amplied by the increasing amount of NGOs that are looking into corporatetax behaviour; thereby establishing the link between tax and CR17. Several corporate actors18are already highlighting the link between tax policy and risk management. Increased cus-tomer and media awareness concerning corporate tax policy has raised reputational risksand indirectly created unforeseen nancial risks for businesses.

In addition there is a more systemic nancial risk connected to irresponsible tax behaviour,as argued in a recent article by Corporate Citizenship: Clarity around tax is not just aboutreputation; there is a wider business case too. Reducing long-term uncertainties, avoidingsudden changes in regulation and minimising costs from legal challenge and orderly collec-tion of taxes make for a better company and a stronger strategy19. Businesses that are in-terested in long-term stability and growth have an interest in contributing to the economicsustainability of its markets and production sites and in creating good relations with scalauthorities. Both considerations will reect on investors disposition to invest in a corpora-tion. Conservative, risk-averse investors look for stable investments and are increasingly

showing concern about CR, including responsible tax behaviour20.

Corporations indeed have an interest in ensuring that any regulation that will limit the abilityof corporations to fully exploit loop-holes and opportunities in tax law are adopted glob-ally. As tax represents a cost for corporations and their shareholders; any cost will inuencecorporations ability to compete internationally. Whereas basic norms for tax payments mayevolve as soft law being applied only by good corporate citizens they should have a globalreach and recognition; similar to already established international norms for good corporatecitizenship; i.e. human rights, including labour rights, environmental and anti-corruptionnorms. Therefore, in order to maintain global competiveness it would be recommendable

that corporations actively engage in establishing such norms internationally, beyond stateand regional restrictions.

4. Principles for Corporate Responsibility on TaxResponsible tax behaviour is un-questionably an issue on the rise. Currently, however, thereis no general consensus on what actually constitutes responsible corporate tax behaviour.In this section IBIS and Christian Aid present principles for Corporate Responsibility on Tax.

Similarly, corporations would appreciate to know not only what they are supposed to deal

with, but also how they are expected to deal with this issue. Although some of the proposedprinciples for tax contain process expectations the how question will require further delib-erations. Section four suggests that the United Nations Guiding Principles on Business andHuman Rights (UNGPs) can provide guidance on how corporations could be expected tomanage any norms that would be agreed content wise. The global recognition of the UNGPsas the authoritative global reference point for managing adverse impacts on sustainabledevelopment would enable alignment of corporate management systems in dealing withadverse impacts; i.e. compliance with international principles for sustainable development.

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Table 1. Draft Principles for Corporate Responsibility on Tax, IBIS and Christian Aid,2012

These principles are meant as a guide that can help companies behave responsible in thecomplex area of tax payments. The aim is to further discuss and develop the principles in or-

der to develop a set of principles, which can be incorporated into standards and regulationsfor corporate responsibility.1. SubstanceCompanies tax payments should reect the location of business activities: Taxes should bepaid and reect where the companies business activities take place.

2. StructureA company should not misuse tax havens or opaque company structures for tax benets:Subsidiaries in tax havens or secrete jurisdictions should not be used to obtain tax benets

or other economic advantages. A companys structure and benecial owners should be dis-closed to the public.3. PowerA company should not use its superior bargaining power to obtain unfair and excessive taxbenets when negotiating contracts with a host country: Contracts between a company anda host country should be balanced and fair for both parties and excessive tax exemptionsand tax holidays should be avoided. Voluntary tax payments should not be used as leverageto gain advantages in other areas.

4. TransparencyA company should be transparent about its tax policy: Understandable, timely and transpar-ent communication about a companys tax policy and tax payments should be put forwardregularly.5. AccountabilityCompanies should at all times comply with the national laws of the jurisdictions in whichthey operate: Compliance means respecting not only the letter of the law, but also the spiritof the law. Where states have weak or poorly constructed scal regulation and/or institutionsthis should not be used to gain tax advantages that were not intended by the law.

6. Financial reportingA company should disclose its nancial reporting for all countries in which it has a perma-nent establishment: Details of tax payments, prots, turnover, intra-company nancing andtrading, number of employees and other relevant data should be disclosed regularly.

7. GovernanceA companys board is responsible for the companys tax strategy and should therefore takean active role in developing the strategy: A companys tax strategy is essential to the com-panys soundness and shall reect the values and ethics of the company, and is therefore ofgreat interest to the shareholders, whom the board is accountable to.

