Sustainability Taxing Issues

8/3/2019 Sustainability Taxing Issues

http://slidepdf.com/reader/full/sustainability-taxing-issues 1/36

Taxing issues

Responsible businessand tax



Contents

ForewordsExecutive summary

1.0 Introduction1.1 Asking the right questions

2.0 The state of the debate2.1 The economic bottom line2.2 Stakeholders and tax2.3 Fair tax and the role of other actors

3.0 The business case for responsibletax policies and planning

3.1 The case for the business community3.2 The case for the company3.3 The case for investors

4.0 At the coal face

5.0 Corporate responsibility and tax5.1 Tax risk and responsibility5.2 Key principles5.3 Passive vs. active

6.0 Conclusions and recommendations6.1 The future of the responsible

company and tax

Notes

Seb

Beloe

Geoff

Lye

RichardMurphy

JohnWhiting

SusanSymons

JenniferWoodward

PaulMonaghan

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SustainAbility

Tax Research LLP

PricewaterhouseCoopers LLP

Co-operative Financial Services



Forewords

SustainAbility

This exploration of whether corporate taxpolicies and practice should be embraced

within the range of corporate responsibility(CR) issues has been an enlighteningexperience. We have been surprised by thepolarisation of views, by the contradictorypositions taken and by the level of generalcorporate sensitivity to even raising —let alone exploring — the issue. On theother hand, the growing media interestin and the level of research into the socialand economic consequence of differenttax policies tended to confirm our suspicionthat this was an issue which has beenlargely ignored not because of itsirrelevance to the CR agenda, but moreas a result of tax’s esoteric, obscure andcomplex nature. Even where companiescover their tax contribution in non-financial reports, it is almost universallypositioned as a credit in a company’s socialbalance sheet, whereas the attitude to thepayment itself has generally been one of tax as a cost to be avoided. While thereare examples of reputational implicationsbeginning to enter the frame – apassive/defensive modification of taxpractice — there is almost no evidenceof companies taking decisions under theinfluence of corporate responsibility.

The seeds of this report were sown in theresearch programme which was reportedin The Changing Landscape of Liability .We concluded that the economic dimensionof the CR agenda is the least understood,the least explored and with the mostpotential to really challenge existingbusiness models. At the time of writing,a Google search of ‘corporate socialresponsibility’ delivered over 4,500,000results; of ‘corporate economic

responsibility’ just 34! This probably tellsus something about the state of the artand the state of the debate.

We argue that economic accountabilityembraces — among other things — theequitable distribution of wealth created.‘Fair Trade’ is a key aspect which is rapidlymainstreaming; ‘Fair Pricing’ is alreadyexercising the minds of global pharma-ceutical companies; while ‘Fair Taxation’is, as we will show, barely on the radarscreen.

This report is, therefore, our attempt to layout the arguments; to make the case fortaxation to be seen by companies throughthe lens of CR; and to offer preliminaryguidelines for companies seeking tounderstand the issue and its implications.We will have achieved our aim if westimulate constructive debate and begin

to bring ‘corporate economic responsibility’to the fore.

Seb BeloeGeoff LyeSustainAbilityRichard MurphyTax Research LLPConsultant to SustainAbility

PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP is pleased tobe one of the sponsors for SustainAbility’scurrent project. In a business environmentwhere tax has gone up the corporate riskagenda and corporate reporting is comingunder increasing scrutiny, we believe thatthere is insufficient research into tax issuesin the UK. Nor is there enough under-standing about how tax impacts businessand its stakeholders. As the leading taxpractice in the UK, we are naturallyinterested in all aspects of the tax systemand its development.

Our own research work has shown thatthere is a real lack of understanding of the wider impact of tax on businesses.Companies, after all, bear many more taxesthan just corporation tax. This has led usto develop our ‘Total Tax Contribution’reporting framework, which in essence isa way of bringing greater transparency andthus understanding into the tax reportingof companies (see www.pwc.com/uk/ttc).

The Total Tax Contribution framework ishelping companies develop the challenging

economic dimension of their corporateresponsibility or sustainability reporting,an area our own Sustainable BusinessSolutions practice is heavily involvedwith. This all has real resonance toSustainAbility’s work on Taxing Issues .

There are many stakeholders interested in,and directly or indirectly affected by, theways in which businesses discharge theirtax responsibilities – not just HM Revenue& Customs and the company itself. Thisreport looks at aspects of what it means to

be a responsible company when it comes totax. It is a complex issue, not least becauseof the diverse and often divergentstakeholder interests.

PricewaterhouseCoopers LLP has not beeninvolved in the development of this reportand expresses no view on the report’sfindings, the work for which has beencarried out completely independently.The one exception to this is Chapter 4where, as readers will see, we havecontributed to the discussion on corporate

responsibility. SustainAbility is to becongratulated on carrying out theTaxing Issues work.

John WhitingSusan SymonsTax PartnersPricewaterhouseCoopers LLPJennifer WoodwardSenior ManagerSustainable Business SolutionsPricewaterhouseCoopers LLPResponsible for the PwCTotal Tax Contribution work

Co-operative Financial Services

After years in the shadow of its social andenvironmental counterparts, the economicaspect of corporate responsibility has beensteadily gaining ascendancy, and with it,the issue of tax. Tax is unquestionablya material issue, yet at times, CR teamsseem to wish it away: like some drunkenuncle at a party whom no-one wishes toacknowledge. Well, this compelling reportwould suggest that business’ who wish topresent themselves as CR leaders in thefuture are going to have to account fortheir performance in this area, and notmerely turn a blind eye.

Responsible tax planning is a fundamentalcomponent of a business’ responsibilityto the communities in which it operates.The Co-operative Bank has disclosedcorporation tax contributions as part of its sustainability reporting since 2002,and research by the Tax Justice Network

would indicate, ‘so far, so good’ with regardto our treatment of tax. However, therecommendations contained within thisreport indicate that we, like others, stillhave much to do.

This report reminds me very much of SustainAbility’s ground breaking workin 2001 on public policy disclosure —Politics and Persuasion, which did so muchto set the issue of responsible lobbyingrunning. I can quite easily foresee thisdoing the same.

Paul MonaghanHead of Sustainable DevelopmentCo-operative Financial Services

1Taxing IssuesForewords



From evasion to mitigation

ShamIllegal withthe appearance

of legality

Blurred boundarybetween irresponsibleand responsible

Absolute boundarybetween illegaland legal

AvoidanceTechnically legal

MitigationLegal and welcomed

EvasionAlways illegal

Figure 1

2 Taxing IssuesExecutive Summary

1 What has tax to do withcorporate responsibility?

Tax is the latest issue to emerge as partof a more thorough review of the economicimpacts that companies have. It hasbecome the subject of greater attention

with a variety of stakeholder groupsactively reviewing the approach thatcompanies take to their tax policies andplanning. This interest is in turn reflectedin, and driven by, the media coverage of the issue, which has increased significantlyin the last few years. With the growinginvolvement of governments, the media,non-governmental organisations (NGOs)and even religious groups, the issue isbeing transformed from a narrow technicaldiscussion for specialists to one whichis directly relevant to corporateresponsibility (CR).

In the UK in particular the CR implicationsof tax policies and planning have becomea heated topic of debate. Leading NGOs,government regulators, the media, investorsand the tax community itself have allbecome actively involved, publishing regularreports and opinion pieces. There is everysign that this level of interest will continue.

Elsewhere in the world, the level of debate has been more muted. A numberof trends suggest, however, that the issuewill emerge elsewhere. For example:

— Corporate responsibility reporting,led by multinationals, is by definitionnot limited by geography. Leadingcompanies can be expected to expandtheir reporting of wider economicimpacts including tax.

— The payment of tax in developingcountries is also likely to emerge as akey issue within the broader discussionabout corporate responsibility and tax.NGOs in particular now believe tax is akey component in the developmentagenda and can be expected to maintaina focus on this issue.

— Wider efforts aimed at combatingcorruption, terrorism and organised crimeare also likely to prompt scrutiny of therole and involvement of multinationalcorporations (MNCs) in tax havens withrequests for greater transparency.

— Increasing use of fiscal instrumentsto achieve social and environmentalobjectives such as carbon taxes are alsolikely to foster wider discussions of thecontribution companies make to nationalexchequers.

What is becoming increasingly apparentis that a purely technical approach totax planning is unlikely to protectcompanies from charges of irresponsibilityand associated reputational damage.This distinction between a financial andlegalistic approach to tax and anaccountability-driven, economic approachis critical. Instead of focusing exclusivelyon an absolute boundary between illegaland legal approaches to tax, companiesshould focus on understanding what isconsidered to be responsible andirresponsible. Figure 1 distinguishesbetween the legal/illegal boundary anda ‘softer’ boundary between what isconsidered to be responsible/irresponsible.

Considering tax as a CR issue does notmean that more tax must be paid than thelaw requires. Nor does it mean that taxplanning should cease. The laws of mostcountries offer alternative ways in whichreal economic transactions can bestructured and the choices often carry

different tax consequences.

Executive summary



Making choices between those optionsis a legitimate and indeed necessarymanagement activity but it also haseconomic impacts for which stakeholdersincreasingly hold companies accountable.It is this which brings the issue into theCR frame.

Given the central importance of tax as anelement of a company’s economic bottomline — and the substantial sums of moneythat are often involved – we would expecttax to be considered a material CR issuefor most companies. The checklist of

questions given in Box 2 is intended tohelp prompt company managers to reviewtheir approach to tax in light of shiftingstakeholder perspectives on the issue.

2 What’s the business case forresponsible tax policies and practice?

The main business arguments for adoptinga responsible approach to tax policies andplanning are:

1 The generalised cost that materialisesacross the business community as awhole through the growing scale andcomplexity of tax legislation which isenacted to address aggressive taxavoidance.

2 Reputational risk for a company whoseposition with stakeholders is potentiallycompromised by adverse publicity andcampaigning.

3 Regime risk associated with thesubstantial and increasing risk of litigation in the event of a company’staxation policy being challenged byone or more of the tax authoritiesconsidering its affairs; more immediately,there is an increasing risk thatunacceptable tax practices will loseaccess to government contracts.

4 Cashflow risk where extensive taxplanning can reduce confidence in futurecashflow through uncertainties abouttaxation liabilities.

5 For investors, post tax earnings are thebasis of price/earnings (p/e) ratios, whichin turn are seen as a key indicator of share value; potential tax impacts onwhat is otherwise robust data can have amaterial impact on investor confidence.

3Taxing IssuesExecutive Summary

Box 2

Report objectives

This report’s objectives are to:

— Set the issue of tax managementand payment in the wider context of corporate responsibility.

— Explore the approaches thatcompanies take to decisions regardingthe planning and payment of tax.

— Provide guidance to companiesthat wish both to demonstrateleadership and limit potential risksarising in this area.

Tax as a material CR issue 1

1 Direct financial impactsover the short term

2 Policy-based performance

3 Business peer-based norms

4 Stakeholder behaviourand concerns

5 Social norms(regulatory or quasi-regulatory)

Does the company’s approach to taxpolicy and planning expose the organ-isation to challenge from key stakeholdersthat are likely to result in direct financialimpacts over the short term?

Does the company have businessprinciples or policies that apply (eitherexplicitly or implicitly) to economicimpacts including the payment of tax?

How do tax payment rates compare withcompany peers and what might thereasons be for any discrepancies?

How would your stakeholders view thecompany's approach to tax policy andplanning if it were reported on publicly?

Are there other standards of behaviour —either codified in regulation or not — thatare likely to conflict with the company’sapproach to tax policy and planning?

Box 1



3 What constitutes a responsibleapproach to tax?

It appears that increasing numbers of companies now acknowledge the real risksassociated with managing tax in a waythat focuses purely on what is technically

legal. While important, this approach isnot the same as acting responsibly. Riskmanagement is an essential component of corporate responsibility but neglects toaddress the accountability that companieshave for their wider economic impacts.A responsible approach sees tax not as acost to be avoided, but as a legitimatepayment from wealth created to thecountries and communities that contributedto the wealth creation in the first place.

