A number of large multinational companies (MNCs) in an effort to maximize profits are undertaking tax avoidance measures to cut costs. Tax planning is a tool that has been extensively and smartly used to avoid tax legally. MNCs make the best use of concessions made available to them in the form of deductions, allowances, exemptions and rebates. Moreover, they optimize use of foreign tax policies such as transfer pricing, profit sharing and payment of tangibles, all by staying well within the legal boundaries. MNCs are reporting higher profits, investors are happy and all seems to be going good. What about the consumers and citizens? Are they happy?
Citizens and consumers clearly don’t seem to be too happy with these strategies. There have been a number of public protests across the globe and the issue continues to rank high on consumers mind. E.g. In a 2012 Institute of Business Ethics (IBE) survey of UK citizens, corporate tax avoidance ranked second most important business ethics issue. While in a recent 2014 IBE poll, tax avoidance ranked the top most public concern among all business ethics issues. The question then is can MNCs still continue to operate this way? For some the answer might not be clear yet. In interest of those businesses, let’s first look at what has been the response from MNCs to such public protests. And then let’s consider a slightly different approach to understand what should be the best way forward.
Defensive Approach Being Deployed
Invariably, the MNCs took a defensive approach. Let’s consider the example of Microsoft and Google, the largest global technology companies. When pressurized on his firm’s tax avoidance practices, Gates said, “If people want taxes at certain levels, great, set them at those levels, but it’s not incumbent on those companies to take shareholder money and pay huge sums that aren’t required.” In another instance in May 2013, Google’s Chairman, Eric Schmidt said “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.”
Primary Culprit: The Conflict of Interest
Agreed, companies operate to maximize profits, however should it come at the cost of social well-being of citizens? Then is there a way to continue to maximize profits and at the same time serve the community better? Although, few would be able to see that, the answer is a resounding yes. To find the answer one needs to closely assess the situation, which is every day, every moment businesses face dilemma and conflict of interest. On one hand they are expected to behave responsibly towards the society and on the other hand they need to maximize returns for investors. Although there seems to be a conflict of interest here, the most critical question here is are investors any different from the society? They are certainly not, then where is the question of conflict?
Change Approach to Realize That in Reality There is no Conflict
To put it simply, the best way for businesses to look at this is through the lens of consequentialism, a class of normative ethics theory. Per consequentialism, a person or business’s conduct is based on the outcome that their action will lead to, i.e. “ends justify means” – a way that the businesses have always preferred to use. When businesses’ start viewing tax avoidance as the betrayal of citizens’ trust and expectations, they will realize that the “end” result would be loss of public trust and revenue/profits. Soon the realization will sink in that corporate tax avoidance is certainly not the right means to serve their end objective of maximizing profits.
Businesses will begin to change their approach, act responsibly and devise mechanisms to encourage and adopt ethical tax practices. For those who do change their approach early, it will prove to be the key differentiating factor that will drive brand loyalty and with that sustainable sales growth. The most essential task is to build a transparent tax payment system and honestly communicate their responsible (fair share) tax payment practices to the society.