A brief on tax and corporate responsibility

June 2012

Table of Contents

1. Introduction 3 2. Understanding tax as a CR issue 3

3. The business perspective 5 4. Principles for Corporate Responsibility on Tax 5. How to work responsibly with tax? 6. Summing up Sources 6 8 10 11

This brief has been prepared by GLOBAL CSR for IBIS as an input for the discussion at the conference Tax and Corporate Responsibility An Emerging Agenda in Copenhagen, June 21st, 2012

1. Introduction

Revenues from taxes constitute the backbone for financing education, health and social development in any country. Establishing a stable tax base is the only sustainable long term financing mechanism for funding development in rich and poor countries. Particularly in resource rich economic developing countries the corporate tax base has a huge potential for financing development. This brief explores the issue of tax from a corporate responsibility1 (CR) angle. It argues that tax can and should be understood as a CR issue; however no international norm has yet emerged to give corporations adequate guidance on what responsible tax behaviour entails. Drawing on recent and crucial developments within the CR agenda, this brief contributes to the ongoing discussions on tax and CR. The first section outlines how tax can be understood in the context of CR. The second section deals with the corporate perspective, and describes the possible business case in viewing tax as a CR issue. In lack of international norms on responsible tax behaviour, section three proposes possible principles for responsible tax behaviour developed by IBIS and Christian Aid. In other words, this section covers what responsible tax behaviour could entail. The last section seeks to outline how corporations can work responsibly with tax, and suggests relevant processes based on the UN Guiding Principles on Business and Human Rights2 (UNGPs) to bring the agenda from principles to practice.

2. Understanding tax as a CR issue

In order to discuss how and where tax fits in the CR agenda, CR needs defining. A challenge for the CR discourse is the many connotations that the concept may carry. Defining CR may vary from country to country and from corporation to corporation. However, a growing convergence in defining the concept has been emerging over the past decade. The UN Global Compact3, a strategic policy initiative launched in the year 2000, has enabled such convergence. Today the UN Global Compact is the worlds largest CR initiative and has in effect helped shape the agenda and how we understand CR across countries, sectors and corporations. For a long time the predominant understanding of CR was centred on the voluntary actions of corporations only. Such definition led to a strong focus on donations and philanthropy. Defining CR as only the voluntary activities that corporations undertake would also lead to a situation where tax as a CR issue would be ill-fitted, since corporate tax payments are well regulated in most jurisdictions and would as such fall outside the definition of the voluntary CR. Over the years the argument evolved that the limitation of CR to voluntary actions only would poorly reflect the actual issues that are being dealt with under CR; i.e. human rights, including core labour rights, the environment and anti-corruption. These issues are all covered by law in most jurisdictions and would, if one was to stick to the voluntary understanding of CR, then be considered non-CR issues - similar to tax payments. Globalisation and companies vast amount of transnational relations combined with the exponential evolution of information- and communication technologies created a need to establish a global reference point for the development of CR; a global management discourse. Which responsibilities should corporations address in relation to the societies that enable them to operate and create a profit? An expectation has emerged that corporations consider and improve their impacts on sustainable development; social, environmental and economic sustainability. 3

The internationally agreed principles for sustainable development have proven ideal for such convergence and constitute the backbone of CR today. These principles are also reflected in the UN Global Compact. Six of the ten Global Compact principles relate to companies social responsibilities, three principles to companies environmental responsibilities and one - UN Global Compact principle 10 to economic responsibilities. These principles form the core of CR; principles that cannot be disregarded by corporations. Corporations can however both contribute to the realisation and disregard of these international principles for sustainable development. Thus the responsible company can no longer choose between more or less arbitrary contributions to the realisation of the principles alone; they need also to avoid adverse impacts on the principles. Today, CR is understood by most as a double-sided concept, which covers how corporations take responsibility for contributing to, while notbecoming a barrier for,social, environmental and economic sustainable development4. In the revised EU strategy on CR from October 2011, the EU Commission defined CR as the responsibility of enterprises for their impact on society5. Following this holistic definition it is clear that the issue of tax no longer can be overlooked when debating CR, as tax payment constitutes one of corporations largest economic impacts on society. Indeed, the EU Commission further explicitly encourages enterprises to work towards the implementation of three principles of good tax governance transparency, exchange of information and fair tax competition6. The commission finally encourages enterprises to disclose information related to the implementation of good tax governance standards7. Likewise, the OECD Guidelines for Multinational Enterprises states that business should refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to human rights, environmental, health, safety, labour, taxation, financial incentives, or other issues8. The OECD in other words links the issue of tax to areas that were part of the CR agenda for some time. Several bodies9 within the OECD are actively working on the issue of responsible tax behaviour. These bodies have established some guidance on the issue, such as the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations10 and the OECD Model Tax Convention11. It is obvious that taxation is considered and should be considered a crucial issue for economic sustainability. However, international norms for tax payments as those we see emerge in OECD did not reach a global level yet. For the same reason tax cannot yet be considered a core CR issue, as is the case with human rights, including labour rights, environmental principles and anti-corruption. International norms to guide corporations on tax were not yet established. The UN Global Compact principles reflect the international principles that have reached global support. In relation to economic sustainability this so far only encompasses principles on anti-corruption. However, looking ahead it likely that economic sustainability will not only be made up by anti-corruption. Anti-corruption may well be joined by principles on tax. Also international principles on anti-trust or anti-competition may be established.

