#TaxResponsibility

Tax havens, COVID-19 and sustainability

By Sara Jespersen

At CBS we will host a workshop and two public events (see below for sign up) on corporate tax and inequality next week 24th – 26th June 2020 – the COVID-19 crisis has underlined the pertinence of this topic in major ways.

Taxation, tax havens and corporate tax have been high on the agenda for a while. Since the outbreak of the global financial crisis of 2008 corporations seeking to minimize their tax payments have been under close watch from the media, civil society and politicians with a focus on ensuring that corporations pay their “fair share”. The OECD and the EU have gone to quite some length to try to stop tax-optimizing behavior through revising and modernizing existing rules and legislation. In collaboration with the IMF and the World Bank they have invested time and resources in strengthening tax systems, governance and improving domestic resource mobilization in low- and middle- income countries. This work is ongoing and corporate taxation is already high on the list of priorities for the world community. But then along came COVID-19.

Taxation is central in two ways when we reflect on the pandemic and what will follow. Firstly, governments have passed historic economic recovery packages to ensure that the private sector stays afloat and to avoid mass lay-offs during the lockdown period in 2020. The question is what can we expect in return? Secondly, the emerging discussion on the disruption caused to national economies should be thought into long-term solutions for sustainability including tax.

“Tax haven free” recovery packages

Poland and Denmark, followed by Italy, Belgium and France have attached an explicit conditionality to their COVID-19 state support that companies cannot be registered in tax havens.

In light of this clear conditionality, there has been a media storm in Denmark, when a journalistic investigation revealed that several companies that government support had an ownership structure that was associated with tax havens and with a consumer outcry on social media. This prompted one of the companies, a well-known bakery “Lagkagehuset”, to take out full-page advertisements in daily newspapers to counter the criticism and explain the company structure. The CEO also did a lengthy interview on the issue of the company’s ownership structure to a major daily newspaper.

Two immediate takeaways can be drawn from this:

It has revived the discussion about the usefulness of tax haven blacklists (see more on this by CBS professor Leonard Seabrooke in Danish). Which countries should be on them, and what does it mean if you as a business (or individual) are associated with a tax-haven on such a list? One thing is clear, measures to push countries into greater cooperation will not in itself comprise a substitute for measures to make companies act responsibly.
It has emphasized the importance of corporate governance including a reflected approach to responsible corporate tax practice. The fact that there are so-called tax havens out there warrants companies and individuals to decide how or if they want to be associated with these. If yes, companies must accept that they may be liable to critique and journalistic and even political inquiry into what that association means. It should come as no surprise that association with these jurisdictions may entail suspicion.

Tax havens are not the only concern in relation to companies’ environmental, social and governance (ESG) behavior in this pandemic. The financial times reported how NGOs and investors are challenging shareholder primacy as it leads to growing inequality. Corporate governance and ESG, including tax, is now more than ever one to watch for companies that wish to be part of a sustainable business community in the short-term and the long-term.

Opportunities in the long term

Recovery packages are short-term measures. However, in the long term, the pandemic offers an opportunity that must not be missed in terms of taking a serious look at which direction our global society is heading.

While the pandemic, in theory, cannot tell the difference between the poor and the rich, it is clear that the existing inequality in our society is all made acutely visible during COVID-19. In the US more than 40 million have lost their jobs during the pandemic. In Sierra Leone, there is allegedly just 1 available ventilator in the entire country (for a population of 7 million, where Denmark has more than 1000 ventilators for a population of 5.8 million). As for the gendered impacts even for the better off, there are indications that women are less able to find time to prioritize research and publishing during the crisis than men are (). While big tech companies look to come out of this crisis more profitable and, possibly, powerful than ever.

These are just examples of how inequality is front and center in this crisis and how it offers an important opportunity to consider if the direction we are heading in is where we want to go.

With many countries having been in a complete] lockdown and economic activity at a standstill, this presents a unique opportunity to truly rethink how well the existing economy has worked for our societies and planet. The city of Amsterdam in the Netherlands has seized the opportunity to embrace the concept of the doughnut economy and the OECD is arguing that it makes discussions about challenges of digitalization of the economy and a minimum level of tax for MNEs more pertinent.

Tax is the central tool for governments to raise revenue and engage in redistribution. However, it is much more than a technical tool in an administrative toolbox.

It is the modern social contract for individuals and businesses as highlighted by the discipline of fiscal sociology. Short term, long term, whichever way, you approach it tax should, and will, play a central role in the debate about where we want to go from here towards a more sustainable, and more equal, future.

It provides a key source of revenue to finance vital public services, it can act as an explicit redistributive tool central to fighting inequality, and if used wisely, it can incentivize the behavior of corporations and individuals including the transition to more sustainable practices. Some of these things will be discussed at CBS in June.

