Multinational corporations enjoy a special powerful position that creates possibilities to circumvent certain tax rules. Of course, corporations have a right to choose the most effective way of tax planning, as long as it is within the limits of the law. However, corporations also have responsibilities towards society at large which means that sometimes they have to think twice before they engage in certain types of tax planning. Especially corporations that call themselves socially responsible should be aware of the moral limits of their behavior.
Multinational corporations enjoy a special powerful position that other actors in the society usually do not have. The power of multinationals to operate beyond states leads to a regulatory vacuum, which means that national laws cannot always tackle international problems and international rulemaking is not sufficiently developed yet.(1) Such a regulatory vacuum of international standards has created a possibility for multinational corporations to use mismatching national (tax) laws to extremes.(2) In the context of tax planning, we can talk about multidimensional corporate power that appears, for instance, in the form of knowledge and possibilities to (ab)use the mismatching of national tax laws to extremea (3) or by lobbying for favorable rules.(4) In other words, multinationals are mobile, and they have strong negotiation powers. Next to the possibilities to move business activities around the globe and to lobby for favorable laws, corporations can also use their power in the law enforcement phase. This means for example that multinationals can negotiate, within the limits of national and international tax law, for specific tax rulings with tax authorities.(5)
Forms of tax planning
Every taxpayer plans taxes, (to a certain extent,) whether this is intentional or not. Taxpayers have the right to structure their affairs to achieve a favorable tax treatment within the limits set by law. Tax planning is a legal way to take into account the tax effects of various laws and rules and adapt ones’ actions accordingly. Tax planning is a concept which is used to describe the interpretation and application of legal rules in order to mitigate one’s tax burden or avoid double taxation. Contrary to (illegal) tax evasion, tax planning is legal in its various forms; it stays within the framework of the law. Tax planning is, nevertheless, a complex topic with many nuances, varying from legitimate tax planning responding to tax incentives to illegitimate tax planning abusing tax laws and paying an unfair share. Tax planning can be seen as a matter of degree, which, at a certain level, becomes socially unacceptable.(6) The first degree of tax planning is tax mitigation: a form of tax planning that makes a legitimate use of tax incentives created by the states and differences in the tax systems. Tax mitigation, for instance, complies with the tax legislation of the countries in which corporations operate and pay the right amount of tax at the right time by making use of tax incentives without allowing such incentives to become the main driver for structuring transactions. Tax mitigation can, however, easily change from legal and legitimate tax planning to forms of legal tax planning, of which the social legitimacy is questionable and results in tax avoidance. In case of tax avoidance corporations intentionally structure their transactions within the existing business operations with a main aim to minimize corporate income tax. Some multinationals even take a step further and create artificial possibilities, such as new artificial entities in tax havens, to reduce the possible tax effects of various rules by engaging in aggressive tax planning. Both tax avoidance and aggressive tax planning include a moral judgement, which has given grounds for public outrage. Aggressive tax planning is not a legal term, but it suggests that there are types of corporate behavior in tax planning matters that raises public concern. It is another strictly legal yet socially illegitimate form of tax planning in which corporations intentionally eliminate their moral responsibilities towards society.
Taxation and society
As a result of legal tax planning that is not always socially acceptable, discussions of morality have entered the picture. Taxes provide funds for governments to offer essential public goods and to redistribute wealth among citizens. In other words, taxes enable the government to provide a (legal) framework for the functioning of society and the economy. Taxes also contribute to the well-being of corporations in other ways, as the state fosters innovation, encourages investment for sustainable growth, boosts worker productivity, and stimulates the efficient use of scarce resources.(7) Based on that, it can be said that taxation is an essential precondition for the sustainable development of society - including markets. Multinationals have various opportunities in their decision-making processes and these choices have an effect on society.(8) However, free-riding and making profits at a considerable cost to society’s welfare could potentially result in businesses losing social legitimacy. Therefore, multinationals have a role to play in taking into account the effects of their tax planning practices, especially CSR companies. Furthermore, without society there would be no corporations.(9) Therefore, corporations need to be accountable to the societies in which they operate; corporate power also presumes corporate accountability.
