In the past decades, the evolution of international norms has led fair labour practices and environmental sustainability to become core parts of corporate social responsibility. Is fair tax contribution next?
How do international norms come to be?
In the late 1990s, international relations scholars Martha Finnemore and Kathryn Sikkink developed a theory for how ideas develop into norms that shape world politics, such as women’s suffrage and the laws of war.
They argued that norms evolve in a patterned “life cycle” composed of three stages:
- Norm emergence: entrepreneurs who seek change frame an issue in such a way that it will lead to the change if widely embraced. They then attempt to persuade others to embrace this new norm.
- Norm cascade: once a critical mass has accepted the norm, a “tipping” point is reached, and the norm begins to “cascade” throughout society. The cascade is driven by norm leaders, who demonstrate the new norm and socialise others to adopt it through a combination of pressure to conform (the stick) and granting legitimacy and esteem (the carrot).
- Norm internalisation: the norm becomes institutionalised and acquires a taken-for-granted quality.
Emergence of a corporate tax responsibility norm - tax avoidance is legal but "morally wrong"
If a new norm around responsible corporate tax behaviour has emerged, it is due to the efforts of the tax justice non-governmental organisations (NGOs).
Organisations like ActionAid, Oxfam, Christian Aid, and the Tax Justice Network have campaigned for over a decade to frame corporate taxation as a moral issue. Their campaigns have drawn on their investigations into companies like Associated British Foods, Paladin, and SAB Miller, demonstrating how they use aggressive tax planning techniques to shift their profits out of low-income countries and into tax havens.
Even though these practices are legal, the NGOs condemn them as immoral since they deprive poor countries of revenue that is badly needed to address major development challenges.
This is significant, as developing countries depend much more on corporate income taxes than developed countries (accounting for 21% of government revenue as opposed to 11%). Developing countries also lose a greater proportion of their GDP to corporate tax avoidance than OECD countries (1.7% rather than 0.5%), amounting to $212 billion per year.
NGOs swaying public opinion that companies can contribute their "fair share"
Using emotive language such as tax abuse, tax cheating, and tax dodging, NGOs have convinced many that companies should not just pay the least they can, but contribute a “fair share”, based on their economic activity in each country. They seem to have swayed the court of public opinion, as a recent survey of British adults (PDF) found that 85% agreed “tax avoidance by large companies is morally wrong, even if it is legal”.
The norm entrepreneurs have also made a business case for making tax a CSR issue (PDF), arguing that paying tax improves the business environment, is key to respecting fundamental human rights, and helps mitigate reputational risks. They have even laid out proposals for what good corporate tax behaviour looks like in a new report titled “Getting to Good” (PDF).
The cascade is driven by influential voices and institutions
The cascade of the new norm has undeniably begun, as powerful international organisations have pushed it forwards. The G7, G8, and G20 have all made cracking down on aggressive tax avoidance and evasion a priority.
The main goal of the OECD’s BEPS process was to reform the international tax system in order to “address tax avoidance and ensure that profits are taxed where economic activities generating the profits are performed”.
While research by the International Centre for Tax and Development has shown that a unitary approach (taxing corporate groups as a whole rather than treating affiliates as separate entities) would best solve this problem, especially for developing countries, it is political anathema to OECD countries. Thus, international organisations are attempting to fix an obsolete system (PDF) while putting onus on companies to act responsibly.
For example, the UN Principles for Responsible Investment initiative recently published a guidance document on engaging with companies on corporate tax responsibility (PDF).
Influential leaders and organisations voicing support for the new norm
UK Prime Minister David Cameron has denounced tax avoidance schemes as “morally wrong”. Of American companies reincorporating overseas for tax reasons, President Barack Obama declared, “My attitude is I don’t care if it’s legal, it’s wrong”. Former UN Secretary General Kofi Annan wrote “It is unconscionable that some companies...are using unethical tax avoidance... to maximise their profits while millions of Africans go without adequate nutrition, health and education.”
Even the “Big Four” accounting firms who facilitate tax avoidance around the world have begun to pay lip service to the new norm.
KPMG is funding a consultation process called “Responsible Tax for the Common Good”, while Deloitte has published reports on tax transparency (PDF) and how to build a sustainable tax strategy (PDF). Partners from PwC have also encouraged companies to think about where tax fits into their CSR strategy, writing, “Not all companies will want to be a leader in this area, but not to have a position could well be a risk”.
The process of socialisation is evidenced by the growing trend of tax shaming
Others like GE, Vodafone, Amazon, Verizon and Apple have faced protests and consumer boycotts for their tax avoidance schemes, damaging the value of their brands. Faced with a boycott in the UK, Starbucks made a “ground-breaking” decision to voluntarily pay the Treasury £20m, while admitting no guilt.
While companies have been punished for tax practices deemed as immoral, others who have taken leadership on tax transparency and responsibility have garnered praise and legitimacy.
The Fair Tax Mark initiative in the UK seeks to reward companies that comply with its criteria. The first FTSE 100 company to earn the mark, SSE plc (the UK’s second largest energy supplier), has been lauded as a “trailblazer”, “game-changer”, and a “pioneer”, and has encouraged others to follow its lead. The Norwegian company Statoil has also won praise for its “historic transparency move” of publishing a comprehensive report of its payments to governments for oil extraction.
Still, these norm leaders remain few and far between.
Powerful opponents could jeopardise the norm’s internalisation
Despite all this, many people fundamentally disagree that tax should be a moral issue, insisting that tax should not be confused with charity. They argue that it should be up to governments to enforce tax payment through legislation, and not up companies to decide what an ethical amount to pay in each country is.
To this, the NGOs counter that just as clothing manufacturers shouldn’t be exempt from providing decent working conditions in countries with weak labour laws, companies shouldn’t be exempt from the consequences of their tax behaviour in an imperfect tax system. Still, others claim that it is actually the fiduciary duty of companies towards their shareholders to pay no more tax than is legally required.
Meanwhile, corporate lobbying against international tax reform is on the rise. In the US, an increasing number of large companies have been lobbying Congress on BEPS. Claiming that many businesses feel the BEPS agenda is “overly ambitious,”accounting firm Ernst & Young is encouraging its corporate clients to lobby governments to water down reforms.
For the OECD’s consultation on country-by-country reporting 87% of the contributions came from the business sector, and their efforts succeeded in eroding the proposal to a mechanism that is now limited and “probably unworkable”.
While the cascade stage has clearly begun, the norm of corporate tax responsibility is still deeply contested, and it is far from certain that it will become internalised.