A timely workshop on corporate tax and inequality

At CBS we are hosting a timely interdisciplinary workshop as a collaboration between the department for Management, Society and Communication, CBS center for sustainability, and the Inequality platform on corporate tax and inequality. We are bringing together researchers from around the world to meet (virtually) and discuss different pieces of research emerging on this relationship. We have legal analysis, economic modelling, qualitative analysis of tax administration efforts, and sociological analysis of tax professionals and wider societal tendencies on the agenda.

Our keynote speaker Professor Reuven Avi-Yonah will give a (virtual) public lecture (SIGN UP HERE) on Thursday 25^th of June 2020 at 14:15 CET. He will speak to the short, medium and long term revenue options in light of the pandemic including a chance for a Q & A. He is a renowned scholar and has published widely on international tax, history of the corporate form, and CSR and tax among other topics.

The workshop concludes on June 26^th 2020 with a (virtual) practitioner panel to discuss knowledge gaps (SIGN UP HERE) from the perspective of professionals of various disciplines. Bringing together professionals from media, NGOs, tax advisory services, tax administration and business. This is likely to be a lively debate with the aim of furthering the CBS tradition of engaging the private sector on what could be fruitful avenues for further research in this axis of relevance between tax and inequality.

About the author

Sara Jespersen is a PhD Fellow at Copenhagen Business School. Her research is on the emerging relationship between responsible business conduct and corporate tax planning of multinational enterprises. In a complex governance context, there are now signs of corporations’ self-regulation and the emergence of voluntary standards. Sara is interested in what this means for our understanding of corporations as political actors and the notion of political CSR.

Image by pickpik

Responsible Tax in Multinational Enterprises – Why?

By Peter Koerver Schmidt

The tax practices of multinational enterprises (MNEs) attract massive interest in these years from the general media, policymakers as well as academia. This public interest is positive, as the subject is both interesting and important. At times, however, the debate can be polarized and rather futile.

Two quotes exemplify the wide spectrum of opinions quite well. On the one side of the spectrum, the more traditional opinion which in the words of NYU Professor David Rosenbloom can be expressed like this: “Taxes are a cost, like any other cost. There is nothing magical or special about taxes as a cost, except that they are subject to adjustment by government action.”[i] And on the other side of the spectrum, UK MP Margaret Hodge’s statement concerning Google’s tax planning set-up “We’re not accusing you of being illegal, we are accusing you of being immoral.”[ii]

Tax is and should be regulated by law

Currently, the zeitgeist strongly seems to favor the latter opinion, and it is often argued that MNEs face a moral or ethical obligation not to engage deliberately in strategic tax behavior solely designed to minimize tax payments. In other words, MNEs should act responsibly and refrain from aggressive tax planning.[iii]

Even though such statements are understandable and well intentioned, it is worth bearing in mind that taxation traditionally – and for good reasons – is an area densely regulated by law.

Generally speaking, the legal order (rule of law) creates stability and foreseeability and acts as an obstacle to power holders of society. This is also important within the area of taxation, as taxes are not voluntary and since taxation is a complex balancing act that needs to be carried out in a transparent democratic order. Moreover, equal and objective treatment of taxpayers presupposes a legal standard, as social/ethical norms are too vague to provide adequate guidance. Finally, yet importantly, procedural justice requires that taxpayers – including MNEs – have access to independent judicial review, in order to give the taxpayers a proper chance to explain themselves and to appeal.[iv]

Reputational risks and shareholders of flesh and bone

Does this mean that everything should just remain as it (perhaps) used to be?

In my opinion, the answer is no. Accordingly, policymakers should cooperate on a global and regional level (as they are already doing at the level of the OECD/G20 and the EU), in order to improve the current international tax regime and reduce the possibilities for applying aggressive tax planning strategies. Moreover, well-managed MNE’s should take account of the fact that the wider public expects them to act responsibly and to refrain from aggressive tax planning.

The reason why MNE’s should acknowledge the growing public distaste for aggressive tax planning strategies is in my view two fold, and does not rest on an inherent social/ethical obligation to so.

Instead, the first argument is based on the fact that responsible tax behavior by an MNE can mitigate a number of corporate risks and that corporate tax planning must be balanced against the potential costs of triggering reputational damage.[v] The second argument is that the management in MNEs should focus on maximizing shareholder welfare, not shareholder value.[vi]

In other words, it should be taken into account that shareholders at the end of the day are ordinary people of flesh and bone that are not only concerned about maximizing profits but also have social/ethical concerns. Accordingly, even though MNEs do not have an inherent social/ethical obligation to stay away from aggressive tax planning behavior there may anyway be good reasons to do so.

Currently, there are strong signs that MNEs have become more prone to critically re-consider their tax planning behavior. More and more MNE’s thus prepare and disclose tax policies/strategies that among other things define the framework for their tax planning behavior. In my view, this appetite for implementing policies on responsible tax is both sensible and laudable.

References

[i] H.D. Rosenbloom, Where’s the Pony? Reflections on the Making of International Tax Policy, 63 Bulletin for International Taxation 11, p. 535-542 (2009).