The amount of guidance available on responsible tax issues and the number of bodies dealing with the issue is growing and this indicates development similar to the establishment of anti-corruption as a core CR issue. The tenth UN Global Compact Principle on anti-corruption was only added in 2004 four years after the founding of the Global Compact. This happened after the adoption of the United Nations Convention against Corruption12 in Merida, Mexico in December 2003. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions13 and not least the US Foreign Corrupt Practices Act14 paved the way for the adoption of the UN Convention. The issue of responsible tax behaviour may undergo a similar stepwise integration into international frameworks on CR and as illustrated with the EU and OECD examples, such development is underway. Until norms on tax are established at the global levels tax will however remain a secondary or non-core - CR issue; ranging on par with issues such as anti-trust and animal welfare. Nevertheless, tax cannot be ignored as a CR issue15. It is obvious that tax is important for economic sustainability and furthermore corporate risk management might drive forth the agenda. It will be interesting to see to what degree corporations will seek to influence the establishment of global norms on corporate tax, considering corporations own interests in ensuring a global level playing field on this issue.

3. The business perspective

CR is increasingly being fully integrated into business operations; the concept is no longer an add-on, it has become a way of doing business. Following the call from the UN Global Compact, corporations seek to incorporate their contributions to sustainable development into their core business strategies, while ensuring that no functions have adverse impacts. Paying taxes have repeatedly been highlighted by corporations as a key contribution to societies; however, it has seldom been recognised as part of CR. Indeed most corporations would simply view payment of taxes as a cost issue and thus seek to reduce such cost within the boundaries of national laws. For example, Clive Baxter, head of Maersks tax department, recently stated that while he sees tax as a fair and necessary cost, it remains to be something which needs to be managed to reduce costs and stay competitive16. In this mainstream corporate understanding of tax, compliance with legislation is the sole requirement or expectation to be met when paying taxes. Thus, aggressive tax planning will be regarded as unproblematic; insofar that tax planning observes black-letter law. Considerations as to how tax planning impacts economic sustainability not of the corporation but of the societies in which they operate, are less relevant. Using tax havens, tax breaks, inter-corporate price settings i.e. transfer pricing and a range of other instruments to minimise the cost of tax may well lead to undermining the ability of national and local authorities to keep the needed supporting infrastructure working; and to ensure its citizens adequate protection and fulfilment of their basic human rights. Thus, a divide appears between the letter of the law and the spirit of the law. The corporate understanding and treatment of tax may be changing following the change in how CR is perceived. As tax gains recognition as a CR issue it will automatically appear on corporate risk management agendas. 5