An active interpretation of the coreprinciples of accountability, transparencyand consistency as described in theframework below is, we believe, likelyboth to provide a firm foundation forthe fulfilment of corporate economicresponsibilities as they relate to tax, aswell as a robust approach in the face of stakeholder challenge (see Box 3).

4 Conclusions and recommendations

Conclusion 1

There is increasing attention andimportance being given to the widereconomic impacts that companies haveon their stakeholders.

Recommendations— Companies should build internal capacity

to better analyse how issues such as‘responsible tax’ are likely to developand what the appropriate managementstrategies are for addressing potential

risks, particularly in developing countries.

— The ‘issues evolution’ mapping toolpresented in section 2.1 should helpto put context around the issue of responsible tax and to develop a morenuanced understanding of potentialtrajectories.

Conclusion 2

The interests and involvement of stakeholders in the debate about corporatetax policies and planning is transformingthe agenda from one driven primarily by theobservance of legal and financial standards,to one focused on economic accountabilityto stakeholder groups.

Recommendations— Bring tax policies and planning firmly

and transparently within widergovernance frameworks includingbusiness principles and corporate values.

— Adopt a two-pronged approach thatincludes both a technical analysis anda reputational/ethical ‘screen’.

— Apply a wider screen using the ‘passiveto active’ framework to take account of wider interests and pressures that treattax as a critical economic contributionfor companies and their stakeholdersrather than merely reputational risk.

Conclusion 3

A significant barrier to the integration of CR principles into tax policies and planningis the cultural framing of tax as a specialist,technical and non-core business activity.

RecommendationsBuild capacity within both tax departmentsand the wider business to understandnew forms of tax risk and links with widerreputational risks. Companies should

consider:

— Building links with other businessprocesses such as risk management,public policy and governmental affairs,corporate responsibility and investorrelations.

— Regularly engaging with seniormanagement to raise awareness aroundthe role of the tax function and provideupdates on the rapidly evolving rangeof tax risks.

— Undertaking CR and ethics training fortax professionals and developing wider

initiatives to equip tax professionalswith skills to understand and addressthe broader aspects of tax risk.

— Reinforcing governance processes toensure that tax planning is conductedwithin guidelines explicitly linked towider governance standards andprinciples, and make sure that thiscan be documented and reported(see below).

In addition, the tax profession itself shouldalso work to demystify tax and tax planningand better articulate both the importantrole that tax planning plays in helpingcompanies and individuals understand andtake advantage of tax system incentivesin ways that are intended by governments,but also to clarify the boundaries of whatconstitutes responsible practice.

Conclusion 4

Increased transparency of corporateapproaches to tax is primarily anopportunity to build more robust taxstrategies, and to generate greaterconfidence among stakeholders.

RecommendationsWe recommend that companies increasethe amount of transparency aroundtax policies and payments. Given thecomplexities involved, we suggest astaged approach to reporting leading froma ‘basic’ level to an ‘integrated’ approach.While companies are increasinglytransparent about their approach to

and payment of tax, Box 4 illustrates theextent to which transparency could beenhanced.

4 Influencing PowerExecutive Summary



5Taxing IssuesExecutive Summary

From passive to active tax responsibility

Accountability

Transparency

Consistency

Passive tax responsibility

Tax seen solely as a cost to be minimised

Correct to the ‘letter’ of the law

Use of tax planning techniques in linewith competitor or peer group

Use of tax avoidance schemes focused onprofit and cash-flow criteria

Compliant with the laws of each state inwhich activity is undertaken but willing totake advantage of differences betweenthose legal systems

Disclosure made on a ‘need to know’ basisas required by law

Make reference to material tax issues

Segmental disclosure of tax paid inaccordance with law and reportingstandards

Tax policy and practice incidental tocorporate governance systems

Details of local tax regimes and relativerates as focus

Active tax responsibility

Tax acknowledged as a key element of acompany’s economic impact on society

True to the spirit of the law: avoids

exploitation of loopholes and transactionsundertaken solely/primarily for tax benefit

Supports moves to eliminate competitionon the basis of taxation

Use of tax mitigation techniquessubject to consideration of social andeconomic impacts

Seeking to declare profits, claim costsand pay taxes in the states in which itcan be best determined that the profitwas earned

Full disclosure based on a ‘right to know’basis defined by stakeholders

Share unresolved tax dilemmasquantifying risk, causes and possibleoutcomes

Full disclosure of all taxes paid bycountry with relevant supporting data

Tax policy and practice integrated intocorporate governance systems

Global application of responsible taxprinciples irrespective of rate implicationslocally

Box 3



6 Taxing IssuesExecutive Summary

Description

Reporting complies with legislation andaccounting standards applying withinthe reporting territory, but provides noadditional context or reference to the

issue as an element of corporateresponsibility.

Reporting provides basic informationon tax policies and payment as part of a company’s overall approach to CR.This may include general references tothe payment of tax as part of overalleconomic impact, specific positions thecompany has taken on taxation issuesand high-level data, but without anycontext or interpretation.

Companies provide a clearer articulationof the system used to manage thepayment of tax as a CR issue. Thereis likely to be evidence of overarchingpolicies and principles as well asreasonable data quality and coverageincluding of different taxes paid (andsubsidies received) by geography.

Companies provide comprehensiveinformation on their governance andmanagement of tax, and the specificlevels of tax payment across differentgeographies. In addition, there are likelyto be clear break-downs of the differenttypes of tax a company pays includingfor example pre-tax profits, levels of current and deferred tax, opening andclosing tax liabilities, and payment of different types of tax including on‘capital’ (corporation tax, irrecoverablesales tax, business rates), ‘people’(employer’s tax liabilities) and on‘product’ (custom duties, excise duties).

Reporting is both systematic andextensive in its coverage, addressingall the issues raised above. In addition,reporting provides evidence that widerbusiness decision-making and processesare coordinated to ensure that thecompany is integrating the CRdimensions of tax into forward planning.

Reporting stages

Level

0 Compliance

1 Basic

2 Systematic

3 Extensive

4 Integrated

Examples

Widespread

BBVA, BP, TheCo-operative Bank,Kesko, Philips, PlacerDome, PotashCorp,SABMiller, Talisman,Unilever

Anglo-American,Statoil

None

None

Box 4



7Taxing IssuesIntroduction

Taxation levels have always been thesubject of vigorous debate. The prominent18th-century statesman Edmund Burkereflected philosophically on our ambivalentrelationship with tax, a point that was alsoforcefully put 600 years earlier when LadyGodiva protested at her husband’s cripplingtax regime by stripping and riding through

England’s mediaeval streets.

And the issue of tax is no less controversialtoday. Democratic elections can be fought,won and lost on the issue and it inspiresand inflames in equal measure. This isunderstandable. Tax revenues are thelifeblood of the social contract, vital tothe development and maintenance of thewelfare state, national infrastructure andto the sustenance of the framework of

justice that underpins liberty and marketeconomies. 2

In that context it is surprising at firstglance that the debate about corporateresponsibility (CR), which has touched onvirtually every other area of corporateengagement with broader society, hasscarcely begun to question companies inone of the areas where their corporatecitizenship is most tangible — the paymentof tax.

Even many of the world’s acknowledged‘CR leaders’ do not appear to view tax asa CR issue. Soon after receiving the UK’sBusiness in the Community ‘company of theyear’ award in 2005, BHP Billiton receiveda tax, interest and penalty charge of Au$989 million from the Australian TaxOffice. The company is contesting thecharge, but other CR leaders such as BP,Starbucks, Novo Nordisk and Vodafone havealso all been cited in recent years ascompanies undertaking controversial —though entirely legal — tax planningtechniques.

This report sets out to challenge thisperspective by arguing that the paymentof tax is a critical element of the economicbottom line for companies, and as such isa key aspect of corporate responsibility.

With this in mind, our primary objective isto consider the issues that tax raises for the

management of a company. For that reasontechnical concerns are not our focus, butthose of governance, accountability, riskmanagement and transparency are. Thereport is structured as follows:

Section 2The state of the debate reviews theevolution of the CR agenda and theemergence of tax as an integral partof this agenda.

Section 3The business case for responsible taxpolicies and planning reviews the mainbusiness arguments for adopting aresponsible approach to tax policiesand planning.

Section 4At the coal face presents a conversationbetween two leading professionals in thedebate to illuminate some of the keyunderlying tensions.

Section 5Corporate responsibility and tax considershow a ‘responsible’ approach to tax differsfrom tax risk management and outlinessome principles for guiding corporatedecision-making in this area.

Section 6Conclusions and recommendations setsout some initial guidance to companies onhow to integrate CR thinking and practicesinto their approach to tax. This section alsoprovides some examples of good practicefrom within the corporate community, andsuggests others we think might be

appropriate.

Introduction

1.0

‘To tax and to please,no more than to love and to be wise,is not given to men.’Edmund Burke 1729–97On American Taxation 1775



1.1 Asking the right questions

It is the premise of this report that taxis not just an issue of concern for theresponsible corporation, but is central to itseconomic interaction with society at large.That being said, the interplay between

corporate responsibility and tax is, weaccept, highly complex. In addition, in spiteof recent publicity, the relationship betweentax and corporate responsibility is stilllargely unexplored, which in itself is amatter of concern that we wish to highlightin this report. Consequently, while we areconvinced of the importance of this issue,it would be naïve of us to expect to provideconcrete answers to many of the legitimatequestions that have been raised about whatcompanies should do in this area.Nonetheless, we do believe that someguiding principles can be identified thatwill help to inform the ongoing debate.

This report is intended to contribute tothat debate in a thoughtful and measuredway, which involves a wide variety of parties. It is our ambition that it shouldhelp interested businesses and other actorsto make real progress in addressing theissue of tax as part of their wider approachto corporate responsibility.

8 Taxing IssuesIntroduction

Methodology

Taxing Issues has been based on a seriesof steps aimed at gathering informationon the relationship between corporateresponsibility and wider businessprinciples and the approach companiestake to tax. Specifically it involved:

— A thorough literature review of published information including mediastories, stand-alone publications fromdifferent stakeholders on tax, andcorporate information contained inannual and CR reports and corporatewebsites.

— A workshop involving representationfrom leading corporations, tax advisersand academics focused on the issueof tax.

— Follow-up interviews with tax directorsfrom leading multinational companies.

The report is intended for an internationalaudience, though we acknowledge a biastowards UK practice and experience dueto the high-level of interest in and debateon the topic in the UK. We would expectnonetheless that the underlying principlesand frameworks will still have inter-national application.

The report will be of specific interest toa wide range of stakeholders includinginvestors, academics, NGOs andgovernment agencies, but has beenwritten primarily for tax and CRprofessionals as well as chief financialofficers and other directors working inand with corporations.

Purpose of study

Taxing Issues explores the topic of corporate responsibility as it applies tothe payment of tax by corporations.It is not intended to assess whether aspecific level of tax payment is fair or not,but rather to explore the process of

decision-making involved in managing acompany’s taxation liabilities. Becausecorporations are liable to pay a range of taxes in addition to those charged ontheir profits, it does not restrict itself tothe subject of profits taxation.Specifically the report seeks to:

— Set the issue of tax management andpayment in the wider context of corporate responsibility

— Explore the approaches that companiestake to decisions regarding theplanning and payment of tax

— Provide guidance to companies wishingboth to demonstrate leadership andlimit potential risks arising in this area.

By choice, this report is focused oncorporations and the approach thatthey take to the payment of tax.For this reason we do not explore indetail the role of other actors includinggovernments. We nonethelessacknowledge that concerns abouttheir role are real (see section 2.3)and encourage others to consider theissue of responsibility as it applies tothese stakeholders.

