Biting the hand. Can tax-dodging companies really call themselves "socially responsible"?
Allegations published in the Guardian (Tues 17 March 2009, pp. 6-7) about the lengths some UK banks will go to avoid paying tax have, not surprisingly, provoked a lot of public anger. At the very same time Barclays was negotiating with the UK government for taxpayer support to help deal with toxic asset risks, whistleblowers were leaking internal memoranda which, it is claimed, demonstrate a labyrinthine mess of highly artificial deals to take advantage of tax havens and exploit loopholes in international tax regimes.
Barclays, it must be said, has denied any wrongdoing, claiming to have co-operated with HM Revenue & Customs in a "prompt, transparent and timely manner". The internal documents themselves were subject to a gagging order, handed down by the High Court on 19 th March, on grounds of commercial confidentiality and "legal professional privilege (1)." And it was not even clear whether the particular structures documented - and briefly available via the internet - were still in effect by the time they were disclosed.
Of course if Barclays has been avoiding tax it is not alone. This kind of tax avoidance is depressingly widespread. It was the political context - and what it suggests about the sheer hypocrisy of some of our business leaders - that kept this particular story in the public eye. But the row over the activities of the Barclays Structured Capital Markets team (and their legal advisers) does raise some important wider issues about law, business regulation and CSR.
At a technical level, the furore illustrates very well the challenges involved in designing regulatory schemes for multinationals. The first difficulty is getting the right balance between flexibility and certainty. Too much flexibility, and the regime risks undermining confidence, and fails to provide companies with the certainty they need to be able to develop effective compliance systems and to plan for the future. Too prescriptive, and the regime is an open invitation to clever lawyers and accountants to find ways around it.
The second challenge, which leads on from the first, concerns the frequent imbalance in information and resources between the company, on the one hand, and the regulator, on the other. As the Barclays whistleblower put it, "SCM [i.e. the Barclays' Structured Capital Markets department] has huge amounts of resources, the best minds rewarded with millions of pounds. HMRC recently advertised for a tax and accounting expert with the pay of £45,000." The implication that the cleverest people will invariably be found in the corporate sector is perhaps a little unfortunate. More to the point is the simple fact that the regulator is always playing catch-up simply because she is an outsider. A company may provide her with all the information she seeks, but she must first know what questions to ask.
The final difficulty - and probably the most intractable one - concerns the inherent practical and legal difficulties in devising international regimes that are as seamless and integrated as the groups of companies they seek to regulate. While companies may have global reach, state authorities do not. Without robust information-sharing and co-operation arrangements between states, international regulation of companies can only ever be piecemeal.
There are no easy solutions to the regulatory problems surrounding banks and tax. In other contexts, where the law is ambiguous or inadequate, CSR is supposed to help to fill the moral gap. But compared to issues like environmental responsibility and human rights, the responsibility of a company to pay its taxes receives surprisingly little attention in CSR debates and reports. Barclays latest (2007) CSR Report contains scant reference to tax, merely noting the net amount of tax paid during the reporting period. (The answer, for the record, was around 2.13 billion pounds to UK authorities and around 2.56 billion in non-UK tax). No policy position on tax is included. But this is not usual. Few companies provide much more detail than this.
So what should companies be aiming for? It is usual to break CSR down into three broad areas, the so-called "triple bottom line" of economic, social and environmental impacts (or, more catchily, "people, planet and profit"). A company's approach to tax falls most obviously in the "economic" part of this framework (which, incidentally, is concerned not just with a company's profits and shareholder returns but also its wider economic impacts on communities). Here, companies tend to present the fact that they pay any tax at all as a positive - a "credit in [the] company's social balance sheet.(2)." No information is provided, though, to help us understand whether this is a fair or proper contribution or not. It is just a number. Unlike other aspects of CSR (which stress the importance of going above and beyond technical legal requirements), tax is just a cost to be avoided.
Tax is also relevant to the social and environmental aspects of CSR - although not as directly. It might be true that tax avoidance lessens the resources available to governments to pay for social and environmental programmes. However, the reverse is not necessarily the case, as there is no guarantee that governments will use the increased tax revenues to improve public services. This is not a good reason for avoiding tax, though. In most states - leaving aside for the time being the most corrupt and worst governed - the idea that companies are the better distributors of resources is as arrogant as it is undemocratic.
It is amazing that there is so little interest in the idea that paying taxes is a social responsibility of corporations. Maybe this is because tax law is perceived as dull, or too technical, or too difficult to understand. But thanks to the "credit crunch", public mistrust of corporations is now very great. Business leaders (and especially bankers) are perceived as grasping, hypocritical, and not prepared to pay their way. In this climate, with tax rises for ordinary people very likely, corporate tax and tax avoidance is set to become a sensitive issue. No one is suggesting that companies should pay more to the state than it is due. But there is a difference between (a) taking advantage of policy-driven tax incentives and (b) concocting an artificial web of companies and transactions that offer the company no commercial advantages whatsoever other than to avoid tax.
The challenge for companies is to look at how their approach to tax fits with their over-arching business principles. Barclays' 2007 Sustainability Report contains the following policy statement:-
"Barclays operates globally and believes that best practice governance, controls and compliance are essential for maximising shareholder value. In order to achieve this, it must act with the highest standards of integrity and honesty in all it does, to give customers confidence when entrusting their business to Barclays".
You can't argue with sentiments like these. This particular policy statement relates to the problem of bribery and corruption (as noted above, Barclays' CSR report contains no policy statement on tax). But it would seem to have wider application. And it would be good to understand a bit more about how the company's overall approach to tax and tax planning fits with these fine ideals.
Sustainability Taxing Issues: Responsible Business and Tax , March 2006. www.sustainability.com/aboutsustainability/article_previous.asp?id=450
Tax Research UK www.taxresearch.org.uk
(1) Legal professional privilege" is the legal doctrine that says that, as a general rule, communications between lawyer and client must be kept confidential.
(2) Sustainability Taxing Issues: Responsible Business and Tax , March 2006.
Jennifer Zerk Consulting: +44 (0)1223 207305 - email@example.com