(Or, changing the terms of the tax governance debate)
Research focus: philosophy of tax law, tax governance, procedural tax law, tax law principles and tax ethics.
Original blog (2016)
In Roman mythology Venus and Mars are two famous Gods who were associated with very different aspects of life. Venus represented love, Mars was a god of war. Both have planets named after them which might suggest that they are inhabited by very different kinds of people.
To someone coming from Mars, doing business on Earth is a rather strange thing. Take for example Starbucks. This multinational considers itself a ‘responsible company’: it appears to connect with people and communities. This responsibility, responsibility to others, is a strange concept in Martians’ vocabulary. On Mars, businesses go for maximum profit, nothing less. Responsibility to others sounds like peaceful cooperation, or even solidarity – nothing like war, a good fight and stiff competition or demolishing one’s competitors. And Martians take pride in it. To earthlings this may sound a bit embarrassing, but in a way Martians are quite charming: they are completely transparent about their warlike culture; they have no hidden agendas.
Martians have another trait: they are quite nosy; they want to know your business and your strategy. Maybe they can learn from it and become more competitive. So they take an interest in mysteries like responsible companies.
That’s why they want to know more about Starbucks. First thing, they check the Starbucks website. It appears that the people at Starbucks believe that they should have ‘a positive impact on the communities we serve.’ So Starbucks is part of society, a corporate member of society, showing concern for their fellow members of society. Again, these are strange words for it does not sound anything like a fierce competition, but the Martians go on reading and find Starbucks’ Global responsibility report 2013 on the website. Here, John Kelly, senior vice president, Global Responsibility and Public Policy, tells us that in ‘2008 we set a series of ambitious goals where we felt we could use our scale for the greatest good in the areas of ethical sourcing, environmental impact and community improvement.’ So in 2008 Starbucks had the ethical ideal of the good society in mind. This is almost the language of fraternity, solidarity – and love of society. How on earth is this possible, do they not want to be competitive, drive their competitors out of the market? Or … is this exactly what their responsibility strategy aims for? Do consumers love a company like this? So being responsible actually generates more profits?
Indeed, it was not just about setting abstract ethical goals, it is definitely more. Ambitions should be implemented into the business. ‘We had a vision that by 2015, we could fundamentally transform the way our company approaches corporate social responsibility (CSR) and imprint these values into our business.’ Again, talk about values sounds quite radical to Martians who think that a corporation must strive to maximize its shareholder-value. Here, a corporation seems to be a moral agent; with a vision on corporate social responsibility to realize the ideal of the good society. This kind of moral responsibility comes close to love, to Venus – Mars’ arch-enemy. But can such a soft approach be successfully put into practice? Martians are well aware that a vision is one thing, putting it into practice throughout the whole company quite another. Did Starbucks succeed?
It appeared that Starbucks struggled with little success to imprint the professed responsibility values into its tax business. In October 2012 Reuters reported that Starbucks as a result had paid virtually no UK company tax since it started to operate in the United Kingdom in 1998, for it had claimed losses in 14 of the 15 preceding years. This is quite remarkable for Starbucks had a 31 percent market share and its shareholder reports indicated solid profitability for the Starbucks group attributable to its UK operations. This news unleashed a political firestorm and public outcry, including demonstrations and threats of consumer strikes of UK Starbucks stores. Within a month the House of Commons Committee of Public Accounts convened a hearing during which Starbucks and other companies were questioned about their tax behaviour in the UK. Martians especially liked the way Margaret Hodge grilled these companies. But though they think that war is the real thing, they understood why Starbucks did not fight back. It was consistent in its soft, value-based approach. Starbucks’s CFO Troy Alstead Committee of the UK House of Commons confirmed one of basic values of CSR: ‘We believe very strongly in transparency — with the Committee, with tax authorities around the world, and with consumers.’
Kris Engskov, director of the British part of this American company, tells us in an open letter on the website that, ‘the most important asset that we have built in our time in the UK is trust – trust with our employees, customers and the wider society in which we operate. We fundamentally believe that acting responsibly and listening to our customers makes good business sense.’ Starbucks actually showed awareness that CSR demands behaviour beyond the letter of the law. Its website states that while Starbucks has always paid taxes ‘to the letter of the law, we know that to retain public trust we need to do more’. As a result, in December 2012 Starbucks announced it would voluntarily pay more tax in the UK. The payment would involve approximately £ 10 million (€ 12 million) per year. To Martians taxes amount to slavery, so they fully understand that a company wants to minimize its tax payments, and chooses to pay to the letter of the law. Just not running afoul of the laws of any jurisdiction, that will do. But why pay more? Why voluntarily go beyond the letter of the law? That’s for somebody who loves to pay taxes. That’s just like they do on Venus.