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5. How to work responsibly with tax?The United Nations Guiding Principles on Business and Human Rights (the UNGPs) wereendorsed unanimously by the UN Human Rights Council in June 2011. They represent therst corporate governance expectation from the UN towards all business enterprises in theworld. They explicitly put forward minimum expectations for managing adverse impacts on

social sustainability; i.e. the internationally agreed principles on human rights including corelabour rights. The UNGPs do not consider how businesses manage contributions to sustain-able development. As such the UNGPs provide authoritative guidance on how to ensure thatbusinesses do not become a barrier to sustainable social development; i.e. one side of thedouble sided concept of CR. The UNGPs make explicit that no matter how much a corpora-tion contributes to some principles for sustainable development it cannot be excused forhaving adverse impacts on other principles.

The UNGPs structure has been used by the EU21 and the OECD22 to describe how corpora-tions should work with the compliance part of CR in general; i.e. covering all three bottom

lines. As the most widely recognised governance structure for addressing all aspects of CRthis section seeks to apply the UNGPs to the issue of tax; i.e. suggesting how the UNGPs canbe applied to any emerging international norm regarding tax payments.

Several policy developers have put forth the potential of using existing CR approaches toframe responsible tax behaviour. Applying existing approaches not only lowers learning bar-riers, but also creates coherence for various existing responsibility mechanisms in the com-pany, thereby facilitating easy implementation processes and strengthening the understand-ing of the organisations responsibility measures.

The UNGPs are designed to be universal in nature, while recognising contextual differencesbetween countries, sectors and companies. Thus, while being applicable everywhere, theyinclude exibility vis vis the context of the given corporation. Thus, they can be applied inall countries, sectors and companies - providing a solid framework for managing an emerg-ing norm on tax responsibility.

A use of the UNGPs on all three bottom lines including the issue of tax will increase coher-ence of a corporations CR approach in general. The UNGPs way expects corporations tohave a policy commitment on tax, to perform due diligence on its own activities as well as inbusiness relationships in order to identify, prevent, mitigate and account for irresponsible taxbehaviour and lastly, to ensure the remediation of adverse impacts on tax norms. The follow-

ing sections (1-3) will provide further details on each of the three expectations.

5.1.PolicyHaving a policy statement in place is necessary to formalise the tax policy and ensure coher-ence throughout the different business units. It enables transparency and should provideguidance for tax reporting. The policy document should be approved at the most seniorlevel, informed by relevant internal and/or external expertise on responsible tax payments,stipulate the expectations for tax payments throughout the various parts of the businessoperations, be publicly available, becommunicated internally and externally to all relevant parties and be reected in operational

policies and processes, enabling the policy to be embedded throughout the corporationsglobal operations.

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The organisation Corporate Citizenship is one of the actors that underline the growing ex-pectation for a clear corporate position on the tax policy of a corporation23. While more andmore actors are demanding transparency, opaque tax structures and undisclosed tax policiesare met with increasing critique.

5.2.Due diligence processThe UNGPs outline the core elements that need to be part of a human rights due diligenceprocess. These elements, by their universal character, are well suited to also describe a taxdue diligence processes. Worth underlining is the essential nature of upholding transpar-ency also in the due diligence process.

In order to prevent and mitigate adverse impacts on internationally agreed tax norms, thendings of the due diligence process should be integrated throughout the corporation. This

can be done in many ways, but a key factor is that the responsibility for addressing adversetax impacts is assigned to the appropriate actor in the organisation and that sufcient re-sources are set aside to implement the determined policy (see also UNGPs 19).

The due diligence process will vary in complexity according to contextual conditions,such as the size of the company or the place and nature of operations. It is importantthat the processes are on-going and dealt with systematically (see also UNGPs 17).

Firstly, a due diligence process should identify and assess both actual and poten-

tial adverse impacts on internationally agreed tax norms. The assessments shoulddraw on internal and/or internal tax expertise, and involve consultation with rel-evant stakeholders (see also UNGPs 18). This may, for example, include national taxagencies and/or civil society tax experts. Several actors underline the importance ofcollaboration between corporations and tax agencies, and the potential inuencecorporate lobbying can have on legislation and authority practices itself, e.g. throughtax negotiations24.

In order to verify whether adverse impacts on internationally agreed tax norms arebeing are being addressed, corporations should track the effectiveness of responses.Tracking should be based on both qualitative and quantitative indicators and feed-back from relevant stakeholders (see UNGPs 20).

The corporations tax performance nally needs to be communicated externally, to

reafrm the corporations position and inform stakeholders as well as shareholdersof how the corporation is performing. The communication should be made in a formthat is accessible to relevant stakeholders, and upheld in a frequent manner. Whilethe corporation itself may choose what content that is disclosed, the point of depar-ture should be that the information provided is sufcient to assess the performanceof the corporation (see UNGPs 21). Reporting on adverse impacts on internationaltax norms could for example be included in the corporations annual report or CRreport. As mentioned the EU is currently calling for greater transparency on tax is-sues25.

