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Taxation and Corporate Citizenship


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  • 1. Taxation and Corporate Citizenship Taxation and Corporate Citizenship Professor Hector R Rodriguez School of Business Mount Ida College Business, Society & Environment
  • 2.
    • Society
      • The Corporation and Its Stakeholders
      • People for the Ethical Treatment of Animals
      • Corporate Citizenship
      • The Social Responsibility of Business
      • The Shareholder Primacy Norm
      • CSR, Citizenship and Sustainability Reporting
      • Responsible Investing
      • The Community and the Corporation
      • Taxation and Corporate Citizenship
      • Corporate Philanthropy Programs
      • Employees and the Corporation
      • Managing a Diverse Workforce
    • Environment
      • A Balanced Look at Climate Change
      • Non-anthropogenic Causes of Climate Change
      • Sulfates, Urban Warming and Permafrost
      • Conventional Energy
      • The Kyoto Protocol
      • Green Building
      • Green Information Technology
      • Transportation, Electric Vehicles and the Environment
      • Geo-Engineering
      • Carbon Capture and Storage
      • Renewable Energy
      • Solid, Toxic and Hazardous Waste
      • Forests, Paper and Carbon Sinks
      • Life Cycle Analysis
      • Water Use and Management
      • Water Pollution
    Course Map – Topics Covered in Course
  • 3.
    • Pros
      • Balances corporate power with responsibility
      • Discourages government regulation
      • Promotes long-term profits for business
      • Improves business value and reputation
      • Corrects social problems caused by business
    • But, can they truly ever be responsible in the eyes of all stakeholders, especially on paying their fair share of taxes?
      • Legal requirement to prioritize shareholder interests
      • Markets exert pressures to increase profits
      • Executive rewards related to published profits
    Why Pursue Corporate Citizenship? Akin to “playing fair” in sports
  • 4.
    • Taxes are a fee charged by a government on a product, income or activity.
    • Taxes are essential for functioning of the state and society
      • Investment in social infrastructure
      • Finance public goods: healthcare, education, transport
      • Support Capitalism and Social Development
    • Yet organized tax avoidance is widespread
      • US loses over $345 billion of tax revenues each year.
      • 1998-2005: 66% of the domestic and 68% of foreign corporations did not pay any federal corporate taxes
      • Major US companies also avoid paying state taxes
    Taxes ‘ Taxes are what we pay for civilized society’ Oliver Wendell Holmes
  • 5.
    • There is a continuum of tax minimization activity that begins with evasion (which is illegal), shades off through aggressive avoidance and less aggressive avoidance to the planning of commercial activities with tax in mind, and ends with the utilization of reliefs specifically enacted by governments to encourage certain activities.
      • Somewhere along this line the activity becomes ‘acceptable’.
    Tax Minimization Continuum The effects on the State by any of them is the same; it is deprived of funds that it would otherwise have had Evasion Aggressive Avoidance Less Aggressive Avoidance Tax Planning Tax Reliefs Unacceptable Acceptable
  • 6.
    • Tax Evasion is defined as any criminal activity which is intended to reduce the incidence of taxation.
      • This might involve theft, fraud or forgery in relation to tax, or specific statutory offences of tax evasion, depending on the jurisdiction concerned.
      • Evasion involves the misrepresentation of the facts to the tax authorities by deliberate or reckless misstatement, concealment or omission.
    • Tax Avoidance involves the arrangement of a taxpayer’s affairs in such a way that, when all the facts are known, the taxpayer can still legally contend for the reduced tax liability that the arrangements are intended to achieve. Finding tax “loopholes” is an example.
    Tax Minimization Continuum
  • 7.
    • Tax planning is the organizing of genuine commercial transactions in such as way as to give the lowest possible tax charge or, strictly, the highest possible after-tax profit. Examples include:
      • Avoiding or postponing income recognition
      • Changing tax jurisdictions (tax havens, see next two slides)
      • Controlling the classification of income
    • Accountancy firms, law firms and banks usually help in these tasks.
    Corporate Tax Planning Some would argue that companies that engage on these activities are being hypocritical regarding their citizenship efforts
  • 8.
    • The term is used to mean jurisdictions with low, or non-existent rates of tax on income
    • Some would see nothing socially irresponsible in making use of tax havens to reduce their tax burden, provided there was no deception or illegality involved.
      • They will argue that, faced with a choice between operating in country A where the tax burden is low, or in country B where it is higher, they would be foolish to contemplate any course other than operating in country A.
      • They might also argue that if they did not take advantage of the opportunities available they would be failing in their duties to their shareholders.
    Tax Havens Source: David F Williams of KPMG’s Tax Business School, September 2007
  • 9.
    • On this view it is legitimate for countries with limited natural or economic resources to use their tax regimes as an economic tool to attract investment, and it is equally legitimate for companies to take advantage of those regimes.
    • Some countries try to attract investment by the introduction of low rates of corporation tax.