Box 5 Box 6



9Taxing IssuesThe state of the debate

The integration of financial,environmental, social and economicissues into business practice

The topic is integrated into all relevant management decisions

Level of

understanding

Figure 2 Adapted from Novo Nordisk

Centuries Decades Years Today

Time since stakeholder ‘impulse’

Targets published anually with external verification

Initiate activities such as reporting and stakeholder dialogue

Definition of (proactive) strategy

Review by external consultants

SWOT analysis

Recognition of the need for a strategy change

Impulse from company stakeholders

Financial

Environmental

Social

Economic

One prominent feature of doing business inthe early 21st century is the attention paidto the impact that any business has on theenvironment and on the communities inwhich it operates. Issues like climatechange, poverty and HIV/AIDs are rarelyout of the newspaper headlines, withnews reports increasingly accompanied by

commentaries on the role businesses playin combating or contributing to such issues.

For many businesses, these pressures seemto have emerged almost overnight. A closeranalysis, however, reveals a slower, steadiergrowth in the corporate responsibilityagenda that has taken place over the pastfew decades moving from an initial focuson environmental issues in the 1970s and’80s, to embrace social issues such ashuman rights and child labour in the 1990s.Most recently, the approach that companiestake to economic issues such as ‘fair-pricing’ (e.g. in the pharmaceutical industry)and ‘fair-trade’ has become a moreprominent issue.

In this light, tax is merely the latest issueto emerge as part of a more thoroughreview of the economic impacts thatcompanies have.

Or as Jeffrey Owens, Director of the OECD’sCentre for Tax Policy and Administration,has put it, ‘Tax is where the environmentwas ten years ago.’ 3 The way in which thesewider economic issues have been managedwithin companies has also run a paralleltrajectory, with growing awareness andsophistication correlated with the time

since the initial ‘impulse’ from companystakeholders. Figure 2 illustrates how manycompanies see their progress in developingsystems to manage the different elementsof the corporate responsibility agenda.

2.1 The economic bottom line

While the CR agenda continues to evolverapidly, it is ironic that it has primarilyfocused on social and environmental issueswhile largely leaving the third, economic,element of the triple bottom line to oneside. In no small part this explains why ithas taken 20 years for the CR movement todebate issues such as tax. This situation israpidly changing with a variety of differentCR organisations researching both theeconomic bottom line and the issue of tax.

The state of the debate

2.0



10 Taxing IssuesThe state of the debate

Of nine CR organisations surveyed for thisreport, seven said that they were activelyresearching or advising companies onaspects of the economic bottom line witheight specifically focused on the issue of tax. 4 Nonetheless, many also made clearthe difficulty in understanding how todefine the economic bottom line as

distinct from the financial bottom line.

5

For that reason we believe we have aduty to explain our terminology and whatwe believe the impact of it might be.

Confusion about the economic line ismuch like the confusion many peopleexperience over the difference betweenaccountancy and economics. Withoutwishing to over-simplify the issue,accountancy is about individual entities,be they individuals or corporations.As such it is focused on what happenswithin an organisation, and ultimatelythe actions that drive its cashflow.It can be fairly said that this is anorganisation’s financial bottom line.

It can just as fairly be said that itseconomic bottom line is different. It ismore encompassing. An organisation’seconomic bottom line encompasses itsfinancial bottom line, but it looks beyondthe immediate and internal consequenceof its transactions and how they simplyaffect its cashflow. Instead, it looks at how

those internal transactions have impact onthe wider economic community, bothdirectly and indirectly and, as importantly,whether within that context they are of benefit or not.

This is not the first occasion on whichSustainAbility has touched on this theme.An earlier attempt to provide greaterclarity in framing the CR dimensions of the economic bottom line was providedin SustainAbility’s report The Changing Landscape of Liability . 6 This report,produced in partnership with financialand legal experts, sets out some basicprinciples in considering the economicaspects of the corporate responsibilityagenda. These include:

— Economic diversity covering corporateroles in encouraging free and genuinelycompetitive markets, both beingnecessary components of fair markets.

Corporate responsibility: a definition

Corporate responsibility is nowincreasingly understood to refer to anapproach to business that embodies:

— A commitment to economic, socialand environmental accountability

— Open and transparent businessprinciples and practices

— Ethical behaviour rooted in clearlydefined values

— Active respect for the full rangeof stakeholders.

‘Fair’ contribution to tax

Fair trade

Fair wages

Fair prices (drugs)

Issues evolution

Public exposure

and awareness

Figure 3

Fringe Emergence Expansion Escalation

Time

Embedding

Local activists International NGOs Media Opinion formers Regulators

Cumulative stakeholder involvement

Box 7



11

UK press coverage of tax andcorporate responsibility 9

Press mentions

Figure 4

2000

Year

2001 2002 2003 2004 2005

120

100

80

60

40

20

Mentions per yearof ‘tax justice’

Mentions per yearof ‘tax & CR’

Taxing IssuesThe state of the debate

— Economic equity addressing the‘equitable’ distribution of economic costsand benefits among stakeholdersincluding tax.

— Economic accountability focusedon the impact and influence of economic power.

These principles are also reflected in theconcerns and perspectives of a variety of stakeholder groups. For example, the rolethat corporations play when exercising theireconomic muscle in the market place haslong been a concern of governments intenton maintaining free and open markets.Economic equity, too, is an increasinglyimportant topic for a variety of stakeholdersincluding, for example, the role pharma-ceutical companies have played in resistingreductions in the price of AIDS drugs inmany developing countries around theworld.

Suppliers have also argued — in some casesvery successfully — for increased prices fortheir goods and services. Suppliers of coffee, chocolate and bananas, for example,have benefited from a willingness by someconsumers to pay more for these ‘fairlytraded’ products.

In fact, both of these issues have arguablycrossed from fringe issues associated withniche business practices to mainstreamconcerns within the business communityand wider society (see Figure 3). 7

2.2 Stakeholders and tax

Most recently of all, tax has become thesubject of greater attention with a varietyof stakeholder groups including investors(such as Henderson Global Investors andCitigroup), government regulators, NGOs(such as Global Witness, Save the Childrenand the Tax Justice Network) and membersof the business community activelyreviewing the approaches that companiestake to their tax policies and planning. Thisinterest is both reflected in, and driven by,the media coverage of the issue, which hasincreased significantly in the last few yearsparticularly in the UK (see Figure 4) but alsoin other countries around the world. 8

NGOs, regulators and governments inparticular, operating from a position of social concern, argue that corporatepractices are having damaging impactson local communities, and wider society(see Figure 5).

Recent reports by NGOs including Save theChildren, Christian Aid and Publish What

You Pay have drawn particular attention tothe damaging impacts of tax avoidance ondeveloping world economies. 10

Most investors, who traditionally have onlyhad a relatively superficial knowledge about

tax, are in turn interpreting this growingattention as a source of increased risk andare developing a more nuanced andsophisticated understanding of the agenda.Henderson Global Investors, for example,has reviewed corporate approaches to taxand tax risk, 11 and Citigroup has publishedguidance notes on how to analyse tax risk. 12

The corporate response, however, has todate been patchy. In the US for example,a proposal from the Financial AccountingStandards Board that would have requiredcompanies to reflect ‘uncertain taxpositions’ in their accounts was opposedby the vast majority of companies 13 and inmany continental European countries, theissue has yet to receive significant profilein the media or from the private sector. 14



Stakeholders’ interest incorporate approaches to tax

Figure 5

Investors— Need for reliable information— Avoid reputational risks— Mitigation within ‘responsible’

parameters— Create and maintain stable

tax regimes

Business peers— Avoid reputational risks— Mitigation within ‘responsible’

parameters— Create and maintain stable and

transparent tax regimes

Intergovernmental organisations— Combat illegal activity

(money laundering, tax havens)— Regulate harmful tax competition

between states— Support retention of capital in

developing countries

NGOs— Promote principle of ‘equity’

in taxation— Promote accountability for

business actions— Create stable and transparent

tax regimes— Support retention of capital

in developing countries

National governments— Ensure compliance with letter

and spirit of the law— Generate sustainable tax base for

the provision of public goods

Media— Promote debate about tax

practices and payment

Company

12 Taxing IssuesThe state of the debate

As noted, the debate in the UK has alreadyachieved a significant profile, with no fewerthan three of the big four accounting firmsproducing reports on the topic in the pastyear. PricewaterhouseCoopers’ chairman,Kieran Poynter, has claimed thataccountants in general are focusing moreon tax assurance work than aggressive tax

planning, and for many UK companies theissue is already clearly understood to playinto existing concerns on tax risk.

A survey conducted by Deloitte in 2005,for example, found that the number of UK tax directors describing their approachto tax as ‘conservative’ (risk averse) hasincreased from 17% in 2003 to 35% in2005. 15 Henderson Global Investors too hassuggested that a significant number of UKcompanies do not minimise the tax thatthey might pay, because to do so wouldexpose them to too much risk of challengefrom the taxation authorities, withconsequent cost. 16

Ultimately, whatever the motive, increasedscrutiny from different stakeholders isfuelling further interest in the approachthat companies take to tax policies andplanning.

As Tax Planning International Review hasargued, ‘The attitude of revenue authorities,corporate governors and the public at largeis definitely shifting against so-calledaggressive tax planning.’ 17 Figure 5summarises the views of a variety of stakeholders.

Tax as an ethical issue

While there is clearly growing stakeholderinterest in the issue of tax and CR, formany in industry, legal distinctions arestill paramount in determining levels of tax risk and wider responsibilities. AsKPMG argues in a recent report, ‘In thepast there was a clear distinction betweenlegal tax avoidance and illegal tax evasion.The distinction remains clear in law, buthas become blurred in the minds of governments, regulators and the public.’ 19

But, with the ever growing involvement of governments, the media, NGOs and evenreligious groups such as Christian Aid andthe Catholic Church, the issue is blurring asit is transformed from a narrow technicaldiscussion for specialists to one that isovertly ethical and social.

This ethical dimension has been illustratedin the US where a number of companieshave been widely criticised for being‘unpatriotic’ in planning moves to avoidcorporation tax by reincorporating inBermuda. In the UK, some were stunnedby a provocative comparison drawn bythe UK’s HM Revenue & Customs (HMRC)

between drink-driving and tax avoidance.Nonetheless, the association clearlyillustrates the degree of emotion that thedebate now engenders. 20

Nonetheless, what is becoming increasinglyapparent is that a narrow technicalapproach to tax planning is unlikely toprotect companies from charges of irresponsibility and associated reputationaldamage. Focusing exclusively on whatconstitutes a legal or illegal approach, anddeveloping planning techniques that meetthe letter of the law, while infringing thespirit, are likely to be increasingly con-troversial in the eyes of stakeholder groupscontributing to this debate. As Financial Times columnist Roger Cowe has argued,‘This is not an argument about legality,it is an argument about respon-sibility.And it is intrinsic to corporate responsibilitythinking — for example on labourconditions, diversity action or communitysupport — that it is not enough simply tooperate within the law.’ 21



There are signs that this perspective isbeginning to catch the attention of financedirectors, at least in many UK companies.A survey in the autumn of 2005 byAccountancy Age , for example, found thatof the 223 finance directors whoparticipated, 57% said that tax avoidancedid have ethical implications.22

PricewaterhouseCoopers, as part of itsguidance to clients, argues for example thatapproaches to tax planning need to bebased on, among other things:

— The importance of the company’sreputation among key stakeholders(taking into account a wider perspectiveon which stakeholders may be interestedin the company’s tax position).

— How the tax strategy relates tobusiness ethics and/or policies oncorporate responsibility.

As Susan Symons, Tax Partner atPricewaterhouseCoopers, puts it to herclients, ‘Do you need to redress the balancebetween short-term, tangible, financialbenefits for shareholders, and the longer-term more intangible benefit of reputationwith key groups of stakeholders?’ 23


Tax as a material CR issue 18

Given the central importance of tax as anelement of a company’s economic bottomline — and the substantial sums of moneythat are often involved — we wouldexpect tax to be considered a material CRissue for the vast majority of companies.

