Tax has become an issue that companies find hard to ignore but the fundamental question of whether a company is managing their tax practices responsibly is still difficult to answer. This dilemma of ‘paying the right amount, in the right place and time’ is at the heart of responsible taxation, and government regulation both in the EU on banks, and the US Dodd-Frank Act on extractive industries have started to address tax transparency.
In a recent opinion poll in the UK, 43 per cent of the public say requiring business to clearly explain the amount of tax they pay would increase their trust in business as responsible taxpayers. More information is starting to emerge about the tax payments and practices of companies on the public record as FTSE4Good has started in 2015 to rate companies on their tax transparency and a Fair Tax Mark was launched in 2014 in the UK label fair tax practices, but they don’t cover all issues or all companies.
A new CSO discussion paper ‘Getting to Good – Towards Responsible Corporate tax Behaviour’ published by ActionAid, Christian Aid and Oxfam charts this area of a changing tax landscape beyond transparency by proposing a process to companies to gradually improve their tax practices based on three steps so that a tax-responsible company:
– Is radically and proactively transparent about its business structure and operations, its tax affairs and tax decision-making;
– Assesses and publicly reports the fiscal, economic and social impacts (positive and negative) of its tax-related decisions and practices in a manner that is accessible and comprehensive;
– Takes steps – progressively, measurably and in dialogue with its stakeholders – to improve the impact of its tax behaviour on sustainable development and on the human rights of employees, customers and citizens in the places where it does business.
This framework would allow companies to make substantive use of their disclosure in order to improve the positive impact of their tax policy and practices in a measurable way. Tax as a human rights issue has already been discussed by the UN rapporteur on extreme poverty and human rights, think-tanks and the International Bar Association. While this new discussion paper does not propose a standard or a benchmark, it addresses linkages between corporate taxation and human rights impact of taxation. Some examples of good practices in eight thematic proposals include:
– A corporate group changes transactions, ownership structures, contractual and transfer pricing arrangements to ensure that it books income from ‘offshored’ management and procurement functions in locations where it has its production, manufacturing or retail operations.
– A corporate group publishes any company-specific tax rulings it has obtained from tax authorities.
– A corporate group makes public, to the extent legally and practically possible, the decision of any adjudication or arbitration to which it, or any of its subsidiaries, is a party, undertaken to resolve a tax dispute, whether in a court or in an arbitration setting.
In terms with linkages to the Guiding Principles on Business and Human Rights (UNGP), the suggested behaviours under the eight propositions in the discussion paper link to the need to have a human rights policy approved at the most senior level of the enterprise (UNGP 16), as well as communicating how impacts are addressed (UNGP 17) and generally to the Pillar 2 concerning the corporate responsibility to respect human rights.
The ‘getting to good’ paper finds it more challenging to align human rights with taxation is the area of remedy – as taxes are not a voluntary contribution, but a mandatory obligation to governments. However, it does make proposals on how to proactively ensure that they do not receive special treatment over other companies or individuals in how they are being taxed nor do they distort the accountability mechanisms through lobbying or influencing the government tax policy in other ways.
Responsible taxation is one way to bring more actors into the room in deciding on how to manage tax policy and practice. If what is paid by a company looks obviously distorting the economic reality of the company’s operations then a company would risk its reputation or trust towards both the public and investors. Between 30 per cent to 60 per cent of all trade transactions are taking place within large MNCs, and are therefore governed by ‘transfer pricing guidelines’ written by the OECD, as developed countries have rejected numerous calls for the UN to be the place to negotiate international tax rules and treaties.
The paper finds that even when rules are relatively clear, there is room for judgment in terms of corporate structures and intangible assets, stakeholder scrutiny and impact analysis of tax practices and policies will start to become the norm. This would mean that international bodies should start to develop guidance also for responsible taxation, including the UN Tax Committee in its current remit where it develops practical manual on transfer pricing, and on tax base erosion from a developing country perspective. Taxation is therefore likely to remain a human rights and corporate responsibility issue for years to come.
Matti Kohonen is Principal Advisor on Private Sector at Christian Aid. Click here to download full version of the paper jointly written by Troels Boerrild, ActionAid Denmark; Matti Kohonen, Christian Aid; Radhika Sarin, Oxfam; Kerry Stares, formerly, ActionAid UK and Mike Lewis, an independent researcher.