However, Starbucks seems to drift about. Although its promise might seem to show Starbucks’s readiness to incorporate CSR values to its tax strategy, just months later the company launched an offensive to protect and expand tax breaks on foreign profits in the United States. The multinational company lobbied the U.S. House Ways and Means Committee for a special regime that would permanently allow its strategies for generating ‘stateless income.’ Does this lobbing really show corporate social responsibility? It rather shows that Starbucks tax strategy is not CSR proof.
So both Starbucks and Martians seem to be puzzled about the relationship between taxes and community. Let’s therefore try to go beyond the Mars and Venus dichotomy. The why of taxes is related to the question to whom one pays taxes. Taxes are payments to the state, but what for? Taxes are payments to the state on behalf of society. They are funding for government and public services. Taxes enable government to support and enhance society by providing all kinds of public goods. Think of defense, justice, infrastructure, healthcare, education. And of course the free market system, for the state and the legal system lay the foundations for a functioning market economy. Without legal institutions, property would not be secure and markets could not exist. Moreover, in order to be competitive and profitable companies rely on government to boost innovation, encourage investment, enhance worker productivity, raise production standards, and foster the efficient use of scarce resources. Many tax systems contain R&D incentives.
These institutions and public goods are funded by taxes, by citizens who pay for the advancement of society. Indeed, without taxes, market, society and communities could not thrive. As Thomas Piketty says, ‘Without taxes, society has no common destiny, and collective action is impossible.’
Companies contribute goods and services to society. They are members of society and also depend on other members doing their share. Paying taxes is a vital part of this reciprocal relationship. Business depends on public goods paid for by taxpayers and it therefore should contribute its share.
This point applies even more strongly to CSR companies. These companies acknowledge several obligations towards society, viz. economic obligations, legal and ethical obligations. They accept duties that are not required by law; they go voluntarily beyond the letter of the law. In short, a CSR company like Starbucks is part of society, a corporate citizen, and engages with other citizens. This view must have tax consequences. A company that takes its social responsibility seriously should extend this responsibility so as to include taxation. This means going beyond the letter of the tax law. To engage with community cannot be a matter of manipulating the (international) tax rules in order to minimize one’s tax liability. For the result of aggressive tax planning is to rob society of its much-needed financial resources.
Nonetheless, nobody demands Starbucks to love paying taxes, for taxes are costs. There is no need to explain this to society. And to plan and structure one’s affairs to achieve a favourable tax treatment within the limits set by law, is a well-known taxpayer’s right. But the exercise of this right becomes less legitimate when it boils down to exploiting the inevitably imperfect tax rules, mismatches and loopholes in order to avoid contributing to society at all or to a bare minimum. To my mind, companies endorsing CSR should balance their right to structure their affairs in a tax favourable way with the obligation to accept the inevitable imperfections of the legal system. In the end, engaging in tax planning in a socially responsible manner is a matter of enlightened self interest. And it comes from neither Mars nor Venus.
This blog was hosted on Cambridge.tax six years ago – Starbucks providing an example of the tax behaviour of many CSR corporations. In the meantime, the international tax climate underwent quite a change. Multinationals’ tax practices continued to be hotly debated by NGO’s, politicians, media and the public at large. The G20, OECD and EU have taken important steps to restore the integrity of the international tax system. Some corporations appear to be very much aware of the link between taxation and the UN Sustainable Development Goals (SDGs). The B Team, for example, encourages ‘an approach to taxation that companies can endorse to demonstrate responsibility and play their part in creating a stable, secure and sustainable society.’ Also institutional investors stepped into the ring, pushing multinational corporations towards more responsible tax behaviour in line with their ESG (environmental, social and governance) agenda. That’s why Global Reporting Initiative launched a (voluntary) sustainability reporting standard focused on corporate tax responsibility: GRI 207: Tax 2019. Thus, tax transparency as the procedural element of good tax governance comes to the fore.
So does Venus prevail over Mars? Public tax transparency is indeed on the rise. Unfortunately, some firms are slow to catch up. In August 2019, nearly 200 CEO’s members of US Business Roundtable redefined the purpose of their corporations. They committed to supporting the communities in which they work and generating long-term value for shareholders. And yes, they are committed to transparency, but unfortunately to shareholders only. So much for their shared ‘fundamental commitment to all of our stakeholders.’ And even so, transparency is no substitute for the substantive element of good tax governance: paying a fair share of taxes.
Still too many CEOs dismiss talk about responsible tax behaviour as ‘political crap’. That may sound like a nice Martian soundbite, but Martians definitely do not like passing the buck to the legislators while fiercely lobbying behind the scenes. It’s time therefore (would be) Martians acknowledge that they have to pay their fair share. As Adam Smith said every tax is to the person who pays it a badge of liberty. However, presently short-term shareholder value maximization still drives out tax ethics.