Corporate Social Responsibility (CSR)
Legal rules in a complex society inevitably leave room for different interpretations and choices with regard to the use of the system of tax rules. In case legal rules fall short, morality should fill the gap. For multinationals CSR can be seen as a tool to balance conflicting interests in a moral way. CSR entails going beyond mere compliance with the law. However, as it is usually difficult to agree upon what an ideal good (corporate) citizen should do, it is important to also focus on the other end, the counterpart of CSR, corporate social irresponsibility (CSI).(10) Whether a corporation is socially responsible or irresponsible is a matter of degree – like tax planning - because not all kinds of legal behaviors are necessarily socially responsible, since, next to legal norms, there are also moral norms in a society. Corporations are part of a social contract and are, in my opinion, therefore also subject to the underlying moral norms of society. CSR is an ideal to strive for and keeping away from CSI can be seen as a practical starting point for responsible corporations. Taxation can be considered an independent category of CSR, since, in the case of aggressive tax planning or tax avoidance, corporations can use their corporate power to ignore the laws and harm the societies in which they operate.(11) CSR is a tool for corporations to show how they deal with the insufficiencies of public governance systems with regard to problems related to corporate moral responsibility towards society. This does not mean that corporations should forget their economic responsibilities, as moral behavior does not require denying one’s own personal needs and aspirations.(12) A corporate management board should act in the best interests of the company.(13) The best interest of the company is long-term financial stability, which is dependent on corporate reputation among its shareholders as well as stakeholders.
Next to societal responsibilities, corporations also have responsibilities towards their shareholders. Some might believe that various other legal obligations, such as corporate governance rules, restrict corporations from opting for moral business practices if it decreases shareholder value (in the short term). However, as long as managers act in the best long-term interests of the corporation, they do not breach their fiduciary duty when engaging in good tax governance. This means paying a fair share (or, at least, not an unfair share); developing tax codes of conduct and being transparent. Corporations have a right to choose the most effective way of tax planning, as long as it is within the limits of the law. However, corporations that value their social license to operate and aim to morally account for their tax behavior, should engage in good tax governance by paying their fair share and being transparent about their tax practices.(14)
To summarize, multinationals have corporate power but they should use it responsibly. However, if corporations are expected to be transparent in their tax planning strategies, values and tax contribution and consider it as part of their CSR policy, other actors (such as states, tax advisors, media or academics) also need to take responsibility and contribute to sustainable global tax governance. While states bear a primary responsibility for creating a fair legal system and legal certainty, a fairer tax system is a shared responsibility of all the actors.(15) Currently there is no common understanding on what is right or wrong when it comes to corporate tax planning. A dialogue is necessary to reach such an understanding. At the end of the day, aggressive tax planning cannot be resolved merely by changing the laws, for all laws can be circumvented; it also requires that the mind-set and attitude of multinationals, but also other actors, such as politicians, public in general or media, change. The majority of existing literature on responsible corporate tax planning focuses mainly on multinationals, since corporations have a significant role to play in this respect. Nevertheless, tax planning is a complex process that also requires the input of several other actors. Such different actors have different interests and different professional and cultural backgrounds. Consequently, the debate concerning aggressive tax planning is peppered with different perspectives. Gribnau describes taxes as an elephant in a village of blind people – depending on their perspective, different people understand it differently.(16) Different parts need to be put together in order to understand the complete picture. Further research is necessary to better understand the role and responsibilities of other relevant actors with regard to good tax governance. For instance, further research could identify the role of various corporate advisors (external and in-house), international organizations, civil society actors (NGOs), intermediaries such as banks, shareholders, investors, and pension funds. How do these actors influence the tax planning culture and corporate decision making?
(1)See e.g. Scherer, A. G. and Palazzo, G. (2008). Globalization and Corporate Social Responsibility. In Crane, A.et al. (Eds.), The Oxford Handbook of Corporate Social Responsibility (pp. 413-431). New York: Oxford University Press. pp. 423-425.
