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

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Lutz PreussSenior Lecturer in International
Business PolicyCSR and Taxation A Business
Ethics Perspective
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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 Westminsters 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)

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  The nature of taxation

• taxation within a company ... reflects the wider
  conflict innate in the role of taxation in
  society, in terms of any states 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.

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Ethical evaluation Kant

• the Duke of Westminsters 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.

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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 Westminsters principle is likely
  to violate both

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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

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Ethical evaluation Kant

• Tax avoidance is immoral to the extent that the
  underlying activity was carried out to reduce the
  companys 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)

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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

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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

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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

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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)

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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 laws 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)

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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

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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