1 Direct financial impacts over theshort-term

2 Policy-based performance

3 Business peer-based norms

4 Stakeholder behaviour and concerns

5 Social norms(regulatory or quasi-regulatory)

The checklist of questions given belowis intended to help prompt companymanagers to review their approach totax in light of shifting stakeholderperspectives on the issue.

Does the company’s approach to taxpolicy and planning expose theorganisation to challenge from keystakeholders that are likely to resultin direct financial impacts over theshort term?

Does the company have businessprinciples or policies that apply (explicitlyor implicitly) to economic impactsincluding the payment of tax?

How do tax payment rates compare withcompany peers – and what might thereasons be for any discrepancies?

How would your stakeholders view thecompany's approach to tax policy andplanning if it were reported on publicly?

Are there other standards of behaviour –either codified in regulation or not – thatare likely to conflict with the company’sapproach to tax policy and planning?

Box 8

A survey in the autumn of 2005 byAccountancy Age found that of the223 finance directors who participated,57% said that tax avoidance did haveethical implications.



14

This distinction between a narrow financialand legalistic approach to tax, and anaccountability-driven, economic approachis critical. Instead of focusing exclusively onan absolute boundary between illegal andlegal approaches to tax, companies shouldfocus on understanding what is consideredto be responsible and irresponsible.

That being said, considering tax as a CRissue does not mean that more tax must bepaid than the law requires. In a very realsense this is not possible; all tax is paidbecause a law requires its settlement.Nor does it mean that tax planning stops.The laws of most countries offer alternativeways in which real economic transactionscan be structured and the choicesoften carry different tax consequences.Making choices between those optionsis a legitimate and indeed necessarymanagement activity but it also haseconomic impacts for which stakeholdersincreasingly hold companies accountable.The way in which companies should make

judgements on these issues is exploredin further detail in Chapter 6.

Figure 6 provides a graphical representationof the distinction between the legal/illegalboundary — which in theory is absolute —and a ‘softer’ boundary between what isconsidered to be responsible/irresponsible.This is framed around a categorisationdeveloped by Lord Templeman, a noted(and now retired) law lord in the UK. 24

It is possible for business to act responsiblywith regard to the payment of tax, andsome progressive businesses are alreadydoing so. In a recent analysis of high streetbanks, for example, The Co-operative Bankwas viewed very positively (see Box 9). 25

2.3 Fair tax and the role of other actors

In undertaking this research, we werewarned that there were a number of important factors that complicate thequestion of what constitutes a responsiblecorporate approach to tax. Foremost amongthese is the question of how responsibleother protagonists such as governmentsand individuals themselves are. In thecourse of this research, for example, storiesabout the tax-planning activities of the‘super-rich’ were rarely far from theheadlines, 26 and while these stories excitemuch popular interest, the small everydaytax avoidance — and evasion — activitiesof the general public pass with muchless comment.

In addition, during this same period, thechallenges that governments face in theway they manage policy frameworks andthe impacts that they have on tax payershas also been highlighted. For many,a ‘fair tax’ is as much about government’sobligations to be responsible in raisingand spending taxes as it is about theresponsibilities of companies andindividuals to adopt a responsibleapproach to its payment.

Others we have consulted have raisedparticular criticism of the role thatgovernments have played in failing toagree common approaches to the taxationof multinational businesses. This lack of consistency in approaches to tax betweennation states and the shifting politicaldynamic around tax legislation can, for

example, make it difficult for companiesto conduct tax planning activitiesresponsibly when the consequences of these actions might extend over aconsiderable number of years.

International tax competition — thecompetition between nation states forinward investment from business on thebasis of the effective tax rate — servesto complicate the issue further. Underpressure from corporations, governmentsincreasingly have to play a difficultbalancing act between ensuring anappropriate taxation rate that meets theneeds and expectations of their electorates,while also ensuring that taxes payableby those companies are competitive withother countries.

Finally, tax planning is also a highlytechnical profession, and has becomeinsulated from non-tax professionals bythe complex terminology and technicalnature of the work. While this has enabledthe industry to develop sophisticatedapproaches to tax planning, the downsidehas been that the practice is very poorlyunderstood by the wider public, keystakeholders including investors, andoften even within the companies in whichtax professionals work or to whom theysupply their services.

Taxing IssuesThe state of the debate

From evasion to mitigation

ShamIllegal withthe appearance

of legality

Blurred boundarybetween irresponsibleand responsible

Absolute boundarybetween illegaland legal

AvoidanceTechnically legal

MitigationLegal and welcomed

EvasionAlways illegal

Figure 6




Technical terms like ‘avoidance’ and‘transfer-pricing’, for example, are oftenseen as synonymous with unacceptablebehaviour, as Loughlin Hickey, Head of KPMG’s Europe, Middle East and AsiaPractice, has suggested. 27

While these issues certainly complicate the

issue of ‘CR and tax’, most are not new tothe CR agenda. Nations also compete toattract inward investment on the basis of other parameters including environmentaland social legislation; the importance of other actors and their responsibilities hasalso been cited in other areas of corporateresponsibility 28 and tax is certainly not thefirst technical discipline to have beenconfronted by stakeholder antipathy.In recent years the scientific community,and in particular the application of genomics, has also come in for heavychallenge. It is in fact for these reasonsthat CR is likely to have a great deal tooffer tax practitioners in providing helpfulinsights into how to engage in theemerging debate.

Example of responsible behaviour —The Co-operative Bank

The Tax Justice Network recentlycompared levels of tax payments amonga group of UK banks. The key findingsfrom this analysis are given below,focusing in particular on the performance

of The Co-operative Bank.

— The Co-operative Bank’s Tax Gap isvirtually non-existent. In effect thismeant that The Co-operative Bankpaid the tax expected of it. This is incontrast to all other banks.

— The Co-operative Bank had thesimplest tax reconciliation of any bankin the sample. The tax reconciliationgave no indication of aggressive taxplanning taking place.

— The Co-operative Bank enjoyed astandard of financial reporting withinits accounts unparalleled with thecompanies surveyed; and had minimaland immaterial prior year [tax]adjustments.

On such a small sample basis it isimpossible to conclude whether TheCo-operative Bank’s performance was aconsequence of it being almost entirelyUK based; because it was a smallercompany [compared with FTSE 50 banks];or whether management policy was amajor influence. It may well be all threebut the presence of a very high level of satisfactory reporting suggests thatmanagement policy is a major influence.This suggests that other companies couldachieve this level if they wished to do so.

Source: Mind the Tax Gap —How Companies Could Help Beat Poverty Tax Justice Network

Box 9

Technical terms like ‘avoidance’ and‘transfer-pricing’, for example, areoften seen as synonymous withunacceptable behaviour.



16 Taxing IssuesThe business case

Presenting responsible tax policiesand planning as an issue of corporateresponsibility is not the only basis forreassessing tax planning activities.There is also evidence to suggest there isan increasingly compelling business case,from the wider perspective of the businesscommunity taken as a whole, from the

perspective of the company itself and,more specifically from company investors.

3.1 The case for the businesscommunity

One oft-overlooked cost to businessof irresponsible tax planning is thegeneralised cost that can materialiseacross the business community as a whole.For example, in the UK, the tax code hasgrown by 54% in the last five years,resulting in many thousands of pages of primary and secondary legislation andsupporting statements; this in itself represents a significant burden onbusiness. 29 This growth is partly a functionof new taxes being added to the code, butis also the inevitable outcome of aggressivetax planning that seeks to exploit legalloopholes, holes that regulators then seekto secure. As one executive told us, thecalculation of benefit is one of ‘instantcash prizes vs. long-term stability’, withthe short-term benefits going to individualbusinesses that exploit existing taxlegislation, while the business communityas a whole loses out in the longer term.

Most significant of all, however, is theessential role taxation plays in providingthe legislative, cultural and marketenvironment in which businesses thrive.Removing the source of this stability isultimately counter-productive to businessas it creates a more hostile and uncertainbusiness environment with the potentiallydisastrous implications uncertainty

can bring.

This issue is particularly apparent indeveloping countries where the temptationto provide fiscal incentives to attractinward investment is often particularlycompelling for developing countrygovernments but is cited as one of themost damaging strategies to their long-term development. 30 For example, the IMF

recently recommended that the eliminationof tax exemptions should be one of thestrategies Mozambique should employ toarrest further deterioration in the country’sfiscal performance. ‘Raising the tax-revenue-to-GDP ratio, strengthening taxadministration, eliminating tax exemptions,and improving compliance are all neededactions,’ said IMF managing directorTakatoshi Kato during a visit toMozambique in the summer of 2005. 31

3.2 The case for the company

For individual companies, the businesscase focuses explicitly on issues of ‘taxrisk’. 32 Three main sources of risk aregenerally cited:

— Reputational riskThe importance of reputational risks tocompanies can be easily down-played.It is for example difficult to ascribespecific sums to the value of a corporatereputation, and even more difficult toprove causation when a weakenedreputation leads to generalised businessimpacts. Nonetheless, it is an issuethat company management take veryseriously. No less than 97% of thosecompanies surveyed by Pricewaterhouse-Coopers said that they would beconcerned about negative press coverageof their tax planning, and 40% citedcorporate responsibility as the mostimportant driver for measuring taxespaid. 33 Ernst and Young, surveying thetax directors in over 350 large

companies, found that a majority nowsee tax risk management as one — if notthe — priority for their companies. 34

No longer is the focus on reducing costor creating value, today the focus is verymuch on risk and, in particular, ensuringthat financial reporting is accurate,that corporate governance is effectiveand that company reputation is notcompromised.

The business casefor responsibletax policies andplanning

3.0



— Regime riskA second source of risk is associatedwith the substantial and increasing riskof litigation in the event of a company’staxation policy being challenged by oneor more of the tax authoritiesconsidering its affairs. The UK’s HMRCfor example has expressed interest in

increasing penalties for aggressive taxavoidance including more prosecutionsfor taxpayers suspected of dishonesty,and stiffer penalties for underpayments.Many large companies at least implicitlyacknowledge this risk. It is not commonfor example for companies to reduce theoverall level of tax payment as far as islegally possible. As US economist MartinSullivan has put it, ‘Even if everything isperfectly legal, if you get too cute, thereis no end to the trouble you can stir up —with an individual auditor, with a wholetax agency, with a whole government.’ 35

Ultimately companies need to balancetheir desire to minimise tax in the shortterm, with the need to maintain goodrelations with tax authorities in thelong term.

More tangibly, there is also an increasingrisk that companies will lose access togovernment contracts if they undertaketheir activities through tax havenvehicles or if they undertake othertransactions seen as unacceptable to thegovernment of the country offering suchcontracts. It has, for example, been madea condition of bidding for UK PublicFinance Initiative (PFI) contracts that thecompany making the bid be UK based.Several attempts have also been made inthe US to restrict access to governmentcontracts for companies which have‘inverted’ by moving their headquartersoutside the US for taxation purposes.Indeed, this was a major element inSenator John Kerry’s presidentialcampaign in 2004.

— Cashflow riskFinally, having greater certainty aboutfuture cashflow is often in itself avaluable component for business.Extensive tax planning, however, canreduce this certainty for companymanagement through inevitableuncertainties about some taxation

liabilities, possible impacts on futurecashflow and the diversion of seniormanagement effort that dealing withsuch cases requires. Pursuing a lessaggressive taxation strategy can payoff by securing greater certainty inthis area.

