While many corporations have embraced the corporate social responsibility framework with respect to environmental sustainability, taxation has been almost completely ignored in CSR discourse and practice.
This is surprising since taxes are a key part of how corporations relate to the societies that nurture them. Tax revenues pay for the goods and services upon which corporations depend: public infrastructure, access to the environmental commons, an educational system that trains workers, social and health services, significant subsidies, and an expensive legal system that safeguards corporate contracts and property rights.
Despite these public subsidies, many corporations engage in elaborate strategies to reduce or eliminate their tax obligations. The globalization of finance and production has provided opportunities for corporations operating internationally to allocate profits to low tax jurisdictions and costs to high tax jurisdictions. Offshore tax havens — now known by the more polite term “offshore financial centres” or OFCs — are today a deeply entrenched part of the global financial system.
Banks and multinational companies routinely establish affiliates in OFCs to obscure their business and financial practices. Frequently, these affiliates are dummy companies, little more than a postal address and a bank account. Tax havens host more than two million dummy corporations. One modest building in the Cayman Islands is home to more that 12,000 of these entities. A report from the U.S. Government Accountability Office revealed that eighty-three of the one hundred largest publicly-traded companies in the U.S., including big banks receiving bail-out money, have scores of subsidiaries in tax havens.
Tax havens facilitate billions in lost tax revenues. A U.S. Senate investigation estimated that tax losses to the U.S treasury have now reached $100 billion annually. In the United Kingdom, tax losses are estimated to be £25 billion
each year. While there is little independent research in Canada, the Auditor General warned in 2002 that corporate “tax arrangements with foreign affiliates have eroded Canadian tax revenues of hundreds of millions of dollars over the past ten years.”
In 2003, Canadian financial assets in tax havens represented two-thirds of all international Canadian banking assets, more than twice Canadian bank holdings in the U.S. A study by the University of Quebec at Montreal estimated that between 1991 and 2003, the five major Canadian banks avoided $16 billion in provincial and federal taxes through offshore subsidiaries.
Developing countries have been particularly damaged by these trends. The Washington-based Global Financial Integrity project calculated that developing countries lose $858 billion to $1.06 trillion in illicit capital outflows every year; ten times greater than all development assistance. About 65 per cent of these losses are due to corporate tax evasion.
A report commissioned by Christian Aid (UK) found that between 2005 and 2007, falsified transfer pricing transferred US $8.5 billion out of the world’s 49 poorest countries, resulting in tax losses of US $2.6 billion to these countries. Raymond Baker, author of Capitalism`s Achilles Heel, calls the hemorrhage of resources from poor countries the “ugliest chapter in global economic affairs since slavery.”
But recently, corporations have discovered that tax avoidance schemes can result in serious reputational risks as citizens are beginning to “name and shame” the most egregious offenders. In response to austerity measures in the United Kingdom, a citizen`s movement called U.K. Uncut has occupied stores and bank branches to protest corporate tax evasion.
One target was the Arcadia fashion empire owned by Sir Philip Green, the 9th richest man in the U.K. Despite operating more than 2,000 stores throughout the U.K., the company pays no corporation tax since it is technically owned by Sir Philip’s wife, who resides in the tax haven of Monaco.
Thirty-five branches of Barclays Bank were occupied after it was revealed that the bank had paid only £113 million in taxes against a 2009 profit of £11.6 billion.
Protesters also targeted the pharmacy chain Boots, which moved its headquarters in 2008 to an obscure canton in Switzerland as a tax reduction strategy.
The U.K. Uncut movement has inspired similar initiatives in Ireland, the United States, Australia and Canada. In the U.S., the tax practices of General Electric, Google, Apple, Citigroup, and the Bank of America are being challenged by U.S. Uncut. In 2010, General Electric reported profits of $5.2 billion but actually received a $3.2 billion tax refund. Google has cut its taxes by $3.1 billion in the last three years by allocating most of its foreign profits to Ireland and then channeling them to Bermuda via the Netherlands. U.S. firms now have over $1.2 trillion in profits parked offshore and have asked Congress for a tax holiday to allow them to “repatriate” these profits. This month, U.S. Senator Carl Levin introduced legislation that aims to close offshore tax loopholes and put an end to offshore tax abuse.
Citizen’s groups are advocating that corporations incorporate responsible tax policies as part of their CSR frameworks. Responsible taxation means complying not merely with the letter of the law, but also the spirit of the law. Tax expert Richard Murphy argues that tax is not a business cost. Rather, tax is much like a dividend – a return due on investments made by society at large from which corporations benefit. One can only hope that corporations will adopt transparent and socially responsible approaches to taxation, and pay their dues to the societies that have sustained them. Otherwise, they will soon be required to do so through legislation.