Responsible businesses and investors should adopt sustainable tax framework

October 12th, 2011

The importance of tax for development is widely accepted. It is also increasingly being acknowledged that a company’s approach to taxation is an integral part of its Corporate Social Responsibility (CSR). Against this background Christian Aid has produced a briefing “Tax and Sustainability: A framework for businesses and socially responsible investors”. This framework can be used by ethical investors to asses whether a company’s tax policy is responsible in its design or implementation.

Aggressive Tax planning can harm companies

The report makes it clear that there are strong commercial reasons for adopting these standards. Companies that pursue aggressive tax strategies face a number of risks including costly legal action from tax authorities, cash flow problems when a tax loophole is closed and ever increasing regulatory complexity as officials seek to keep up with aggressive avoidance schemes. Meanwhile government contracts often exclude offshore companies and increasingly public sector procurement procedures will seek disclosure about partner’s use of tax havens. Risk of reputational damage is also especially significant as spending cuts lead to greater public awareness of tax dodging in Europe. Protests by the Indignados in Spain and UK Uncut, have channelled outrage at individual companies’ tax arrangements.

Sustainable Tax planning can benefit companies

Research has shown that direct investors in low income countries tend to value political stability, the rule of law and human capital more than effective tax rates when deciding whether to invest. Sufficient, predictable tax revenue is needed to foster all of these conditions. High public investment is something companies need but some are not prepared to pay for.

Practical Steps for companies and investors

Christian Aid’s framework suggests steps that companies can take to demonstrate their commitment to development and a fair approach to taxation or that socially responsible investors could demand from the companies in which they invest. A company should, at all times, comply with the laws of the jurisdictions in which it operates, respecting the spirit as well as the letter of the law. A company ought to record profit in the countries where real economic activity such as manufacturing takes place and then pay up on time. Transparency must be a key principle of tax policy, therefore companies should report their tax planning arrangements and strategies to governments. Additionally firm’s should undertake full country by country reporting of its financial position in every country in which it operates, there is strong a business case for this.

The code considers companies with a presence in low income countries or states where governance is weak are at a high risk of not complying with this framework. Tax avoidance by multinational companies is especially problematic for low income countries where tax authorities are less well equipped and corporation tax often accounts for a greater share of government revenue.

The framework also recommends that some activities should be banned such as adding stages into a transaction solely to reduce tax liabilities and using secrecy jurisdictions. Unfortunately as Action Aid’s new report “Addicted to tax havens: The secret life of the FTSE 100” shows many companies on the London Stock Exchange are a long way from achieving these standards, with 98 out of the FTSE 100 using tax havens.

Previous reports have found this to be the case for the largest companies: In the extractive industries; At the Pan European level; As well as in Spain and France.

Written by Alex Marriage

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