3.3 The case for investors

Clearly if a company suffers for any of theabove reasons, investors will usually beexpected to suffer as well. Therefore fora company to face any of the risks notedin the previous section will usually bedisadvantageous to its shareholders.In addition, however, there are a varietyof other ways in which aggressive taxplanning might represent a risk forinvestors. But much of this additional riskis compounded by poor communicationbetween investors and companies.As Citigroup has argued, the ‘complexityof tax planning and the lack of information[provided by companies], dissuades allbut the most diligent investors frominvestigating.’ 36

But these issues can be very significant,for example while a number of performanceindicators are based on pre-tax profits,many are focused on after-tax figures.Small changes in overall tax liabilitiestherefore can have very significant effectson these indicators creating extra potentialrisks for investors.

For example the uncertainty of taxationreporting as a result of challenges toaggressive taxation strategies can give riseto significant variations in stated post-taxearnings. Post-tax earnings are in turn thebasis of price/earnings (p/e) ratios, whichare seen as key indicators in corporatevaluations. If taxation impacts on what is

otherwise reasonably objective data, thiscan have a material impact on investorconfidence.

In addition, a significant component inthe taxation charge of many companies isthe deferred tax charge where companiesregister an apparent tax charge in theirprofit and loss account with a much lowersum being actually paid in tax. The resultingdifference is treated as a deferred taxliability, which can be substantial(amounting to more than US$15 billion onthe 2003 accounts for BP, equivalent to20% of its shareholder funds). The problemfor investors is that there is no way of knowing when, or if, these liabilities mightcrystallise. As above, when companies arevalued on the basis of after tax cashflowsthis creates an uncertainty that is hard tofactor into valuation estimates. This issuewas underlined in late 2005 when Vodafoneannounced that it would probably have topay a tax bill of £5 billion from 2005 to2008. The announcement knocked £10billion off the group’s stock marketcapitalisation. 37

And finally, once a pattern of uncertaintyin taxation reporting is known to exist, thenit is possible that a company may trade ata discount to its true value for fear thatfurther uncertainties will be revealed.

17Taxing IssuesThe business case

Once a pattern of uncertainty in taxationreporting is known to exist, then it ispossible that a company may trade at adiscount to its true value for fear thatfurther uncertainties will be revealed.



18 Taxing IssuesAt the coal face

Many of the issues that are addressedwithin the corporate responsibilitydebate are controversial, but in ourexperience few if any have been asdivisive as the issue of tax. As partof this ongoing debate, we invitedRichard Murphy of Tax ResearchLLP, and John Whiting, Tax Partner

at PricewaterhouseCoopers in the UK,

38

to discuss some of the underlying issues.

Seb BeloeJohn, as a leading tax practitioner, do youthink there is a corporate responsibilitydimension to the issue of tax?

John WhitingCorporate responsibility covers many areasand increasingly tax is included within it.It is clearly a company’s responsibility topay the taxes that are due as a result of itsbusiness activities. At the same time, thecompany has a responsibility to itsshareholders to give them a proper return —which must include taking advantage of sensible planning to manage the company’stax bills appropriately. There can be noobligation on a company — or an individualfor that matter — to pay more tax than isdue. In planning its actions, a companymust be able, when faced with two coursesof action — both equally sensible inbusiness and economic terms — to choosethe course of action that attracts the lowertax bill.

The difficulty, however, lies in balancingthese varying responsibilities whilerespecting the needs of stakeholders.In tax terms, management needs to assessthe risks of its action and agree its taxstrategy. What is its attitude to tax riskand how aggressive will its tax planning be?Has it assessed and planned for all therisks this entails? Then it needs to considerthe appropriate level of reporting: in theinterests of transparency it needs toconsider reporting on what it is doing so

that stakeholders can assess its actions.

Seb BeloeSo the legislative frameworks are clearlyessential, with companies also needingto take account of the expectations of key stakeholders. Richard, as a leadingadvocate in this area, what is your viewon the relationship between corporateresponsibility and tax?

Richard MurphyI think the issue is more fundamental thanJohn suggests. Corporate responsibility is infact nonsensical without the corporationhaving a sense of citizenship, of beinggrounded in those locations in which itconducts its trade. It is about a company’sduty to its customers, its employees, itssuppliers and to the communities in whichthey live, each of which runs in parallelwith the obligation to shareholders.

Many of the needs of these communitiesare paid for by the governments of theterritories in which those people reside.As such, for a company to seek to avoid itsobligations to the territories in which itconducts its trade is a deliberate act of corporate irresponsibility. It is irresponsiblebecause it is an action that seeks to denyboth the importance of accountabilitywithin democratic society, and a company’sduty to support the societies in which itsstakeholders live and work. Companies dohave that duty. What else can corporateresponsibility be about?

Three things evidence this responsibility.The first is a desire to declare taxes wherethey are earned. The second is a willingnessto work within the spirit as well as theletter of the law. The third is transparentreporting that proves that the first twohave happened.

At the coal face

4.0

‘For a company to seek to avoid itsobligations to the territories in whichit conducts its trade is a deliberateact of corporate irresponsibility.’Richard MurphyTax Research LLP



19Taxing IssuesAt the coal face

Seb BeloeOne of the more controversial aspectsof tax planning has been the practice of ‘transfer-pricing’ whereby goods andservices are transferred across nationalboundaries while remaining within thesame organisation. In such cases,companies are often caught in a dispute

between different governments makingcontradictory claims on the same productsor services. The scale of such claims can run into many millions — even billions of US dollars. In these cases, what are therespective responsibilities of companies,and of governments?

Richard MurphyGlaxoSmithKline (GSK) is a goodcontemporary example of where this ishappening, and the scale of the claimdoes indeed run into the billions —US$7.6 billion to be precise!

The GSK case is clearly highly complex but Iwould argue that the fact that GSK wereone of the first companies to very obviouslyrelocate their manufacturing activitiesoutside their traditional areas of productionis not immaterial. Rather than beinglocated in the company’s countries of origin(the UK and the US), its facilities are nowlargely based in Singapore, Puerto Rico andIreland, all clearly chosen for taxationreasons, and giving rise to substantialsavings in tax, which the companyacknowledges.

Since the company has treated tax as a costthat it is trying to avoid, it seems possible,at the very least, that the UK and USgovernments are responding by treatingpart of that saving in tax as a cost saving,meaning more taxable benefit should bedeclared within their territories. Thecompany should in fact not be surprisedthat if it treats tax as a cost it is challengedupon the allocation of its costs. Instead,they should ask if they have applied the

right criteria to the management of theirtaxation liabilities.

None of this is to say that governmentsdo not have duties to companies and toeach other. Unfortunately it is difficultto coordinate this duty. There is nointernational body which can arbitratesuch disputes. There are no disclosuremechanisms that allow data of the typeinvolved in this dispute to be resolved

multilaterally. This is a failure of theinternational tax system. But until this isresolved, a multinational company thatseeks to exploit the limits of nationalboundaries for its own taxation advantageshould expect to suffer the consequence of a legal challenge that seeks to determinewhether such approaches can be sustainedin accordance with local law.

Seb BeloeSo, to an extent at least, companiesinvolved in this kind of dispute ‘have itcoming to them’?

John WhitingMultinational companies can feel verymuch ‘piggy in the middle’. Certainly nocompany should embark on a saga thatmight open it up to the risk of tax authorityinvestigation and double tax exposurewithout proper care and attention, andcompanies also undoubtedly have aresponsibility to use proper prices fortheir products, and support these withappropriate documentation. That thetransactions need to be real goes withoutsaying. A company needs to make whatevertax returns are demanded by the taxauthorities relevant to where it doesbusiness. Having done that all to the bestof its abilities and in accordance with thelaws of the countries concerned, and of course paid its taxes at the right time, ithas discharged its responsibilities.

But in all these cases, governments toohave responsibilities. Tax authorities canchallenge the correctness of tax returns,but these challenges should be based on

an understanding of the company’sbusiness; sometimes, it has to be said,that can be lacking.

This is why both industry and governmentneed to pursue good relationships andactive dialogue to ensure legislation isdeveloped in a properly informedenvironment.

While this is improving, surely it mustalso be part of a tax authority’s role to carry

out its job with the minimum of intrusion.The UK HM Revenue & Customs (HMRC)has made much of its aim to work withbusinesses and minimise burdens on them.It is surely part of the taxman’s job to liaisenot just in pursuit of defaulters or what itsees as unacceptable practices, but also tohelp its customers by smoothing outdifficulties.

And it is not just procedures that taxauthorities should coordinate. Rules needto be harmonised in the first place forthings as basic as cross-border trading.Governments should make sure that taxtreaties address this area and provide fora dispute resolution process. Companiesshould not be put to unnecessary costs andconcerns just because two tax authoritiescannot agree how their respective rulesshould interact.

Seb BeloeClearly there is an argument abouthow much of a responsibility lies withgovernment and how much with business,but what in practice do you thinkcompanies should be doing to addresstheir responsibilities?

John WhitingUltimately it has to be part of a company’sresponsibility to pay its taxes, whichincludes of course making appropriatereturns to the tax authorities, but alsoextends to all the taxes that impact onthe company’s activities — and there willbe many, far more than just corporateprofits tax.



20 Taxing IssuesAt the coal face

What is considered ‘appropriate’ — orindeed responsible — is not always clear.Companies need to make this judgementbased on their tax strategies and theirattitudes to risk, as well as their activitiesand economic circumstances. Ideally,companies should think through theseissues and have general guidelines, in the

same way that they no doubt have policiesin place for many of their activities.

In any case, companies also have aresponsibility to report on their taxposition to stakeholders. That reportingshould go beyond a simple recording of thecorporate tax charge; it should adhere tosimilar principles as laid out inPricewaterhouseCoopers’ Total TaxContribution framework including:

— Reporting the full tax contributionit has made, showing meaningfulsplits into major taxes.

— Commenting on its tax strategy andpolicies and how these link to andsupport overall business strategyand principles.

— Discussing its approach to themanagement of tax risk.

— Considering reporting taxes collected,tax administration costs and widereconomic contribution (e.g. inlicence fees).

The aim of this increased reporting shouldbe to improve transparency and to give aproper picture of the tax contribution thatthe company is making to the country.

Responsibility cuts two ways, though.The government has a responsibility forcreating and maintaining a tax system thatis clear and understandable, and whichfacilitates compliance. That responsibilityencompasses making sure that the taxsystem encourages business and recognisesthe contribution that business makes to

the wider economy.

Richard MurphyI would start by saying that companiesshould not in principle undertaketransactions or steps in transactions thatare intended mainly or entirely to securea tax advantage and which have nocommercial or practical purpose beyondsecuring that advantage. A company thatis seeking to pursue responsible taxplanning would I believe seek to avoidsuch transactions as a matter of course.This does not stop tax planning, but itmeans that it takes place within clearparameters.

Then, as John points out, transparencyis essential. It is not good enough for acompany simply to claim to be responsiblewith regard to any issue. It has todemonstrate that fact. As such greaterdisclosure of tax paid is not just part of a company's corporate responsibility; it isan essential element of it. Corporateresponsibility is a duty of care to peopleand, given that tax is and can only be paidto nation states, that responsibility cannotbe evidenced unless a company disclosesthe payments it makes to each state inwhich it operates.

But, and this is where I disagree withJohn, it is not enough to publishimpressively large amounts of taxes paid.As all accountants know, data ismeaningless when presented in isolation.Wider disclosure is needed to enable anytax disclosure to be understood and thisincludes information on inter-group and

external sales and purchases, labour costs,interest charges, profit and tax paid forevery country in which a group operates.The tax charge should also be analysedinto the normal component elementsused in notes to financial statements.Then, and only then, can the corporationbe considered to have disclosed theinformation needed to demonstrate thatit is acting responsibly.