This tendency is amplified by the increasing amount of NGOs that are looking into corporate tax behaviour; thereby establishing the link between tax and CR17. Several corporate actors18 are already highlighting the link between tax policy and risk management. Increased customer and media awareness concerning corporate tax policy has raised reputational risks and indirectly created unforeseen financial risks for businesses. In addition there is a more systemic financial risk connected to irresponsible tax behaviour, as argued in a recent article by Corporate Citizenship: Clarity around tax is not just about reputation; there is a wider business case too. Reducing long-term uncertainties, avoiding sudden changes in regulation and minimising costs from legal challenge and orderly collection of taxes make for a better company and a stronger strategy19. Businesses that are interested in long-term stability and growth have an interest in contributing to the economic sustainability of its markets and production sites and in creating good relations with fiscal authorities. Both considerations will reflect on investors disposition to invest in a corporation. Conservative, risk-averse investors look for stable investments and are increasingly showing concern about CR, including responsible tax behaviour20. Corporations indeed have an interest in ensuring that any regulation that will limit the ability of corporations to fully exploit loop-holes and opportunities in tax law are adopted globally. As tax represents a cost for corporations and their shareholders; any cost will influence corporations ability to compete internationally. Whereas basic norms for tax payments may evolve as soft law being applied only by good corporate citizens they should have a global reach and recognition; similar to already established international norms for good corporate citizenship; i.e. human rights, including labour rights, environmental and anti-corruption norms. Therefore, in order to maintain global competiveness it would be recommendable that corporations actively engage in establishing such norms internationally, beyond state and regional restrictions.

4. Principles for Corporate Responsibility on Tax

Responsible tax behaviour is un-questionably an issue on the rise. Currently, however, there is no general consensus on what actually constitutes responsible corporate tax behaviour. In this section IBIS and Christian Aid present principles for Corporate Responsibility on Tax. Similarly, corporations would appreciate to know not only what they are supposed to deal with, but also how they are expected to deal with this issue. Although some of the proposed principles for tax contain process expectations the how question will require further deliberations. Section four suggests that the United Nations Guiding Principles on Business and Human Rights (UNGPs) can provide guidance on how corporations could be expected to manage any norms that would be agreed content wise. The global recognition of the UNGPs as the authoritative global reference point for managing adverse impacts on sustainable development would enable alignment of corporate management systems in dealing with adverse impacts; i.e. compliance with international principles for sustainable development.

Table 1. Draft Principles for Corporate Responsibility on Tax, IBIS and Christian Aid, 2012 These principles are meant as a guide that can help companies behave responsible in the complex area of tax payments. The aim is to further discuss and develop the principles in order to develop a set of principles, which can be incorporated into standards and regulations for corporate responsibility. 1. Substance Companies tax payments should reflect the location of business activities: Taxes should be paid and reflect where the companies business activities take place. 2. Structure A company should not misuse tax havens or opaque company structures for tax benefits: Subsidiaries in tax havens or secrete jurisdictions should not be used to obtain tax benefits or other economic advantages. A companys structure and beneficial owners should be disclosed to the public. 3. Power A company should not use its superior bargaining power to obtain unfair and excessive tax benefits when negotiating contracts with a host country: Contracts between a company and a host country should be balanced and fair for both parties and excessive tax exemptions and tax holidays should be avoided. Voluntary tax payments should not be used as leverage to gain advantages in other areas. 4. Transparency A company should be transparent about its tax policy: Understandable, timely and transparent communication about a companys tax policy and tax payments should be put forward regularly. 5. Accountability Companies should at all times comply with the national laws of the jurisdictions in which they operate: Compliance means respecting not only the letter of the law, but also the spirit of the law. Where states have weak or poorly constructed fiscal regulation and/or institutions this should not be used to gain tax advantages that were not intended by the law. 6. Financial reporting A company should disclose its financial reporting for all countries in which it has a permanent establishment: Details of tax payments, profits, turnover, intra-company financing and trading, number of employees and other relevant data should be disclosed regularly. 7. Governance A companys board is responsible for the companys tax strategy and should therefore take an active role in developing the strategy: A companys tax strategy is essential to the companys soundness and shall reflect the values and ethics of the company, and is therefore of great interest to the shareholders, whom the board is accountable to.

