Much of the debate about Base Erosion and Profit-Shifting (BEPS) and global tax minimisation focuses on the current legal requirements to pay tax and amendments to ensure liability and responsibility to pay tax. But this is not, first and foremost, a legal issue. Even if the legal/illegal, avoidance/evasion dichotomies were clear-cut, public outrage is applied to both. Indeed, clever planning may make the actions that some call tax avoidance, tax minimisation or tax planning seem worse for the obvious premeditation, while the complex legal arguments claiming that the assault on the public purse is legal may merely extend the outrage to lawyers rather than excuse the clients.
The failure to pay tax is first and foremost a moral complaint about the corporations and their attitudes to the communities in which they operate and which grant them a legal presence. One might, therefore, suppose a concern for fair tax obligations would be well-represented in the discussions and formulations of corporate social responsibility (CSR). CSR speaks directly of moral principles requiring businesses to do more than obey the strict letter of the law (and, indeed, ‘beyond the bottom line’).
Yet, if one turns to the major codes, charters, compacts and guidelines for best business practice and CSR, a striking fact presents itself. Most of these important documents say nothing – literally nothing – about tax avoidance, minimisation or planning. This is despite the fact that, as Christensen and Murphy (2004) observe: “Paying taxes is perhaps the most fundamental way in which private and corporate citizens engage with broader society.”
The codes of conduct for corporations that fail to mention fair tax obligations include pre-eminent and otherwise-demanding charters like the Caux Round Table Principles, the UN Global Compact (as well as its Principles for Responsible Investment), The Earth Charter, the Guiding Principles of the World Forum for Ethics in Business, the UN OHCHR’s Guiding Principles on Business and Human Rights, Amnesty International’s Human Rights Principles for Companies, and the Equator Principles.
To be sure, some of these codes have particular agendas (such as an environmental focus) that might serve to push fair tax obligations onto the back-burner. Even so, the fact remains that explicit fair tax obligations are so rare in the CSR space that the International Standards Organization’s (ISO, 2010) analyses of both sectoral and cross-sectoral initiatives fail to even list such obligations as a potential CSR element in their taxonomies.
If we want corporations to start living up to their tax obligations, then this widespread silence needs to change. Almost all the above-mentioned codes contain principles that are relevant to, or can be interpreted to apply to, tax obligations. For example, the Caux Roundtable Principles include the broader community in a business’s stakeholders, and stress that responsible businesses must live up to the spirit and intent behind the law. Equally, the International Bar Association showed how strong tax obligations follow from the OHCHR’s Guiding Principles, at least in the context of multinational’s tax obligations to developing countries.
However, potential interpretation and glancing treatment of such obligations in other codes (such as in the ISO’s Guidance on Social Responsibility and in the Triple Bottom Line Approach) – are not enough. In an area that involves a corporation directly shouldering significant costs impacting on its bottom line, society needs to lay down clear and unequivocal commitments. The tax-related responsibilities following from general principles needs to be explicitly highlighted to any corporations who aims to comply with them.
All of these codes provide aspirations to good corporate citizenship: but few make a point of saying that good corporate citizens pay their share of tax as part of their ‘corporate social responsibility’ or ‘social license to operate’.
We see the ‘social license to operate’ as just one of several expressions of the responsibilities of business ‘above the bottom line’. However, this concept enjoys currency in debates about CSR across sectors, ranging from extractive industries to banking to the professions. It also puts the CSR arguments more simply and strongly.
The ‘social license to operate’ acknowledges that a corporation can only exist within a community if it is legally recognised by that community or its sovereign representatives. Likewise it can only have property if that possession is recognised by the community (which also provides some protection for that property). Some forms of property, especially intellectual property, only exists within a territory because of the operation of that territory’s property laws.
The ‘social license to operate’ recognises that corporations enjoy a number of privileges – from limited liability to some very special privileges granted to particular industries or companies such as the exploitation of mineral resources and the lender of last resort to banks. The society also provides access to its consumers, which are the cashflow, or lifeblood, for the likes of Google, Apple and Starbucks. More generally, companies are entrusted with the bulk of the economy. Finally, all organisations involve a combination of power, people and resources to secure a range of ends. That power can be used to further those ends but it is always subject to capture and those powers being used (abused) against the community in which it operates. The American founding fathers recognised the risks with governments. They were not aware of the risks of joint stock companies which were smaller and less numerous than those of our time (though their Glaswegian contemporary, Adam Smith, did recognise the risks and warned against them).
Communities do not provide all of the above benefits (let alone take the above risks) for the good of corporations. They do it for the benefit flowing from the latter’s incorporation. This is not to deny that corporations should seek profits. However, companies are expected to do so in ways that benefit the community rather than damage it. The social license to operate suggests that corporations need to justify themselves to the communities in which they operate on the basis of the benefits they deliver – and commit themselves to delivering them rather than paying lip service to the ideal.
The ‘social license to operate’ is analogous to the ‘social contract’ approach to government legitimacy (but far more practical to implement because limited liability joint stock companies are the product of legislation which was passed on the basis of claimed benefits to the community and duties established and varied by legislation.
Of the various duties corporations might be expected to take on, the payment of tax would surely be one of the most prominent.
Two good starting points that are specific to taxes are the principles offered by Tax Justice Network’s Code of Conduct (Murphy 2007) and the OECD’s Guidelines for Multinational Enterprises (OECD, 2011). Both codes set down the fundamental responsibility of living up to the spirit and intentions of tax codes. They also take care to explicitly prohibit some of the more egregious tax-minimisation strategies, such as those surrounding transfer pricing and beneficial ownership.
Corporations that abuse their social license to operate by minimising, avoiding or evading tax are putting at risk the license given to all and secure a competitive advantage over companies that are unable or unwilling to avoid tax in the same way as others. It is in the interests of the latter to work with taxation authorities and civil society organisations to work through fair tax principles and incorporate them in updated CSR principles.
Notes:John Christensen, and Richard Murphy. "The Social Irresponsibility of Corporate Tax Avoidance: Taking CSR to the Bottom Line." Development 47, no. 3 (2004): 37-44.
This article was first published at: Australian Tax Policy. http://www.austaxpolicy.com/is-paying-tax-part-of-the-social-license-to-operate/ (11 July 2016). The work profited from the spirited discussions at the Regional Ethics Forum, the Red Chamber, Queensland Parliament House, 27 May 2016.