Transcript School of Management

Lutz Preuss
Senior Lecturer in International Business Policy
CSR and Taxation:
A Business Ethics Perspective
Issues raised by the papers
“Is there any guidance as to when tax avoidance slips into
tax evasion? ... [if yes, then] counter ... the Duke of
Westminster’s principle ” (Morris, pages 7 and 26)
A typical CSR definition: going beyond the law, but how to
apply this to taxation? (Frecknall Hughes and Glaister,
page 4)
Societal discourse: “Increasingly campaigners and pressure
groups are sceptical of corporate power and are
concerned about the harms that they can inflict on people
(Sikka, page 1)
The nature of taxation
“taxation within a company ... reflects the wider conflict
innate in the role of taxation in society, in terms of any
state’s right to take compulsorily a portion of its citizens’
goods, profits, income or gains as taxation”
(Frecknall Hughes and Glaister, page 6)
Taxation as precondition for being allowed to engage in
business; akin to health and safety
“If it is assumed that their aim is maximisation of corporate
profits, then the directors have a duty to minimise tax.”
(Frecknall Hughes and Glaister, page 5)
“ ... then the directors have a duty to minimise health and
safety expenditure.”
Ethical evaluation: Kant
the Duke of Westminster’s principle
Immanuel Kant (1724-1804), the Categorical Imperative
“I ought never to act except in such a way that I could also
will that my maxim should become a universal law”
operationalisation in two stages through:
• a consistency principle: whether the maxim, i.e. the
principle upon which a person is to act, can be imagined
without contradiction, and
• a human dignity principle: whether a moral agent would
want to live in the resulting world.
Ethical evaluation: Kant
human dignity principle
“disable democratically elected governments and limit their
capacity to alleviate poverty, invest in education, pensions,
healthcare, security ...” (Sikka, page 4)
consistency principle
- Duke of Westminster versus PAYE employee
- share incentivised executive versus salaried manager
- MNC versus domestic firm or SME
= the Duke of Westminster’s principle is likely to violate both
Ethical evaluation: Kant
The categorical imperative represents “an action as
necessary of itself without reference to another end, i.e. as
objectively necessary”
Humans are capable of determining what a Categorical
Imperative is, since we have the “faculty to choose that
only which reason independent of inclination recognises
as practically necessary”
Hence moral value can be ascribed to actions where humans
act out of their duty rather than follow their inclinations or
where duty coincides with an inclination to undertake the
action
= ethical evaluation focuses on the motive
Ethical evaluation: Kant
Tax avoidance is immoral to the extent that the underlying
activity was carried out to reduce the company’s tax
burden rather than for operational reasons related to the
goods or services the company offers
Example WalMArt, presiding judge: “there is no evidence that
the rent transaction, taken as a whole, has any real
economic substance, other than reducing Wal-Mart's
taxes” (Sikka, page 21)
“Tax is never the driver for any strategic decision, although
we try to minimise tax legitimately within a risk adverse
environment” (Frecknall Hughes and Glaister, page 21,
Respondent 74)
Ethical evaluation: Utilitarianism
Jeremy Bentham (1748-1832), John Stuart Mill (1806-1873)
“Utility, or the Greatest Happiness Principle holds that actions
are right in proportion as they tend to promote happiness,
wrong as they tend to produce the reverse of happiness.”
(1) identify all affected individuals,
(2) (2) measure the amount of utility and disutility an act
generates for them and then
(3) (3) select the alternative that creates the greatest utility
for the greatest number
Ethical evaluation: Utilitarianism
Evidence of utilitarian thinking
KPMG tax professional: “Based upon our analysis of the
applicable penalty sections, we conclude that the penalties
would be no greater than $14,000 per $100,000 in KPMG
fees” (Sikka, page 13)
But: Should include all affected parties
Ethical evaluation: Utilitarianism
Tax avoidance: Gain in utility
- companies with tax management
- their directors and shareholders
- Offshore Finance Centres: additional income
Tax avoidance: Loss in utility
- governments and other tax payers
- shareholders: reduced transparency, increased risk
- competitors
- OFCs: dependency effects
Ethical evaluation: Utilitarianism
= likely outcome: Tax avoidance does not lead to increased
utility for the greatest number and hence would be immoral
Some evidence:
• “There must be some value in good reputation” (Frecknall
Hughes and Glaister, page13, Firm E)
• “What would happen to the company if one or more of the
newspapers became aware of the tax avoidance planning?
In addition, prudent tax avoidance planning should always
address the question, “what happens if it goes wrong, if
the legislation is changed?” (Morris, page 26)
Conclusions
Overlap between ethics and law only partial
• “concern about the language now used to frame the
debate on tax avoidance” (Frecknall Hughes and Glaister,
page 15)
Societal discourse
• “the law’s the law ... and if the law is unclear you argue
about it” (Frecknall Hughes and Glaister, page 16, Firm E)
• “... this blurring of what is acceptable ... there is a lot of use
of the moral issue to taint and to make an emotive
argument out of some of these issues” (Frecknall Hughes
and Glaister, page 16, Firm F)
Conclusions
Distinction between morality and ethics (Crane and Matten,
2007)
• morality: norms, values and beliefs which define right and
wrong for an individual or a community
• ethics: concerned with the application of reason to
elucidate specific rules and principles
Here
• individuals may claim that tax avoidance is amoral
• but does not mean that ethical discussion in wider society
ebbs away
• at closer look companies very much try to influence this
Conclusions
Call for academics from various disciplines to “expand the
scope of the social responsibility literature to encompass
taxation issues” (Sikka, page 2)
• “CSR literature is self-congratulatory and lauds modest
corporate achievements” (Sikka, page 26); consequences
of tax avoidance may well wipe out benefits from corporate
investment in CSR
• going beyond the law in taxation? (Frecknall Hughes and
Glaister, page 4), need for a more robust definition of CSR