5. How to work responsibly with tax?

The United Nations Guiding Principles on Business and Human Rights (the UNGPs) were endorsed unanimously by the UN Human Rights Council in June 2011. They represent the first corporate governance expectation from the UN towards all business enterprises in the world. They explicitly put forward minimum expectations for managing adverse impacts on social sustainability; i.e. the internationally agreed principles on human rights including core labour rights. The UNGPs do not consider how businesses manage contributions to sustainable development. As such the UNGPs provide authoritative guidance on how to ensure that businesses do not become a barrier to sustainable social development; i.e. one side of the double sided concept of CR. The UNGPs make explicit that no matter how much a corporation contributes to some principles for sustainable development it cannot be excused for having adverse impacts on other principles. The UNGPs structure has been used by the EU21 and the OECD22 to describe how corporations should work with the compliance part of CR in general; i.e. covering all three bottom lines. As the most widely recognised governance structure for addressing all aspects of CR this section seeks to apply the UNGPs to the issue of tax; i.e. suggesting how the UNGPs can be applied to any emerging international norm regarding tax payments. Several policy developers have put forth the potential of using existing CR approaches to frame responsible tax behaviour. Applying existing approaches not only lowers learning barriers, but also creates coherence for various existing responsibility mechanisms in the company, thereby facilitating easy implementation processes and strengthening the understanding of the organisations responsibility measures. The UNGPs are designed to be universal in nature, while recognising contextual differences between countries, sectors and companies. Thus, while being applicable everywhere, they include flexibility vis vis the context of the given corporation. Thus, they can be applied in all countries, sectors and companies - providing a solid framework for managing an emerging norm on tax responsibility. A use of the UNGPs on all three bottom lines including the issue of tax will increase coherence of a corporations CR approach in general. The UNGPs way expects corporations to have a policy commitment on tax, to perform due diligence on its own activities as well as in business relationships in order to identify, prevent, mitigate and account for irresponsible tax behaviour and lastly, to ensure the remediation of adverse impacts on tax norms. The following sections (1-3) will provide further details on each of the three expectations. 5.1.Policy Having a policy statement in place is necessary to formalise the tax policy and ensure coherence throughout the different business units. It enables transparency and should provide guidance for tax reporting. The policy document should be approved at the most senior level, informed by relevant internal and/or external expertise on responsible tax payments, stipulate the expectations for tax payments throughout the various parts of the business operations, be publicly available, be communicated internally and externally to all relevant parties and be reflected in operational policies and processes, enabling the policy to be embedded throughout the corporations global operations.

The organisation Corporate Citizenship is one of the actors that underline the growing expectation for a clear corporate position on the tax policy of a corporation23. While more and more actors are demanding transparency, opaque tax structures and undisclosed tax policies are met with increasing critique. 5.2.Due diligence process The UNGPs outline the core elements that need to be part of a human rights due diligence process. These elements, by their universal character, are well suited to also describe a tax due diligence processes. Worth underlining is the essential nature of upholding transparency also in the due diligence process. The due diligence process will vary in complexity according to contextual conditions, such as the size of the company or the place and nature of operations. It is important that the processes are on-going and dealt with systematically (see also UNGPs 17). Firstly, a due diligence process should identify and assess both actual and potential adverse impacts on internationally agreed tax norms. The assessments should draw on internal and/or internal tax expertise, and involve consultation with relevant stakeholders (see also UNGPs 18). This may, for example, include national tax agencies and/or civil society tax experts. Several actors underline the importance of collaboration between corporations and tax agencies, and the potential influence corporate lobbying can have on legislation and authority practices itself, e.g. through tax negotiations24. In order to prevent and mitigate adverse impacts on internationally agreed tax norms, the findings of the due diligence process should be integrated throughout the corporation. This can be done in many ways, but a key factor is that the responsibility for addressing adverse tax impacts is assigned to the appropriate actor in the organisation and that sufficient resources are set aside to implement the determined policy (see also UNGPs 19). In order to verify whether adverse impacts on internationally agreed tax norms are being are being addressed, corporations should track the effectiveness of responses. Tracking should be based on both qualitative and quantitative indicators and feedback from relevant stakeholders (see UNGPs 20). The corporations tax performance finally needs to be communicated externally, to reaffirm the corporations position and inform stakeholders as well as shareholders of how the corporation is performing. The communication should be made in a form that is accessible to relevant stakeholders, and upheld in a frequent manner. While the corporation itself may choose what content that is disclosed, the point of departure should be that the information provided is sufficient to assess the performance of the corporation (see UNGPs 21). Reporting on adverse impacts on international tax norms could for example be included in the corporations annual report or CR report. As mentioned the EU is currently calling for greater transparency on tax issues25.

5.3.Access to remedy There is seldom a direct individual victim for harmful tax practices by corporations; instead it is society that collectively loses out. Where corporations identify that they have caused or contributed to adverse impacts on international tax norms, they should nevertheless provide for or cooperate in their remediation through legitimate processes. This expectation would, as a minimum, include informing country authorities on identified adverse impacts.

