One of the most interesting debates going on now in the CSR universe is about fair tax payments. So far it has been mainly focused in the UK, where it was revealed that companies like Starbucks, Google and Amazon pay little or no tax on their earnings, but it echoes all around the globe with a growing number of stakeholders looking to hold companies accountable for their tax (avoidance) strategies.
Last week, my colleague Harry Stevens made the case why companies like Google or Starbucks shouldn’t be blamed for minimizing their tax bill. Today, I’d like to make the case for why they should. Actually, this is not so much about Google or Starbucks as it is about the inclusion of tax fairness in the CSR agenda, or in other words, why you can’t call yourself a responsible company and minimize your tax bill to the lowest possible amount at the same time.
I’ll try to answer this question by looking at four of the main arguments used by those who believe legal tax avoidance and CSR have nothing to do with each other.
1. This is capitalism
“We pay lots of taxes; we pay them in the legally prescribed ways. I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate,” Google Chairman Eric Schmidt told Bloomberg. The company isn’t about to turn down big savings in taxes, he added. “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”
Schmidt is right that this is capitalism, but just like there are different search engines or browsers, there are also different types of capitalism. I believe Schmidt can see the differences between capitalism that is guided by short-termism and led to the 2008 financial meltdown, and sustainable capitalism that abandons “the pernicious orthodoxy of short-termism” and seeks to maximize long-term economic value.
Bottom line: There is no contradiction between paying a fair share of taxes and being a capitalist – it is just about the type of capitalist you want to be.
2. It is legal and, hence, acceptable
One of the most common arguments is that the tax-avoidance techniques used by corporations like Starbucks or Google are legal and therefore they’re not to be blamed, but the tax systems that make them possible.
Apparently these techniques are indeed legal, but here are couple of other things that are legal, such as: cutting down trees in rainforests, sourcing blood minerals from Congo, working with suppliers in China that release hazardous materials into rivers or with factories in Bangladesh that put their employees in jeopardy, or not paying for externalities. Yet, we have expectations from companies that call themselves responsible to do more than just comply with the law in these cases – after all, it is widely assumed that CSR begins where the law ends. So why should tax payments be any different?
Bottom line: While tax systems should be revised, legality is no excuse for not doing the right thing, no matter if you’re talking about natural resources, working conditions or tax payments.
3. Fiduciary duty to maximize profits
More than 40 years ago Milton Friedman argued that “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits.” He also addressed the question of fiduciary duty, explaining that “corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.”
Now, Friedman (followed by others like Prof. Aneel Karnani) made this claim with regards to corporate social responsibility (CSR) activities in general, not paying more taxes. It only shows that basically there is no difference between CSR activities and tax payments when it comes to fiduciary duty and you can’t separate between the two – if one is acceptable then so is the other and vice versa.
Bottom line: Tax fairness is no different than other CSR issues when it comes to fiduciary duty, and hence there’s a good chance that the courts won’t interfere in the case of paying more taxes than required by the law as long as there’s a potential benefit to shareholders.
4. There is no business case for paying more taxes
Those who try to differentiate tax fairness from CSR argue that while there is a relatively strong business case for CSR, there’s none for paying more taxes.
I’m not familiar with any research about the business case for paying more taxes, but looking at what happened with Starbucks, for example, you can clearly see the risks of inaction – losing customers, jeopardizing relationships with important stakeholders, hurting the brand, and so on. These risks can eventually translate to shrinking sales and shareholder value. The other side of the coin is the creation of shareholder value in companies that will take action to pay their fair share of taxes.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.