(2)See e.g. Grapper, J. (2019, November 4). Do Global Businesses have too Much Power? Financial Times (online). See more on the concept of tax planning in chapter 3, section 3. Of course, with regard to tax planning, corporations do not always act against the will of the government, as states sometimes also provoke tax planning by engaging in tax competition; see chapter 3, section 4.
(3)Even Ruggie places corporate power in the context of tax planning by arguing that “multinationals’ structural power is greatly augmented by the existence of tax havens.” Even though he does not exactly define ‘tax havens’ as it is defined for instance by the OECD, he adds that, as long as tax and tariff rates are not harmonized, “this remains a source of structural power for multinationals.” See Ruggie, J. G. (2017). Multinationals as Global Institution: Power, Authority and Relative Autonomy. Regulation & Governance 12 (3), 317-333. p. 8. It must also be noted that lobbying, as such, may add more knowledge to democratic process and this in turn enhances the quality of better-informed decisions.
(4)For more information about the lobbyist activities in the EU, see e.g. Corporate Europe Observatory webpage. Exposing the Power of Corporate Lobbying in the EU.
(5)See e.g. LuxLeaks; EU state aid cases: Apple, Starbucks, Fiat; see also European Commission. (2015, October 21). Commission Decides Selective Tax Advantages for Fiat in Luxembourg and Starbucks in the Netherlands are Illegal under EU State Aid Rules. Press release
(6)Jallai, A.-G. (March 2020). Good Tax Governance: International Corporate Tax Planning and Corporate Social Responsibility – Does One Exclude the Other?. Tilburg Law School PhD dissertation. Available at SSRN: https://ssrn.com/abstract=3688985
(7)See e.g. Avi-Yonah, R. S. (2006). The Three Goals of Taxation. Tax Law Review 60 (1), 1-28. p. 3; Gribnau, J. L. M. (2015). Corporate Social Responsibility and Tax Planning: Not by Rules Alone. Social & Legal Studies 24 (2), 225–250. pp. 229–230.
(8)Barkan, J. (2013). Corporate Sovereignty: Law and Government under Capitalism. Minneapolis: University of Minnesota Press. pp. 1-18.
(9)For example, an American business magnate and investor Warren Buffett has agreed that, for his success, a well-functioning society has been crucial: “I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a market system that happens to reward what I do very well – disproportionately well.” As quoted in Chang, H.-J. (2010). 23 Things They Don't Tell You About Capitalism. London: Allen Lane, p. 30.
(10)Tench, R. et al. (2012). The Challenging Concept of Corporate Social Irresponsibility: An Introduction. In Tench, R. et al. (Eds.), Critical Studies on Corporate Responsibility, Governance and Sustainability, vol. 4 (pp. 3-20). Bingley: Emerald. p. 19.
(11)Jallai, A.-G. (March 2020). Good Tax Governance: International Corporate Tax Planning and Corporate Social Responsibility – Does One Exclude the Other?. Tilburg Law School PhD dissertation. Available at SSRN: https://ssrn.com/abstract=3688985
(12)Paine, L. S. (1996). Moral Thinking in Management: An Essential Capability. Business Ethics Quarterly 6 (4), 477-492. p. 478
(13)Stout, L. A. (2012). New Thinking on ‘Shareholder Primacy’. In Vasudev, P.M. and Watson, S. (Eds.), Corporate Governance after the Financial Crisis (pp. 25-41). Cheltenham: Edward Elgar Publishing. p. 29
(14)Jallai, A.-G. (March 2020). Good Tax Governance: International Corporate Tax Planning and Corporate Social Responsibility – Does One Exclude the Other?. Tilburg Law School PhD dissertation. Available at SSRN: https://ssrn.com/abstract=3688985
(15)See also Peters, C. (2020). Global Tax Justice: Who’s Involved?. In Van Brederode, R. F. (Ed.), Ethics and Taxation (pp. 165-187). Singapore: Springer.
(16)Gribnau, J. L. M. (2016). Belastingen als Olifant. NTFR: Nederlands Tijdschrift voor Fiscaal recht 17 (8), 1-5.