6. Summing up

This brief has explored corporate tax from a CR angle. Conceptually, it is becoming more and more difficult to argue that tax should not be part of the CR agenda. As a concept CR is increasingly being understood as corporations impact on society, and tax payments are hard to ignore when looking at a corporation from this angle. However, no global norm has yet emerged to give corporations adequate guidance on what responsible tax behaviour entails. As such tax is yet to become a globally accepted core element of CR, although recent developments among major political actors point in this direction. In lack of globally accepted norms IBIS and Christian Aid is suggesting principles on what responsible tax behaviour looks like. Such principles as well as potentially forthcoming international norms can be implemented by corporations in line with how other CR issues e.g. human rights are being managed. Such an approach would further a holistic and coherent development and integration of the CR agenda including the issue of responsible tax behaviour and help create a global level playing field of value to corporations as well as societies.

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Sources
1. In this brief the term corporate responsibility is used interchangeably with the term corporate social responsibility (CSR). 2. UN Human Rights Council (2011): The UN Guiding Principles on Business and Human Rights, http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf 3. http://www.unglobalcompact.org/ 4. The GLOBAL CSR definition of CSR, www.global-csr.com 5. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 6, section 3.1. http:// ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010 6. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 7, section 3.3. http:// ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010 7. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 11, section 4.4.3. http:// ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010 8. The OECD (2011), Guidelines for Multinational Enterprises: p. 19. http://www.oecd.org/dataoecd/43/29/48004323.pdf 9. E.g. The Global Forum on Transparency and Exchange of Information for tax purposes, The Centre for Tax Policy and Administration and the Forum on Harmful Tax Practices. 10. OECD (2010): Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, http://www.oecd.org/document/24/0, 3746,en_2649_33753_1915490_1_1_1_1,00.html 11. OECD (2010): Model Tax Convention on Income and on Capital, http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/ model-tax-convention-on-income-and-on-capital-condensed-version-2010_mtc_cond-2010-en 12. UN (2003): The United Nations Conventions against Corruption, http://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/0850026_E.pdf 13. OECD (1997): Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, http://www.oecd.org/dataoecd/4/18/38028044.pdf 14. United States Congress (1997): US Foreign Corrupt Practices Act, http://www.justice.gov/criminal/fraud/fcpa/ 15. KPMG, David Williams (2007): Tax and Corporate Social Responsibility, p. 6. http://www.kpmg.co.uk/pubs/Tax_and_CSR_Final.pdf 16. Maersk Group (2010): Maersk post, February 2012, p. 7 17. E.g. the Tax Justice Network, Christian Aid, ActionAid, Ibis etc. 18. KPMG, David Williams (2007): Tax and Corporate Social Responsibility, http://www.kpmg.co.uk/pubs/Tax_and_CSR_Final.pdf and PriceWaterhouseCoopers (2004): Tax Risk management: http://www.pwc.com/en_GX/gx/tax-management-strategy/pdf/tax-risk-managementguide.pdf 19. Corporate Citizenship (2011): Tax as a Corporate Responsibility Issue. http://www.corporate-citizenship.com/wp-content/uploads/Taxas-a-Corporate-Responsibility-Issue.pdf 20. Henderson Global Investors (2005): Tax, risk and corporate governance: http://www.eiris.org/blog/why-should-responsible-investorsworry-about-taxation/ ; Eiris (2012): Why should responsible investors worry about taxation? http://www.eiris.org/blog/why-should-responsible-investors-worry-about-taxation/ ; Loughlin Hickey & Patrice Day (2007): What IROs should know about tax, 18th September 2007. 21. The European Commission: A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 6, section 3.1. http://ec.europa.eu/ enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010 22. OECD (2011): The OECD Guidelines for Multinational Enterprises, eg. p. 31. http://www.oecd.org/dataoecd/43/29/48004323.pdf 23. See for example: Corporate Citizenship (2011): Tax as a Corporate Responsibility Issue. http://www.corporate-citizenship.com/wpcontent/uploads/Tax-as-a-Corporate-Responsibility-Issue.pdf 24. Action Aid (2011): Tax responsibility - The business case for making tax a corporate responsibility issue, chapter 4.1.2. http://www. actionaid.org.uk/doc_lib/tax_responsibility.pdf; KPMG, David Williams (2007): Tax and Corporate Social Responsibility, http://www.kpmg. co.uk/pubs/Tax_and_CSR_Final.pdf 25. The European Commission (2011): A renewed EU strategy 2011-14 for Corporate Social Responsibility: p. 7, section 3.3. p. 11, section 4.4.3. http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010

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