‘Responsibility cuts two ways, though.The government has a responsibility forcreating and maintaining a tax systemthat is clear and understandable, andwhich facilitates compliance.’John WhitingPricewaterhouseCoopers



5.1 Tax risk and responsibility

As we have sought to illustrate, many —if not most — companies acknowledgethe real risks associated with managingtax in a way that focuses purely on legalframeworks and does not take account of

the views of key stakeholders. As HendersonGlobal Investors put it in a report publishedin October 2005, ‘Where good workingrelationships with tax authorities and agood reputation in the eyes of governmentmore broadly, as well as with customers,employees and the public at large . . . mightbe prejudiced by “aggressive” tax planning,the prudent business course might be toforgo the tax opportunity.’ 39

We stress however, that while important,this is not the same as acting in the mannerwe propose. Of course, risk managementis an essential component of corporateresponsibility, but if it is the sole criterionfor making decisions on tax then thosedecisions stay firmly in the complianceand ‘financial bottom line’ frames of reference and are not being judgedagainst broader accountability for the‘economic bottom line’.

The distinction is relatively simple. Lookingthrough the lens of legal, financialcompliance leads to a narrow balancing of risk and opportunity in pursuit of taxminimisation. Looking through the duallenses of compliance and accountabilitybrings into play a range of other factorswhich could significantly influencethe final tax strategy and outcome.This acknowledges the views andexpectations of the stakeholders to whomthe company holds itself accountable and,more particularly, actively manages thecompeting claims on the wealth (or addedvalue) created by the enterprise.

This approach sees tax not simply as a costto be avoided but as a legitimate paymentfrom wealth created to the countriesor communities that contributed to thecreation of wealth in the first place.This does not necessarily imply higher sumsof tax actually paid, but it does imply abroader and deeper appraisal of tax policy

and strategy than traditional compliancethinking has required. The growing numberof companies that report on their taxpayments as part of their economic bottomline in their corporate responsibility reportssuggests that — at least implicitly — thepayment of tax is seen in this way.

As many companies have found, while thepursuit of responsible practices, whether forsocial, environmental or economic reasons,has given rise to apparent increases inimmediate cost there have also often beenbenefits. It is not uncommon now to hearthe argument put forward that companiesengage in such ethically based, corporatelyresponsible decision-making because it isin fact consistent with their own goals asprofit-making enterprises.

This might also be true with regard totaxation. If tax is to be managed inaccordance with corporate responsibilitycriteria then it means that these affairswill be managed from an economic andnot just from a financial perspective.It may or may not follow that the tax paidwill increase or decrease. It is also possiblethat the locations where tax will be paidwill change. Neither is surprising given thata different management technique wouldbe in use for this issue.

21Taxing IssuesCorporate responsibility and tax

Corporateresponsibilityand tax

5.0

This approach sees tax not simplyas a cost to be avoided but as alegitimate payment from wealthcreated to the countries or communitiesthat contributed to the creation of wealth in the first place.



22 Taxing IssuesCorporate responsibility and tax

5.2 Key principles

So how should companies that are keen toaddress this agenda respond? We outlinethree key principles drawn from — andtested in — other controversial areas of corporate practice that we believe form

a robust framework for a responsibleapproach to tax policies and planning.

Accountability

Accountability represents a core principle inany discussion of corporate responsibilityand in this context refers to the need forcompanies to give an account of theeconomic contribution they make throughtheir payment of tax. An analogy mighthelp in illustrating why companies are nowbeing held to account in this way.

When the issue of a corporation being heldaccountable for what occurred within theirsupply chain was first raised as a CR issue,many companies did not see why theyshould be responsible for what happenedon the other side of a transaction in whichthey participated. That might be seen as thefinancial perspective. From their internalperspective the issue was not their concern.But when viewed from what might beconsidered the broader, economicperspective, issues such as the exploitationof child labour within their supply chainwere clearly issues in which they wereinvolved, and on which they were in somesense accountable, even if indirectly.

To their credit, many companies haveaccepted this argument. They realise theirimpact on society extends beyond theimmediate issues on which they areengaged or on which they contract.

The approach that the vast majorityof companies take to tax is analogous.

Companies are being held accountablefor their wider economic impacts, whetherthis is through their purchasing policiesand in their supply chain, or through theirpayment of tax. Increasingly stakeholdersare looking to companies to express theircorporate responsibility in the way theyconsider and govern their payment of tax,i.e. by treating it not just simply as a costto be minimised, but as a key componentof their wider economic impact.

As already mentioned, the emphasis in thisreport is not on the actual amount of taxpaid, but on the process of decision-makingabout tax payments. Here we would arguethat the principle of accountability suggeststax planning is responsible where:

— The planning does not seek to shift thepayment of a tax out of the country inwhich the other economic benefits of the transaction arise.

— The tax planning is secondary to thecommercial purpose of the transactionand does not define or significantlyalter that purpose.

Transparency

Within the last decade, debates aboutthe disposal of Shell’s Brent Spar andMonsanto’s attempt to introducegenetically modified (GM) crops in Europesparked outrage in spite of scientific andlegal frameworks which said sinking theBrent Spar was the best environmentaloption and that planting GM crops was

permissible in certain circumstances.

Responding to this and other criticismsof Shell, Cor Herkströter, then Chairmanof the company’s Committee of ManagingDirectors, argued that his and othercompanies were no longer operatingin what he called a ‘trust me’ world.Stakeholders simply didn’t trust them tobehave responsibly, nor indeed did they

even trust the ensuing reassurances frombusiness. Instead, Herkströter argued,companies were operating in a ‘show me’world, where stakeholders needed to seeevidence of how companies were managingcontroversial issues. Transparency, Shellargued, was one way of beginning torebuild trust.

Similarly, the issue of tax is also nowunder growing scrutiny from stakeholders.Bland assurances from the businesscommunity that tax is well governedinevitably fall on very sceptical ground.As KPMG argues, ‘An attitude of benignassumption that tax is under control cannotprovide the transparency demanded inthese times of heightened sensitivity tocorporate governance and responsibilityissues.’ 40

PricewaterhouseCoopers, too, recommendsthat companies provide greater disclosureof tax payments so as to increasetransparency around the ‘total taxcontribution’ that companies make,and also to ‘help answer the ultimatequestion: what exactly is a responsibletax strategy?’ 41

Finance directors have had what oneexecutive described to us as a ‘conspiracyof trust’ with their tax directors andadvisers, whereby they have largely beentrusted to ensure that their approach totaxation is both legal and responsible.



This lack of formal, transparent decision-making around tax also seems to be borneout by the relative lack of interest shownby boards in tax affairs, and the limitednumber of companies that have taxpolicies. With greater scrutiny of corporatepractice generally, combined with specificpressures on companies to be transparent

about their approach to tax, theseapproaches will probably have to change.

Transparency, however, is likely to requiremore than the simple disclosure of payments made, welcome as that would be.Demonstrating that a company is actingresponsibly will require a wider perspectiveon the context surrounding paymentsincluding the underlying ‘philosophy’ at thecompany as well as the specific policies andthe data on which the tax payments arebased. Chapter 6 provides additional detailon the types of additional information webelieve will be necessary if transparency isgenuinely to contribute to greater trust.

Consistency

And finally, in the same way thatcompanies are expected to be consistentin their application of core businessprinciples and values to areas of socialand environmental impact, so too is therean expectation that this should apply toareas of economic impact such as tax,wherever the company operates. Indeed,some companies actually reference theircommitment to pay taxes as an essentialcomponent of their business principles andgovernance. Johnson & Johnson, forexample, commits to ‘bear [their] fair shareof taxes’ as part of the company’s ‘credo’.

AstraZenecca says, ‘We draw a distinctionbetween tax planning using artificialstructures and optimising tax treatmentof business transactions and only engagein the latter.’ 42 Being consistent both inthe application of business principlesthroughout the organisation, including inthe area of tax, and being seen to be

consistent are likely to be key componentsin building greater trust and understandingof the validity of corporate approachesto tax.

5.3 Passive vs. active

Based on our conversations with taxpractitioners, as well as other sourcesof research in this area, it is clear that atleast some companies take an approachto tax that they believe is based, at

least implicitly, on strong principles of consistency and accountability. We wouldargue that, as in other controversial areasof business practice, it is important forcompanies that wish to rebuild trust toadopt an active interpretation of thesecore principles.

The framework summarised in Box 10 takesthese core principles and interprets them inthe context of what we would consider torepresent a responsible approach to taxpolicies and practice.

23Taxing IssuesCorporate responsibility and tax

Transparency, however, is likely torequire more than the simple disclosureof payments made, welcome as thatwould be.



24 Taxing IssuesCorporate responsibility and tax

From passive to active tax responsibility

Accountability

Transparency

Consistency

Passive tax responsibility

Tax seen solely as a cost to be minimised

Correct to the ‘letter’ of the law

Use of tax planning techniques in linewith competitor or peer group

Use of tax avoidance schemes focused onprofit and cash-flow criteria

Compliant with the laws of each state inwhich activity is undertaken but willing totake advantage of differences betweenthose legal systems

Disclosure made on a ‘need to know’ basisas required by law

Make reference to material tax issues

Segmental disclosure of tax paid inaccordance with law and reportingstandards

Tax policy and practice incidental tocorporate governance systems

Details of local tax regimes and relativerates as focus

Active tax responsibility

Tax acknowledged as a key element of acompany’s economic impact on society

True to the spirit of the law: avoids

exploitation of loopholes and transactionsundertaken solely/primarily for tax benefit

Supports moves to eliminate competitionon the basis of taxation

Use of tax mitigation techniques subjectto consideration of social and economicimpacts

Seeking to declare profits, claim costsand pay taxes in the states in which itcan be best determined that the profitwas earned

Full disclosure based on a ‘right to know’basis defined by stakeholders

Share unresolved tax dilemmasquantifying risk, causes and possibleoutcomes

Full disclosure of all taxes paid bycountry with relevant supporting data

Tax policy and practice integrated intocorporate governance systems

Global application of responsible taxprinciples irrespective of rate implicationslocally

Box 10



25Taxing IssuesConclusions and recommendations

This discussion paper has sought to shedsome light on the complex relationshipbetween corporate responsibility andcorporate tax policies and planning.In this section we offer some preliminaryconclusions on the basis of our researchas well as some recommendations on howcompanies can best integrate corporate

responsibility principles and thinking intotheir approach to tax. It is our view that byexplicitly linking tax policies and planningwith corporate responsibility, companiescan develop approaches that are robust inthe face of challenge from stakeholders,and form a firm foundation on which toconduct responsible tax planning.

Conclusion 1

There is increasing attention andimportance being given to the widereconomic impacts that companies haveon their stakeholders.

The wider economic contribution thatcompanies make to local and nationaleconomies has been the subject of growinginterest from a variety of stakeholdergroups. Key issues that have emerged inrecent years have included predatorylending practices in the financial sector,fuel poverty issues for energy companiesand pricing levels in corporate value chains.These and other industry sectors areincreasingly being interrogated on theirapproach to — and management of — theireconomic impacts. 43

RecommendationsCompanies concerned about the potentialbusiness risks associated with this evolvingagenda should improve their internalcapacity to analyse how issues such as‘responsible tax’ are likely to develop andwhat the appropriate managementstrategies are for addressing potential risks.

Particularly controversial issues such as thepayment of taxes in developing countriesmay be areas of significant risk. AsHenderson Global Investors has argued,‘Companies may be particularly vulnerableto public criticism if they are perceived asnot making an appropriate contribution topoverty reduction in developing countries.’ 44

The ‘issues evolution’ mapping toolpresented in Chapter 2 is one approach thatmay help companies to put some contextaround the issue of responsible tax and helpdevelop a more nuanced understanding of potential trajectories. Similarly, companiesmight also consider reviewing how theirspecific stakeholders view the issue andhow this might evolve (see Box 8).

Conclusion 2

The interests and involvement of stakeholders in the debate aboutcorporate tax policies and planning istransforming the agenda from one drivenprimarily by the observance of legal andfinancial standards, to one focused onresponsible behaviour and economicaccountability to stakeholder groups.

