Corporate responsibility and paying tax – oecd observer grade 9 electricity quiz

If we look back 20 years or so, we can see how aspects of corporate responsibility have developed and become embedded in the mainstream. Health and safety is a good example. Today, workers’ health and safety is a core and well-regulated aspect of good business management, with clear benefits in employee welfare and reduction of working days lost. But this was not always the case. Twenty years or so ago, health and safety was only just beginning to be considered as a core business responsibility, following some high profile industrial accidents, with campaigning groups arguing that tougher regulation and better business practices were required.

Today we see that paying tax is already being looked at as an element of corporate responsibility, so it is interesting to ask the question: how might this develop in the future? The recession and the financial crisis have deepened the lack of public trust in business and led to much wider public interest in what tax companies pay. Campaigning groups are active, with numerous reports from non-government and non-profit organisations in the past year or two calling for more transparency and regulation over companies’ tax affairs. And some corporations are taking leadership positions and treating tax as an element of their approach to corporate responsibility.

There is no universally agreed definition of “corporate responsibility”. For the leading companies in the area, we suggest it is simply about how their business adds value, now and in the future, for shareholders, but also for other stakeholders, including employees, customers, government and the wider community. Johnson and Johnson, the US-based worldwide consumer healthcare group, state this clearly in Our Credo, a set of operating principles that they have followed for over 60 years. In the Credo, they put their responsibility to shareholders after that to customers, employees and communities, believing that if they follow these principles, the business will survive and shareholders will receive a fair long-term return.

Paying tax into public finances is clearly part of how business contributes to society. Looked at simply, companies affect the community in three dimensions–social, environmental and economic. Paying tax is clearly part of the economic dimension, and how companies contribute to the creation of prosperity and to stability. Taxes provide essential public revenues for governments to meet economic and social objectives. Other aspects of the economic dimension include creating jobs and employment, and generating business for suppliers.

However, we would argue that taxes in this context involve much more than just the corporate income tax on companies’ profits; they also include all the other taxes corporations pay, such as employer taxes and property taxes, and those they generate and administer through their economic activity, such as VAT, and employee taxes deducted through the payroll. Our work, using our Total Tax Contribution Framework, has shown that on average in the UK, companies bear nine different taxes, and collect four others; and that corporate income tax is less than half (47%) of their tax cost. In Switzerland, the average figures are 18 taxes borne and 10 taxes collected; corporate income tax is 30.2% of taxes borne (see references).

Some of the groups campaigning on tax would like to see a change in reporting standards to require multinational companies to report their tax affairs in much more detail in their audited accounts, essentially a profit and loss account, assets and tax charge for every country where they operate, known as country-by-country reporting. The campaigners want this because they believe it would give greater transparency to tax avoidance and alleged profit shifting by multinationals, particularly out of developing countries.

These proposals would clearly involve a great deal of cost and effort for many companies, which business may be concerned about. Also it is not clear what the benefit would be for users of financial statements through such detailed reporting, or whether the proposals would achieve their aim of increasing tax revenues in developing countries. Nevertheless, such proposals clearly reflect a lack of public trust in corporate behaviour and show that tax is a complex area, and difficult for the non-tax expert to understand.

Greater transparency has been a theme of many previous corporate responsibility campaigns. The extractive industries have been at the forefront of the countryby- country reporting campaign. Mining companies often operate in resource-rich developing countries, and there is naturally much interest in their tax and other payments to government, as part of their licence to operate and the price for natural resources.

It is therefore interesting to see how some mining companies have already taken on the challenge of greater transparency on tax. In their Report to Society, Anglo American, the UK-based global mining company, discuss their payments with government (including tax) alongside other aspects of their corporate responsibility. Anglo American report their total tax contribution by country as part of their economic value added, or the economic dimension, including all the different taxes that they pay and collect, such as corporate income tax, royalties, employer’s social contributions, and employee taxes deducted through the payroll. They explain how all these taxes are generated across the life-cycle of a mining project, and show that two thirds of their tax payments are made in developing countries.

This type of reporting is quite different from the country-by-country proposal, which focuses solely on corporate income tax and the tax charge in the financial statements. Arguably, it better reflects how taxes are part of the economic benefits that companies bring to society.

We believe that paying tax has already started to develop as a corporate responsibility issue. We suggest that large companies, if they have not already done so, should start to think about where tax fits into their approach and strategy on corporate responsibility. Not all companies will want to be a leader in this area, but not to have a position could well be a risk.

We also suggest that more companies need to take up the challenge of greater tax transparency and how better to communicate their tax affairs. While there could be risk in providing more information, there may also be value in corporate reputation.

*Thomas Scheiwiller and Susan Symons are PricewaterhouseCoopers partners based in Zurich and London respectively. They have spent over 20 years advising clients and have combined their expertise to consider corporate responsibility (Thomas) and paying tax (Susan).