Tristan Shirley – Unbelievable! The Ethical Failure at the Heart of Corporate Tax Avoidance

Tristan Shirley explores the belief system that underpins tax avoidance by multinational corporations and reflects on the ethical failures revealed by their unbelievable behaviour.

Cross-posted from Tax Justice Network

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.

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