      • Some believe that such ‘tax competition’ amounts to irresponsible behavior on the part of the countries concerned, and that it is equally irresponsible of companies to encourage it by taking up the opportunity offered.
    Tax Havens Source: David F Williams of KPMG’s Tax Business School, September 2007
  • 10.
    • Some believe these arrangements are artificial and oppose them in terms of fundamental ethical concepts such as honesty, transparency or ‘plain dealing’.
    • Others, who are equally determined to behave in an ethical way , and who adopt a very similar basic ethical stance, may consider that the degree of artificiality is not an ethical issue provided no attempt is made to misrepresent the facts or to hide them from the tax authorities.
      • They may argue that the tax system is entirely a creature of statute, that the system is itself artificial and arbitrary, so there is no ‘right’ amount of tax except in the sense of what is arithmetically correct.
    Fundamental Ethical Principles and Issues Source: David F Williams of KPMG’s Tax Business School, September 2007
  • 11.
    • Those who argue for a wider understanding of ‘fairness’ are sometimes dismissed by companies as advancing an anti-business agenda in which:
      • However much tax a company pays, a demand for a ‘fair’ contribution will always mean ‘more than you are paying now’.
      • Even among those who reject the ‘letter of the law’ approach, there is no unanimity on what is fair.
    • Commentators with an anti-business agenda do tend to set profitability and Citizenship in opposition to each other.
      • However, profits are a prerequisite of any sustained course of socially responsible behavior.
      • In the tax area, if paying more tax is seen as per se socially responsible, then more profits will be needed to finance this .
    Fundamental Ethical Principles and Issues Source: David F Williams of KPMG’s Tax Business School, September 2007
  • 12.
    • "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
    • (Justice Learned Hand, in the case of Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)
    Tax Planning is However Legitimate Let’s review some cases where legitimacy was compromised
  • 13.
    • UBS External Report – “UBS maintains the highest ethical standards… UBS takes its responsibility to preserve the integrity of the financial system… The firm has developed extensive policies intended to prevent, detect and report money laundering, corruption.”
      • In in February 2009, UBS was fined $780 million by the US authorities for “helping US taxpayers hide their bank accounts and taxable income from tax authorities”.
      • Bankers routinely travelled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade United States income taxes.
    UBS – Offers “Wealth Management”
  • 14.
    • KPMG external report – “We believe quality and integrity start with culture. That’s why we place so much emphasis on bringing our shared values alive within member firms… Independence, integrity, ethics, and objectivity—these are all vital to the way we work…”
      • KPMG fined $456 million in 2005 for “criminal wrongdoing”
      • Senior tax professionals urged firms to knowingly, purposefully, and wilfully violate the federal tax shelter law.
      • “ KPMG tax professionals calculated the penalties for noncompliance - For example, our average …deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000.”
    KPMG – Audit, Tax and Advisory Services
  • 15.
    • Wal-Mart: “we believe in a philosophy of operating globally and giving back locally. We know we can make the greatest impact on our communities by supporting causes that are important to our customers right in their own neighborhoods.”
      • Wal-Mart – with advice from Ernst Young developed elaborate structures to avoid taxes
      • REITs- paid rent to itself.
      • Judge said, “there is no evidence that the rent transaction, taken as a whole, has any real economic substance, other than reducing Wal-Mart's taxes”
  • 16.
    • In contrast to many other aspects of its business activity, the relevant question as regards its tax liability is not how it pays it, but only how much it pays.
    • Data for the period 1996-2000 show that over a five-year trading period Enron generated pre-tax profits approaching US$1.8 billion, but paid no federal income taxes and was, in fact, a net recipient of tax rebates.
    Taxation in Context In the end, quantity of taxes paid is the only significant variable when assessing a company’s tax contribution
  • 17.
    • There might be a case for companies to supplement the disclosure of their policies in the area of tax avoidance and tax planning by giving details of what transactions they have undertaken, and what they have rejected.
    • In practice, however, commercial considerations may prevent disclosure of such planning arrangements, because this could involve giving details of the company’s confidential business arrangements.
      • While they may wish to be as transparent as possible, they may also be conscious of commercial disadvantages if they disclose what others do not.
    Disclosure of Tax Avoidance and Planning Source: David F Williams of KPMG’s Tax Business School, September 2007
  • 18.
    • Companies should consider how their chosen approach to Citizenship applies to all aspects of their activity, including the management of their tax liability.
      • In a climate where there are increasing pressures to behave in a socially responsible way, and where a more carefully nuanced debate is developing about the acceptability of different tax minimization techniques, these are matters that companies need to consider carefully if they are to make the most of the commercial opportunities available to them while meeting their obligations to shareholders and other stakeholders.
    • Companies should develop a policy for tax that is consistent with their policy on other Citizenship concerns
    Conclusion Source: David F Williams of KPMG’s Tax Business School, September 2007