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5.3.Access to remedyThere is seldom a direct individual victim for harmful tax practices by corporations; insteadit is society that collectively loses out. Where corporations identify that they have caused orcontributed to adverse impacts on international tax norms, they should nevertheless providefor or cooperate in their remediation through legitimate processes. This expectation would,

as a minimum, include informing country authorities on identied adverse impacts.

6. Summing upThis brief has explored corporate tax from a CR angle. Conceptually, it is becoming moreand more difcult to argue that tax should not be part of the CR agenda. As a concept CRis increasingly being understood as corporations impact on society, and tax payments arehard to ignore when looking at a corporation from this angle. However, no global normhas yet emerged to give corporations adequate guidance on what responsible tax behav-iour entails. As such tax is yet to become a globally accepted core element of CR, although

recent developments among major political actors point in this direction. In lack of glob-ally accepted norms IBIS and Christian Aid is suggesting principles on what responsible taxbehaviour looks like. Such principles as well as potentially forthcoming international normscan be implemented by corporations in line with how other CR issues e.g. human rights arebeing managed. Such an approach would further a holistic and coherent development andintegration of the CR agenda including the issue of responsible tax behaviour and help cre-ate a global level playing eld of value to corporations as well as societies.

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Sources

1. In this brief the term corporate responsibility is used interchangeably with the term corporate social responsibility (CSR).

2. UN Human Rights Council (2011): The UN Guiding Principles on Business and Human Rights, http://www.ohchr.org/Documents/Publi-cations/GuidingPrinciplesBusinessHR_EN.pdf

3. http://www.unglobalcompact.org/

4.The GLOBAL CSR denition of CSR, www.global-csr.com

5. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 6, section 3.1. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

6. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 7, section 3.3. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

7. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 11, section 4.4.3. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

8. The OECD (2011), Guidelines for Multinational Enterprises: p. 19. http://www.oecd.org/dataoecd/43/29/48004323.pdf

9. E.g. The Global Forum on Transparency and Exchange of Information for tax purposes, The Centre for Tax Policy and Administrationand the Forum on Harmful Tax Practices.

10. OECD (2010): Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, http://www.oecd.org/document/24/0,3746,en_2649_33753_1915490_1_1_1_1,00.html

11. OECD (2010): Model Tax Convention on Income and on Capital, http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2010_mtc_cond-2010-en

12. UN (2003): Te United Nations Conventions against Corruption, http://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pd

13. OECD (1997): Convention on Combating Bribery o Foreign Public Ofcials in International Business ransactions, http://www.oecd.org/datao-ecd/4/18/38028044.pd

14. United States Congress (1997): US Foreign Corrupt Practices Act, http://www.justice.gov/criminal/fraud/fcpa/

15. KPMG, David Williams (2007): Tax and Corporate Social Responsibility, p. 6. http://www.kpmg.co.uk/pubs/Tax_and_CSR_Final.pdf

16. Maersk Group (2010): Maersk post, February 2012, p. 7

17. E.g. the Tax Justice Network, Christian Aid, ActionAid, Ibis etc.

18. KPMG, David Williams (2007): Tax and Corporate Social Responsibility, http://www.kpmg.co.uk/pubs/Tax_and_CSR_Final.pdf and Price-WaterhouseCoopers (2004): Tax Risk management: http://www.pwc.com/en_GX/gx/tax-management-strategy/pdf/tax-risk-management-guide.pdf

19. Corporate Citizenship (2011): Tax as a Corporate Responsibility Issue. http://www.corporate-citizenship.com/wp-content/uploads/Tax-as-a-Corporate-Responsibility-Issue.pdf

20. Henderson Global Investors (2005): Tax, risk and corporate governance: http://www.eiris.org/blog/why-should-responsible-investors-worry-about-taxation/ ; Eiris (2012): Why should responsible investors worry about taxation? http://www.eiris.org/blog/why-should-re-sponsible-investors-worry-about-taxation/ ; Loughlin Hickey & Patrice Day (2007): What IROs should know about tax, 18th September2007.

21.The European Commission: A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 6, section 3.1. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

22. OECD (2011): The OECD Guidelines for Multinational Enterprises, eg. p. 31. http://www.oecd.org/dataoecd/43/29/48004323.pdf

23. See for example: Corporate Citizenship (2011): Tax as a Corporate Responsibility Issue. http://www.corporate-citizenship.com/wp-content/uploads/Tax-as-a-Corporate-Responsibility-Issue.pdf

24. Action Aid (2011): Tax responsibility - The business case for making tax a corporate responsibility issue, chapter 4.1.2. http://www.actionaid.org.uk/doc_lib/tax_responsibility.pdf; KPMG, David Williams (2007): Tax and Corporate Social Responsibility, http://www.kpmg.co.uk/pubs/Tax_and_CSR_Final.pdf

25. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 7, section 3.3. p. 11, section4.4.3. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

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