…it is obvious that corporate tax avoidance is not going away any time soon. It is impossible to eliminate it as long as there are creative and innovative people to unravel tax systems and regulations. May be, it is a necessary evil – a tolerable act of irresponsibility – and a price for the benefits of entrepreneurial capitalism.
Benjamin Franklin, one of the founding fathers of the United States, is reputed to have said: “In this world nothing can be said to be certain, except death and taxes”. This statement couldn’t be more true today. The recent row over Google’s and Apple’s and now Facebook’s tax deals in Europe is reinforcing the dogged certainty of taxes, and their challenges to big businesses, in public debates.
Given that corporate taxation is often driven by different and often divergent interests between businesses and governments, it has always been a vexing concern for both. While businesses are profit-driven, governments pursue social welfare. In some cases, both interests can be reconciled through regulation. However, corporate responses to taxation are also largely influenced by national competition; where countries with tough corporate taxation may not constitute favourable destinations for businesses, especially for multinational corporations.
Unsurprisingly, most firms would want to distance themselves from the social welfare maximisation agenda. The common belief is that it is the role of the government and the civil society to pursue the maximisation of social welfare, whilst firms chase profits. This understanding of firms and the dichotomisation of roles in the society have become so entrenched, over time, that it is often difficult not to agree that the business of business is business.
In a recent letter to the Financial Times (January 28, 2016) Peter Barron, Google’s European public affairs chief, strongly reiterated this view: “Governments make tax law, the tax authorities independently enforce the law and Google complies with the law”. But there is no water-tight regulation; and many regulatory systems are dotted with loopholes, some of which could be exploited through creative and efficient corporate tax planning and avoidance schemes.
Corporate taxation is also a controversial issue often exacerbated through politics and corporate lobbying. As such, it provides an arena for games and contestations. Set up as a game, it becomes a source of corporate innovation and competitiveness, which is at the heart of most corporate tax planning activities.
Constructed as an innovative practice, tax planning and avoidance appears to creatively escape the purview of normative screening.
A soothing name for this, which is often appealing to the business community, is strategic regulatory arbitrage. The actors in this innovative space often include: tax consultants, lawyers, and financial analysts.
Constructed as an innovative practice, tax planning and avoidance appears to creatively escape the purview of normative screening. However, revenues from corporate taxes to governments are one of the positive impacts of the economic activities of firms in different societies.
The exploitation of loopholes in a regulatory system, whilst often legal, raises an important question with regards to the essence of a regulation and the purpose of the Law – that is, what should count most: the spirit of the Law or the technicalities surrounding its interpretation and implementation? This is rather a matter for jurisprudence, which goes beyond the remits of this piece, but yet relevant to it.
If the spirit of a Law is to be taken seriously, then efficient tax planning and tax avoidance is illegitimately inimical to revenues accruable to the government through corporate taxation. Since corporate taxation is always on profits, it is difficult to argue that it constitutes an input cost to businesses; even though it appears so, on the face of it.
Instead, tax avoidance could suggest an irresponsible practice of denying broader society its share of profits arising from a firm’s economic activities, despite the fact that the firm would have used some critical resources from the society to achieve such profit levels. Some of these resources may include natural, human and physical resources. Tax avoidance in this case, therefore, becomes a free-riding activity with the capacity of generating consequent negative externalities, which need to be minimised.
…living with corporate tax avoidance requires more wisdom than is often acknowledged. It is a balancing act, and as the saying goes, “virtue lies in the middle”.
The incessant corporate tax cases suggest that government regulation, alone, is obviously grossly inadequate in tackling the often inadvertent negative impacts of corporate tax avoidance strategies mainly due to information asymmetry between governments and businesses. Given this endemic information asymmetry involved, reflexive law (or self-regulation) is being acknowledged as a useful complement to public regulation.
Self-regulation is at the heart of the corporate social responsibility agenda, as an alternative business paradigm, which operates from a viewpoint that fostering a better society and enhancing human development is a collective project between business, government, and society. This alternative paradigm, suggests that businesses can also constitute a force for good, given the vast resources they control, the power they wield, and the expertise they have.
Self-regulation can be useful in many ways: (a) it saves the government the cost of designing and enforcing regulatory measures, and (b) it empowers firms and offers them the opportunity to adopt efficient and effective measures to internalise the negative externalities associated with their activities. In other words, business policy should complement public regulation and not undermine it. This is ethical business regulation, which has been endorsed by the UK government.
This is exactly what Facebook has done recently by voluntarily, through self-regulation, agreeing “to pay millions in UK tax after abandoning controversial structure”. But will this always be the case with other businesses and in different situations? To what extent should self-regulation be trusted? Despite the advantages of self-regulation, it also sometimes fails when employed in isolation.
After all said and done, it is obvious that corporate tax avoidance is not going away any time soon. It is impossible to eliminate it as long as there are creative and innovative people to unravel tax systems and regulations. May be, it is a necessary evil – a tolerable act of irresponsibility – and a price for the benefits of entrepreneurial capitalism.
As such, living with corporate tax avoidance requires more wisdom than is often acknowledged. It is a balancing act, and as the saying goes, “virtue lies in the middle”.
Kenneth Amaeshi (@kenamaeshi) is the director of the Sustainable Business Initiative, and an associate professor in strategy and international business at the University of Edinburgh, United Kingdom. He is a visiting fellow at Cranfield School of Management and Lagos Business School.