[ii] Public Accounts Committee Chairman Margaret Hodge. Quote from The Telegraph, November 2012: https://www.telegraph.co.uk/finance/personalfinance/tax/9673358/Starbucks-Amazon-and-Google-accused-of-being-immoral.html.

[iii] P. Schmidt & K. Buhmann, Taxation, General Anti-Avoidance Rules and Corporate Social Responsibility in Fair Taxation & Corporate Social Responsibility, p. 227-260 (K. Elgaard et al. eds., Ex Tuto 2019).

[iv] R.P. Österman, Perspectives on Corporate Taxation from a Sustainable Business Perspective in Challenges, in Managing Sustainable Business pp. 371-397 (S. Arvidsson ed., Springer 2018).

[v] A. van Eijsden, The Relationship between Corporate Responsibility and Tax: Unknown and Unloved, 22 EC Tax Review 1, p. 56-61 (2013). See also R. Knuutinen, Corporate Social Responsibility, Taxation and Aggressive Tax Planning, Nordic Tax Journal 1, p. 36-75 (2014).

[vi] O. Hart & L. Zingales, Companies Should Maximize Shareholder Welfare Not Market Value, Journal of Law, Finance, and Accounting 2, p, 247-274 (2017).

About the author

Peter Koerver Schmidt, PhD, is Professor with special responsibilities in tax law at Copenhagen Business School and Academic Advisor at CORIT Advisory. His research mainly focuses upon international (corporate) tax law, and it has been published in Danish, Nordic and international journals and anthologies. In addition, he has authored and co-authored a number of books, including a dissertation on Danish CFC legislation from an international and comparative perspective.

Photo by 401(K) 2012 available on Flickr.

Investigating Emerging Responsible Corporate Tax Practice

By Sara Jespersen.

In the absence of an over-arching world tax authority, much agency and power remains in the hands of the corporations operating the system.
Much of the discussion on responsible corporate tax practice is focused on those corporations that maximize the use of the rules to minimize their tax payments
But what about those corporations that do not participate in the race to the bottom on tax practices – can we see emerging trends of responsible corporate tax practice and where?

Approximate reading time: 2-3 minutes.

The issue – corporate tax and globalization
Corporate tax planning is high on the political agenda in Denmark and, indeed, internationally since the revelations of how corporations minimize their tax bills through the use of tax havens have started rolling. Several corporations have been exposed for their aggressive practices by the European Commission, NGOs, journalists – to the great outrage of the public and politicians.

Valuable work is being undertaken to understand the depth of the crisis for society, the seriousness of the problem – its persistence and scale, and the dynamics of the politics of solving it. Much of which is focused on those corporations that maximize the use of the rules to minimize their tax payments.

But what about those corporations that already pay their so-called fair share and do not participate in the race to the bottom on tax practices? In particular, those who are not afraid to show it?

The governance challenge – tax competition among sovereign states and the offshore world
The challenge of all this arises because of the way in which the governance of the tax affairs of multinational enterprises (MNEs) is set up. MNEs that operate in several countries from the North to the South of the world operate in various judicial systems. Many of them also have mobile assets that can be moved from one jurisdiction to another through the click of a mouse and has little to do with the physical world. Some jurisdictions have set themselves up to attract the location of this type of intangible assets and will give favourable tax conditions in return. Judging where corporate assets should be taxed and what the market value is of intangible assets is no easy task for any one country in the world. With no over-arching world tax authority the outlook for permanent solutions to some of these fundamental challenges to the taxation of MNEs corporate profits is looking somewhat long-term.

What role for business and for responsible corporate tax practices?
So it looks that much agency and power remains in the hands of the corporations operating the system. In a society where the focus on corporate tax payments remains one of the hottest topics and trust in corporate tax affairs is dwindling for years on end conditions are perfect for encouraging greater responsibility in corporate tax matters. But what responses are we seeing from the business world of their own initiative if any? How are they responding to this mounting distrust in corporate taxation practices from “society”?

There are signals that somethings are brewing. The fair tax mark in the UK have taken off, CSR Europe have included the issue of corporate tax in their work, as has the network of responsible investors the Principles for Responsible Investment (PRI) and the European Commission is not shy to be clear about their vision of tax as a part of CSR (speech by Margrethe Vestager, EU trade commissioner.

My research going forward will focus on investigating this emerging trend of responsible corporate tax practice. It will investigate to what degree it is already taking place and what it might consists of, as well as its meaning and potential in an international political economy with a great focus on corporate tax payments and MNE’s role in supporting the achievement of the sustainable development goals around the world.

Sara is PhD Fellow at Copenhagen Business School and her research is focused on the emerging relationship between responsible business conduct and corporate tax planning of multinational enterprises. Building on several years of experience from working with international development NGOs, Sara is particularly interested in how this affects developing countries’ financing challenges and the focus on the role of the private sector in achieving the sustainable development goals (SDGs).

You can contact Sara via email and follow her on Twitter.

Pic by Madison Kaminski (Unsplash), edited by BOS.