Tax has traditionally been the preserveof highly skilled, technical specialists.The growing interest in the topic from avariety of stakeholders is driving a morenuanced debate on what the appropriateor ‘responsible’ approach to corporate taxpolicies and planning is based on theinterests and approaches of thesestakeholders.

Conclusions andrecommendations

6.0

As with other areas of business practice,tax policies and planning need to be broughtfirmly and transparently within widergovernance frameworks including businessprinciples and corporate values.



26 Taxing IssuesConclusions and recommendations

RecommendationsAs KPMG pointed out in its 2004 reportTax in the Boardroom, ‘Parties involved inthe debate about what is an acceptablelevel in tax should learn from theirexperience in the wider corporategovernance debate.’ 45 Indeed, as with otherareas of business practice, tax policies and

planning need to be brought firmly andtransparently within wider governanceframeworks including business principlesand corporate values.

While the specific nature of theseframeworks will vary from company tocompany, we recommend that companiesshould adopt a two-pronged approachthat includes what one tax directordescribed to us as both ‘a technical analysisas well as a reputational screen’. The latter,he confessed was ‘infinitely more difficult’.Such screening at minimum can includebasic tests such as those developed by theInstitute of Business Ethics, which posesthree questions:

1 Do I mind others knowing whatI have decided?

2 Who does my decision affector hurt?

3 Would my decision be consideredfair by those affected? 46

More specifically, tests have been createdthat focus explicitly on tax. For example,the Australian Tax Office has generateda checklist of indicators that staff use toalert them to potential abuses. These areillustrated in Box 11.

While the Australian Tax Office approachis valuable to companies wishing tounderstand how — in this case — theAustralian regulator assesses the potentialfor abuse of the system, there are widerstakeholder pressures and expectations thatcompanies also experience. We thereforestrongly recommend that companies apply

a wider screen of the sort described in box10 to take account of wider interests andpressures that treat tax as a criticaleconomic contribution for companies andtheir stakeholders rather than merely as areputational risk.

Conclusion 3

A significant barrier to the integrationof CR principles into tax policies andplanning is the cultural framing of taxas a specialist, technical and non-corebusiness activity.

As with many aspects of change, thebiggest challenge in bringing together CRand tax is unlikely to be in the developmentof the ‘hardware’ such as the managementtools and metrics that need to be developedto enable tax professionals to review andreport on their tax policies. Instead, the realchallenge is likely to be cultural.

The technical nature of tax that has servedto insulate tax practices in the past isincreasingly emerging as a major barrier toeffective communication with external andinternal stakeholders. As Citigroup put it inits guidance note on tax risk, ‘There aregood reasons why a company’s tax issuesmay not be investigated fully by investors.First, and probably none truer, is that taxissues are complex and require an under-standing of almost alien terminology.’ 48

The Australian Tax Office’s ‘checklist’for identifying potential tax abuse 47

Financial or tax performance that variessubstantially from industry patterns:

— Significant variations in the amountsor patterns of tax payments compared

with past performance and relevanteconomic indicators and industrytrends.

— Unexplained variation betweeneconomic performance, productivityand tax performance.

— Unexplained losses, low effective taxrates, and cases where a business oran entity consistently pays relativelylow tax.

— A history of aggressive tax planningby the corporation, group, boardmembers, key executives or advisers.

— Weaknesses in the structures, processesand approaches to tax compliance.

— Tax outcomes that are inconsistentwith the policy intent of tax reform.

Box 11

We strongly recommend that companiesapply a wider screen to take account of wider interests and pressures that treat taxas a critical economic contribution forcompanies and their stakeholders ratherthan merely as a reputational risk.



This lack of communication creates risk andprobably contributes to the acknowledgedmistrust of the practices employed. Evenwithin a company there can be barriers.As a tax director at one FTSE 100 companytold us, ‘Tax exists in an alternative universe[to other business issues]. Even the financedirector’s eyes glaze over when you broach

the subject of tax.’

RecommendationsInternally, the arms-length approach to themanagement of tax that is so prevalent incompanies will need to change. Tax risksare becoming too public and too significantfor the issues to be managed in this way.A recent survey by Deloitte suggests thatprogress is already under way with thepercentage of senior managementexpressing an interest in the company’sapproach to tax growing from 50% in2003 to 74% in 2005. 49

This does, however, leave many companiesthat do not appear to give tax the attentionit deserves. It is also clear that much moreneeds to be done to build capacity withintax departments and the wider business tounderstand new forms of tax risk and linkswith wider reputational risks. The stepscompanies should consider include:

— Building links with other businessprocesses such as risk management,public policy/governmental affairs(see below), corporate responsibility andinvestor relations.

— Specific recruitment and/or training fordirectors and other senior managerscombined with regular engagement toraise awareness around the role of thetax function and provide updates on therapidly evolving range of tax risks.

— Undertaking corporate responsibility andethics training for tax professionals anddeveloping wider initiatives to equip taxprofessionals with skills to understand

and address the broader aspects of tax risk.

— Reinforcing governance processes toensure tax planning is conducted withinguidelines explicitly linked to widergovernance standards and principles, andensure that this can be documented andreported (see below).

The public face of the profession

The ‘alien terminology’ and lack of voluntary disclosure on tax issues alsorepresents a challenge for the taxprofession more broadly as well as forindividual companies. The reputation of the tax industry, dented by scandals atAndersen and more recently KPMG, 50

continues to suffer from lurid newspaperheadlines over the role the industry plays inassisting the ‘super-rich’ to avoid taxes. 51

Responding to these challenges will beessential in correcting such popularimpressions of the industry and under-pinning a more positive environment fortax planning. In particular, efforts areneeded to help demystify tax and taxplanning and better articulate both theimportant role that tax planning plays inhelping companies and individuals takeadvantage of tax system incentives in waysthat are intended by governments, butalso to clarify the boundaries of whatconstitutes responsible practice.

The tax ‘industry’ may indeed want toconsider taking proactive steps by takinga leaf out of the experiences of otherindustries that have come under fire. Whileorganisations like PricewaterhouseCoopersand others have developed their own codesof conduct, other industries such as thechemical industry, finance and theextractive sector 52 have all developedframeworks against which they are alsorequired to report publicly.

By publicly reporting against a code of conduct or quality standard that outlines aframework for responsible tax planning, andby taking proactive steps to ensure that thiscode is taught and adhered to, the taxprofession could build greater awareness of its own approach and responsibilities.

Conclusion 4

Increased transparency of corporateapproaches to tax is primarily anopportunity to build more robust taxstrategies, and to generate greaterconfidence among stakeholders.

Viewing increased transparency aroundthe reporting of tax policies, planning andpayment is an essential component inbuilding greater trust between companiesand key stakeholder groups.PricewaterhouseCoopers in its 2005 reporton tax reporting 53 suggested that increasedtransparency with external stakeholders willhave a range of benefits including:

— Greater general awareness of the taxand economic contribution of business.

— Encouraging a balanced view of taxcontributions.

— Responding to information demandsof key stakeholders and transparencyinitiatives.

— Tailored stakeholder reporting andcommunication.

— Longer-term reputation risk benefits.

The report also found overwhelmingsupport (74% of 70 respondents) from thebusiness community for the principle of greater transparency as a helpful tool inreducing tax risk.


Viewing increased transparency aroundthe reporting of tax policies, planning andpayment is an essential component inbuilding greater trust between companiesand key stakeholder groups.



RecommendationsSo how should companies report on theirapproach to tax? Given the complexitiesinvolved, we would recommend a stagedapproach that enables companies to buildincreasingly sophisticated systems andframeworks providing information on boththe overall principles and governance of tax

planning as well as specific information onlevels of payment. 54 Box 12 sets out a five-stage model leading from ‘compliance’ toan ‘integrated’ approach to reporting.

Current status of reportingAs previously noted, the coverage of economic issues in corporate responsibiltyreports is still a relatively novel practice.Nonetheless, a growing number of corporate reports do cover the wideraspects of economic impacts thatcompanies have. Of these, several also coverthe topic of tax — often as part of ‘valueadded’ or ‘value disbersed’ statements. Formost though, reporting is still at aLevel 1 ‘basic’ stage. Companies like BBVA,Co-operative Financial Services, Kesko,Philips, Placer Dome, PotashCorp,SABMiller, Talisman and Unilever all provideextensive information on wider economicperformance, but information on tax isgenerally confined to high-level data onoverall taxes paid, with occasional detailon where the taxes are paid. BP providesa more qualitative discussion of its rolein revenue generation as part of thecompany’s broader responsibilities togovernment.

The extractive sector in particular is wellrepresented among companies that reportin some detail on their tax policies andpayments. In part this is likely to be dueto specific challenges that these companieshave received from NGOs on theiroperations in developing countries, 55

and for many a direct result of theirinvolvement in the Extractive IndustriesTransparency Initiative (EITI). 56

28 Taxing IssuesConclusions and recommendations

Description

Reporting complies with legislation andaccounting standards applying withinthe reporting territory, but provides noadditional context or reference to the

issue as an element of corporateresponsibility.

Reporting provides basic informationon tax policies and payment as part of a company’s overall approach to CR.This may include general references tothe payment of tax as part of overalleconomic impact, specific positions thecompany has taken on taxation issuesand high-level data, but without anycontext or interpretation.

Companies provide a clearer articulationof the system used to manage thepayment of tax as a CR issue. There islikely to be evidence of overarchingpolicies and principles as well asreasonable data quality and coverageincluding of different taxes paid (andsubsidies received) by geography.

Companies provide comprehensiveinformation on their governance andmanagement of tax, and the specificlevels of tax payment across differentgeographies. In addition, there are likelyto be clear break-downs of the differenttypes of tax a company pays includingfor example pre-tax profits, levels of current and deferred tax, opening andclosing tax liabilities, and payment of different types of tax including on‘capital’ (corporation tax, irrecoverablesales tax, business rates), ‘people’(employer’s tax liabilities) and on‘product’ (custom duties, excise duties).

Reporting is both systematic andextensive in its coverage, addressingall the issues raised above. In addition,reporting provides evidence thatwider business decision-making andprocesses are coordinated to ensurethat the company is integrating theCR dimensions of tax into forwardplanning.

Reporting stages

Level

0 Compliance

1 Basic

2 Systematic

3 Extensive

4 Integrated

Examples

Widespread

BBVA, BP, TheCo-operative Bank,Kesko, Philips, PlacerDome, PotashCorp,SABMiller, Talisman,Unilever

Anglo-American,Statoil

None

None

Box 12




For a handful of companies, primarilydrawn from the extractive sector, thequality of reporting is clearly ‘systematic’.Statoil in particular, provides acomprehensive account of its tax paymentsboth by type of tax (income taxes, indirecttaxes, payroll taxes and so on) and bycountry in which it operates. The company

does also give some sense of its overallapproach to tax including as part of theEITI. Anglo-American, too, provides somedetail around its tax payments and includessome limited discussion of the underlyinggovenance of tax at the company.

6.1 The future of the responsiblecompany and tax

One of the challenges we envisaged inwriting this report was to make acompelling case that tax is indeed acorporate responsibility issue. In the event,it seems in the UK at least, where thecorporate responsibility implications of taxpolicies and planning have become aheated topic of debate, that the case hasbeen forcefully made for us. Here, leadingNGOs, government regulators, the media,investors and the tax community itself have all become actively involved,publishing reports and opinion pieceswith startling regularity. Many, if not all,have made the case that corporationswould be well advised to become moreengaged in this debate and review theirapproaches to tax policy and planningthrough this new ‘CR lens’. For many CR andtax is mainly a risk management issue. Forsome it is a more fundamental componentof a company’s responsibility to thecommunities in which it operates.

Taxing Issues is just one of at least eightmajor reports to have addressed the topicin 2005–06 alone. 57 Furthermore, there isevery sign that this level of interest willcontinue.

Elsewhere in the world, the debate has beenmore muted. Press searches reveal some

activity, and certainly individual actors suchas Citizens for Tax Justice in the US and theAustralian Tax Office have served at thevery least to foster debate in these other

jurisdictions.

