TJN Admin ■ Unbelievable! The Ethical Failure at the Heart of Corporate Tax Avoidance
In this year-end guest blog, Tristan Shirley explores the belief system that underpins tax avoidance by multinational corporations and reflects on the ethical failures revealed by their unbelievable behaviour.
Almost every commuter on the train is reading the free paper. There is a surprised headline exclaiming the negative impacts of austerity and rising inequality, although everyone remains expressionless. Although reading a London commuter’s face for feeling is folly, I wonder if it is because they know that the political and financial system around them legally and aggressively redistributes capital out of their public purse via tax avoidance. It is unlikely; the highly opaque, complex and supposed legality of tax avoidance hinders the public from seeing its existence and influence in everyday life. After all some may have unknowingly paid for their tickets via the tax avoiding trainline!
Around the world many people are calling for tax justice, and there is growing understanding and evidence to demonstrate the damage tax avoidance has on the provision of human rights and distribution of political power. There are also proven ethical tax reform initiatives which would massively improve on the status quo. Why then, in the face of such clear analysis do tax avoiding (not evading) multinational corporations (MNCs) believe their behaviour is still acceptable and fail to adopt reform? For me and many others it is unbelievable! From that commute I set out to prove it.
Beliefs are the acceptance that something exists or is true and they can be used to justify action, such as avoiding paying tax. Beliefs sit together within systems where they interact and influence each other in an interconnected manner. Therefore a believer has a degree of control on which part of their beliefs to modify or distort when presented with contrary evidence, often protecting a stronger core belief. For example, Flat Earthers (people that believe the earth is flat) can ‘‘…postulate that satellite photographs are affected by systematic distortions of light, that people have hallucinations about ships disappearing over the horizon…’’ so as to maintain that the earth is flat.
You will be pleased to hear that there are limits to these distortions. The limit is defined by what can be considered as plausible. The Flat Earthers distortions break the seams of plausibility and as a result their belief system isn’t credible. Sure, anyone can believe what they want to believe but it is implausible to do so.
Hang on, surely a corporation can’t believe!? A MNC can and does in fact believe, through its Corporate Internal Decision (CID) structure which organises personnel towards the corporation’s endeavour and exercise of corporate power. It is the executives and senior leadership who are responsible for formulating the CID and embedding a culture of tax avoidance. They do so because they believe in the sanctity of the fiduciary duty, in return for equity and power they place the interests of the shareholder ahead of their own and obviously, those of third parties. Usually in the pursuit of profit!
Instinctively human rights should easily challenge the MNCs belief system as being implausible. The global MNC tax avoidance of $500 billion per annum massively harms people, especially those in developing countries where governments cannot uphold their obligations to their citizens. It is clearly morally reprehensible, however, having this label does not make it something implausible to believe in. MNCs are business orientated and their function is to generate profit on behalf of their shareholders, it just so happens in doing so MNCs believe in the fiduciary obligation as more plausible than moral obligations and the rights of several billion people who are affected.
Intuitively in a similar vein, social contract theory between citizens and state seems to be hold the answer to challenging the plausibility tax avoidance beliefs. In 2016 Pakistan lost an estimated 40% of tax revenues to MNCs. Theoretically, such tax avoidance threatens the assumptions of fairness and egalitarianism on which the social contract between state and individuals rests. Citizens of Pakistan would be unlikely to actively agree to enter into an agreement with MNCs and the state, if such unfavourable outcomes were known. Unfortunately though for us, the social contract is in fact inapplicable to MNCs. They may benefit from the provisions of the state but they do so as a third party, not as an equal contributing participant within the contract, they are not a citizen and only need to abide by the law. Laws which funnily enough promote vast tax avoidance. Unfortunately any further philosophical coercion towards paying tax that ordinary citizens like you and I have are voluntary for the MNC.
With hindsight the fiduciary duty is resilient, these criticisms fail to diminish the nature and importance of business and the unique characteristics it bestows on MNCs. It is clearly morally reprehensible and massively damaging for the social contract to believe in avoiding tax, yet given the fiduciary contract and its vital role in business not implausible. Nonetheless, it is in the constant appeals to the ‘nature’ of business and profit that gives MNCs enough rope, to eventually hang themselves.
