Taxation and Corporate Social Responsibility

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Elwin Poortman
Analyst, Netherlands

Taxation and Corporate Social Responsibility

The Panama Papers showed that tax avoidance takes place on a large scale. Taxation strategies of some large MNE’s involve aggressive tax planning, including transferring profits and using artificial structures in combination with tax havens to achieve lower taxes and larger profits as a result. Putting this into a CSR-context, such tactics can be seen as immoral strategies.

Taxes have a contradictive meaning:
- On the one hand, taxes are like any other costs for a company.
- However on the other hand, they are an economic contribution to the society in which the business is conducted. Therefore, aggressive tax planning can have significant burdens on a country’s well-being and that of its taxpayers, who eventually end up paying more taxes. Because aggressive tax planning often takes place within the regulatory framework, meaning that it is not illegal (by law), one has to consider to what extent aggressive tax planning aligns with the moral responsibility (CSR) of a company.

Aggressive tax planning carries reputational risks. For example, aggressive tax planning behaviour that is not accepted by consumers or media can have genuine effects on customer loyalty and sales. As a result, aggressive tax planning is slowly being replaced by active tax responsible behaviour.

The OECD and the European Commission run an extensive program to promote this incentive, and have both highlighted the following key indicators that should be embedded in a company’s tax strategy:
  1. SPIRIT OF THE LAW: Companies should comply to the letter of the law as well as to the spirit of the law. The latter refers to the moral code that is embedded in the law and aims that a company complies to this specific law by taking into consideration the initial intention of the law. This includes that company can no longer exploit legislative loopholes that for example allow them to use tax havens for tax avoidance, or artificial fiscal structures that are emplaced to create profits.
  2. INCREASE TRANSPARENCY: CSR requires openness and transparency; a responsible company reports its businesses and activities in public, and thus provides the general public with an opportunity to assess its activities. Tax payments and the overall tax strategy should be included in this framework, which therefore need to be specified and communicated publicly.
  3. COUNTRY-BY-COUNTRY REPORTING: Companies are encouraged to publish their tax payments per country in which they are active. This contributes to the company’s tax transparency and allows the general public to examine whether companies share a fair part of their profits to countries they operate in.
  4. APPLY THE ARM'S LENGTH PRINCIPLE: This means that internal transfers of commodities and services within companies are valued against market prices. This ensures that profits and therefore taxes are accounted in the country where value is created and prevents companies from shifting profits to countries with a lower statutory tax rate.
⇒ Do you think that the Panama Papers are marking the beginning of more responsible tax planning by companies, banks and financial advisors, or will all of this just turn out to have been a storm in a teacup?

Source: Knuutinen, R. 2014: CSR, Taxation and Aggressive Tax Planning, Nordic Tax Journal 2014 VOL 1

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