While the level of debate in other countrieshas yet to reach the energetic levels thathave occurred in the UK, a number of trends suggest that the issue will emergeelsewhere. For example:

— Corporate responsibility reporting, ledby multinationals, is by definition notlimited by geography. At the behest of key stakeholders, leading companies canbe expected to expand their reporting of wider economic impacts, including tax. Inturn this is likely to foster interest fromother multinational companies elsewherein the world.

— The payment of tax in developingcountries is also likely to emerge asa key issue within the broader discussionabout corporate responsibility and tax.Currently the issue is focused onextractive industries, but with increasinglevels of cross-border trade throughoffshoring in the services sector, as wellas in the IT and apparel sectors,questions are also likely to be directed tothese industries on their tax contributionin these countries.

— In addition, as the major NGOs involvedin the Make Poverty History campaignnow believe tax is a key component inthe development agenda, it is likely thatthey will maintain a focus on this issueas they have previously on issues suchas fair trade.

— Wider efforts to increase transparencywithin tax havens (for example incombating corruption and organisedcrime) might also be expected to spillover into greater scrutiny of the role andinvolvement of multinational companiesin tax havens.

— Increasing use of fiscal instruments toachieve social and environmentalobjectives such as carbon taxes are alsolikely to foster wider discussions of thecontribution companies make to nationalexchequers.

Ultimately, we believe that as pressurecontinues to build for companies to adoptmore transparently responsible approachesto the question of tax, they will be bestserved by adopting an active interpretationof their responsibilities on this issue. Toomany stakeholders, ranging from investors,to regulators, to society at large, are wakingup to the importance of managing tax in arobust and responsible way. The days whentax could be managed by ‘gentlemen’sagreement’ are drawing to a close.

The days when tax could bemanaged by ‘gentlemen’s agreement’are drawing to a close.



30 Taxing Issues

Notes

1 This table is based on work undertakenby AccountAbility, specifically the reportRedefining Materiality: Practice and Public Policy for Effective Corporate Reporting , 2003.

2 Will Hutton, The State We’re In,

Little Brown, 2002.3 Quoted in Vanessa Houlder, ‘The TaxAvoidance Story as a Morality Tale’,Financial Times , 22 November 2004.

4 Organisations included AccountAbility(UK), Aspen Institute (US), Business forSocial Responsibility (US), Business in theCommunity (UK), CSR Europe (Bel),Forum for the Future (UK), the GlobalReporting Initiative (NL), the TellusInstitute (US) and Tomorrow’s Company(UK).

5 See, for example, Business for SocialResponsibility, Reporting on Economic Impacts , 2005.

6 SustainAbility, Swiss Re, InsightInvestment and Foley Hoag LLP,The Changing Landscape of Liability: A Director’s Guide to Trends in Corporate Environmental, Social and Economic Liability , 2004.

7 For example, prices charged for AIDSmedicines in least developed countrieshave fallen from over US$1,000 perpatient per year in May 2000 to underUS$168 in January 2005 (Medicins SansFrontières, Untangling the Web of Price Reductions: a Pricing Guide for the Purchase of ARVs for Developing Countries , 2005).

8 For example, in 2005 media stories onthis topic have appeared in countriesincluding Australia, Canada, China, India,Ireland, Korea, New Zealand, Russia,South Africa and the US.

9 We have used ‘tax and corporateresponsibility’ and ‘tax justice’ as bothterms have come into common usagein recent years to cover key elements of this debate.

10 Including various reports fromPublish What You Pay; Christian Aid,The Shirts off Their Backs – How Tax Policies Fleece the Poor , 2005; andSave the Children, Beyond Rhetoric: Measuring Revenue Transparency , 2005.

11 Rob Lake, Tax, Risk and Corporate Governance , Henderson Global

Investors, 2005.12 Kenneth Lee, Generation (Ta)X ,Citigroup Equity Research Europe, 2005.

13 The proposal was opposed by thevast majority of companies includingMicrosoft, Merck, General Motors,Intel, Alcan and Ford.

14 This lack of engagement may changewith recent NGO campaign launches ondifferent aspects of the tax agendataking place throughout 2005 in, forexample, Finland, France, Germany, ItalySpain and Switzerland.

15 Nicholas Neveling, ‘FDs DividedOver Ethics and Tax Avoidance’,Accountancy Age , 20 September 2005.

16 Henderson Global Investors,Responsible Tax , 2005.

17 Clare Bolton, The Role of TaxBenchmarking, Tax Planning International Review, June 2004.

18 This table is based on work undertakenby AccountAbility, specifically the reportRedefining Materiality: Practice and Public Policy for Effective Corporate Reporting , 2003.

19 KPMG, Tax in the Boardroom: A Discussion Paper , 2004.

20 Vanessa Houlder, ‘The Tax AvoidanceStory as a Morality Tale’, Financial Times ,22 November 2004.

21 Roger Cowe, ‘Tax Avoidance is Risingup the Ethical Agenda’, Financial Times ,29 November 2004.

22 Nicholas Neveling, ‘FDs Divided OverEthics and Tax Avoidance’, Accountancy Age , 20 September 2005.

23 PricewaterhouseCoopers,What is a Responsible Tax Strategy? www.pwcglobal.com

24 CIR v Challenge Corporation Ltd (1986)8 NZTC 5,219.

25 The Tax Gap Ltd, Mind the Tax Gap –How companies could help beat poverty ,Tax Justice Network, 2006.

26 For example, there was wide coveragein September 2005 of the Tax JusticeNetwork publication Tax Us If You Can,which concluded that US$11.5 trillionis held in offshore tax havens by rich

individuals.27 Loughlin Hickey, ‘The Debate:Draw a Clear Line’, Accountancy Age ,29 September 2005.

28 For example, the issue of NGOaccountability has been a recurringtheme in recent years. See, for example,SustainAbility/UNEP, The 21st Century NGO: In the Market for Change ,SustainAbility, 2003.

29 Tax Faculty of the Institute of CharteredAccountants in England and Wales,8 September 2005.

30 Christian Aid, The Shirts Off Their Backs: How Tax Policies Fleece the Poor , 2005.

31 ‘Mozambique Will Continue to GrantFiscal Exemptions to Mega Projects’,Mozambique Business – Daily Investor Intelligence , 21 September 2005.

32 See, for example,PricewaterhouseCoopers,Tax Risk Management , 2004.

33 PricewaterhouseCoopers,What is a Responsible Tax Strategy?,www.pwcglobal.com.

34 Ernst & Young, Tax Risk Management: the Evolving Role of Tax Directors ,Ernst & Young, 2004.

35 Martin Sullivan, ‘Reputation or LowerTaxes?’, Tax Notes , 29 August 2005.

36 Kenneth Lee, Generation (Ta)X ,Citigroup Equity Research Europe, 2005.

37 Alex Hawkes, ‘Vodafone Shares SinkUnder Tax Bill’, Accountancy Age,24 November 2005.

38 Both Richard Murphy andPricewaterhouseCoopers have alsobeen involved in this report, Richardas a consultant to SustainAbility andPricewaterhouseCoopers as a sponsor.

39 Henderson Global Investors,Responsible Tax , 2005.



31Taxing Issues

40 KPMG, Tax in the Boardroom, 2004.41 PricewaterhouseCoopers, Total Tax

Contribution Framework – What is Your Company’s Overall Tax Contribution?,2005.

42 AstraZeneca plc, Annual Report 2004,page 42.

43 This trend is also reflected in the

coverage of economic issues in corporateresponsibility reports. According to theUNEP/SustainAbility studies from 2000to 2004, the average score for coverageof economic issues increased from 32%to 47%, reflecting an increase in thequality and quantity of information oneconomic issues (for more informationsee www.sustainability.com/insight/reporting-article.asp?id=164).

44 Henderson Global Investors,Responsible Tax , October 2005.

45 KPMG, Tax in the Boardroom, 2004.46 For more information see

www.ibe.org.uk/tests.htmlA similar ‘test’ developed by TexasInstruments is also widely referenced(see www.ti.com/corp/docs/company/citizen/ethics/quicktest.shtml).

47 Australian Tax Office, Large business and tax compliance , (2003).

48 Kenneth Lee, Generation (Ta)X , CitigroupEquity Research Europe, 2005.

49 Deloitte, Tax Moves up the Agenda for Senior Management , 6 October 2005.

50 See for example John Plender,‘How Everyone Pays For Ethical Lapses atKPMG’, Financial Times , 20 June 2005.

51 This has included coverage by arange of newspapers including theFinancial Times and Observer of TJN’sstudy, The Price of Offshore www.taxjustice.net/cms/upload/pdf/Briefing_Paper_-The_Price_of_Offshore_14_MAR_2005.pdf

52 Such industry sector initiatives haveincluded Responsible Care® in thechemical industry, the Equator Principlesin the finance sector and the ExtractiveIndustry Transparency Initiative in the

extractives sector.

53 PricewaterhouseCoopers,Total Tax Contribution Framework –What is Your Company’s Overall Tax Contribution?, 2005.

54 This is also the approach that HendersonGlobal Investors recommends in itsreport, Responsible Tax .

55 See, for example, the work of the

Publish What You Pay Coalition(www.publishwhatyoupay.org).56 For more information see

www.eitransparency.org57 For example, reports have been published

by Christian Aid, Citigroup, GlobalWitness, Henderson Global Investors(two reports), PricewaterhouseCoopersand the Tax Justice Network.



Publication details

Taxing issues: Responsible business and tax First Edition 2006ISBN 1-903168-15-5

SustainAbility Ltd 2006. All rights reserved.

No part of this publication may bereproduced, stored in a retrieval systemor transmitted in any form by any means,electronic, electrostatic, magnetic tape,photocopying, recording or otherwise,without permission in writing from thecopyright holders. Any errors of fact or

judgement are ours: if you detect any,please let us know.

Research and writingSeb BeloeGeoff LyeKelly CruickshankSustainAbilityRichard MurphyTax Research LLP

Information designRupert Bassett

Disclaimer

This publication has been prepared forgeneral guidance on matters of interestonly, and does not constitute professionaladvice. You should not act on theinformation contained in this publicationwithout obtaining specific professional

advice. No representation or warranty(express or implied) is given as to theaccuracy or completeness of theinformation contained in this publication,and, to the extent permitted by law,SustainAbility Limited and the sponsors of this publication accept no liability, anddisclaim all responsibility, for theconsequences of you or anyone else acting,or refraining to act, in reliance on theinformation contained in this publicationor for any decision based on it.

PricewaterhouseCoopers LLP (the limitedliability partnership registered in Englandunder registration no. OC303525 and withits registered address at 1 EmbankmentPlace, London WC2N 6RH) is pleased tosponsor this publication and to act as aninterviewee for the discussion in Chapter 4,but has not otherwise been involved in theauthorship of this publication.

Acknowledgements

The Taxing Issues project benefitedenormously from the contributions of avariety of organizations and individualswhom we gratefully acknowledge for theirtime and energy. We would like to thankworkshop participants and interviewees

who helped to provide key insights into theviews and perspectives of key communitiesincluding among others Ian Menzies-Conacher (Barclays), John Fox and ChrisTuppen (BT), Philip Gillett (ICI), ProfessorJudith Freedman and Professor DoreenMcBarnett (Oxford University) and DavidColville and Alan Miller (Pearson).

We would also particularly like to thankJohn Whiting, Susan Symons and JenniferWoodward from PricewaterhouseCoopersand Paul Monaghan, Colin Baines and JoHealy from CFS for their support for theproject. We would also like to thank RobLake from Henderson Global Investors, aswell as John Elkington, Peter Zollinger andKavita Prakash-Mani from SustainAbility fortheir comments on drafts of the report.

32

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Taxing Issues

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Date post:	07-Apr-2018
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Sustainability Taxing Issues

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