The market in which businesses operate does in fact provide it’s own robust moral framework. It is based on the market’s purpose of distributing goods in the most efficient manner possible by setting the best ‘price’ dictated by supply and demand. In our real-world market there are imperfections which restrain this efficiency. To behave in a way that exploits them is deemed as unreasonable, leading to market inefficiencies otherwise known as ‘Market Failure’.
Unsurprisingly, tax avoidance exploits market imperfections so that the MNC is able to charge artificial prices that are “too low,” relative to the true cost. This process of externalising costs (to the citizens of host countries who have to pay for the remaining tax liability) increases the amount of profits that executives are able to deliver in line with the fiduciary duty.
This behaviour is rife in the current competitive market and the dysfunction it creates is evident as markets fail to deliver on their purpose. It is implausible for MNCs to believe in tax avoidance, not because of human rights or social contract considerations which to some extent are independent of them, but because in doing so they emaciate and cripple the global market on which their very own and so many others existence relies on. With the damage done, retrospective pleas of ‘but it was legal!’ will hold even less merit.
Business ethics and its impact has long been restrained by appeals to the fiduciary duty. It has been sidelined and adherence to its advised ethical norms or practices have been limited to voluntary adoption to likes of ‘CSR’. Belief in the current fiduciary duty without modification is simply unbelievable. The behaviour of MNCs needs to be contextualised within the larger competitive market system in which they operate; tax avoidance for short term profit causes market failure and is not excusable and their behaviour must reflect that. For example, by pursuing with vigour ethical tax reforms like the multi-factor global formulary apportionment with a minimum corporate tax rate.
Positively, the legal interpretation of the fiduciary duty (in UK law at least) has become clearer, thanks to the work of TJN and their legal work. Farrer and Co. are of the opinion that it is not possible to construe that duty as constituting a positive duty to avoid tax, in fact to do so is ‘misconceived’. The nature of the fiduciary relationship does not in fact limit the ethical considerations of MNC boards and the payment of tax. The result being that the tax avoidance beliefs inculcated in a MNC at a leadership level are in fact not just implausible philosophically, but also perhaps implausible in law too.
Of course executives will still appeal to the sanctity of the fiduciary duty until the tide truly changes. However, given that belief is implausible and clearly undermined, we witness their real belief that much clearer – it is simply greed.
Who knows, one day MNCs that believe in tax avoidance may be deemed as absurd as Flat Earthers. A change in this direction may result in significantly larger tax bills to MNCs, but to be honest that cost was theirs all along.
The author
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Socially Just Taxation and Its Effects (17 listed)
Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?
Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).
However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (see Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).
Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.
Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community, after an initial difficult start and not by the natural resources. As the village and city expand, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their site-values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid being by tenants make their residences more costly and the provision of goods and services more expensive. It also creates unemployment when entrepreneurs find the rents too high for them to operate and employ workers. This speculation causes wages to be lowered by the monopolists, who control the big producing organizations and whose land was previously obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.
The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access rights to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily in rent for its right to access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce. The product becomes more costly–this monopolist can effectively charge more for it, than what an entrepreneur normally would, were he/she able to compete on an equal basis, because of the excessive rent demanded by the landlord.
A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed almost 140 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains, etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and wrongly find that land dominance has its own reward.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Government:
1. LVT, adds to the national income as do all other taxation systems, but it can and should replace them.
2. The cost of collecting the LVT is less than for all of the production-related taxes—then tax avoidance becomes impossible because the sites being taxed are visible to all.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the government’s management of national affairs.
4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
6. The land owner pays his LVT regardless of how his site is used. When fully developed, a large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not being used).
7. LVT stops the speculation in land prices and any withholding of land from proper use is not worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, (even though their rental value can still grow over long-term use). As more sites become available, the competition for them becomes less fierce so entrepreneurs are more active.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).
Three Aspects Regarding Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.
Four Aspects About Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks–LVT is a natural system of national income-gathering.
15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
16. The improved and proper use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.
Love this article – I am forwarding to some students who are having a one off lecture with me on tax avoidance carried out by MNCs. TJN continues to deliver informed, well researched and accessible pieces in a manner of formats which are attractive for all learning pathways. Proud to be a TJN member!