In January 2019, Dutch journalist and historian Rutger Bregman was invited to the World Economic Forum in Switzerland, where he gave a passionate speech to the panel, The Cost of Inequality. The next year, Bregman was not invited back to this event.
He jokingly tweeted, “Was it something I said?” Indeed – Bregman had addressed the elephant in the Forum, in front of all the billionaires, CEOs and diplomats. Or, as he himself said irreverently, “I called them on their bullshit.” His message: “The wealthiest in the world, both privates and companies, structurally contribute less than they should to society. And we are not talking about it (…) I feel like I’m at a firefighters’ conference and nobody is allowed to talk about water.” The topic, of course, was taxes.
Oxfam International’s executive director, Winnie Byanyima, chimed in by saying that governments are choosing to maintain low corporate tax rates, resulting in insufficient funds for them to put back into the health, education and social protection of their people. The consequence is rising levels of inequality.
While Bregman was mainly referring to tax evasion (which is illegal and immoral), Byanyima alluded to the structurally flawed global tax system, which has built-in loopholes, designed to allow businesses to legally minimise their total tax bill.
And let’s be honest, it is totally understandable, right? Have you ever ticked the box on your tax form stating you would like to voluntarily pay a higher tax rate? (Yes it exists, go on, look it up!)
Since Bregman’s speech on why companies should adopt responsible tax strategies was received with similar scepticism by the leaders of large corporations present at the World Economic Forum, we decided to help him along by providing you with a more positive outlook, and highlighting some of the benefits companies can expect by doing so.
- Corporations benefit from the physical infrastructure, education systems and public services paid for by their taxes
- You can even think of it as a type of philanthropy!
- Current structures that allow companies to optimise their tax burden and thereby enhance short-term profitability, are unlikely to persist in the long term
- Governments of both rich and poor countries are increasingly taking measures against base erosion and profit shifting, which are causing them to miss out on hundreds of billions of tax revenue each year. Get ahead of the game by pursuing a responsible tax strategy sooner rather than later.
- Larger companies are vulnerable to future policy changes, which will be made to correct the imbalance with smaller companies
- Current disproportionate tax configurations are not sustainable over time, therefore policy action is inevitable (think of fines and penalties, as well as increased enforcement of existing rules). And that future is not necessarily far away; take the Netherlands for example, officially marked as a tax haven for multinationals by the European Parliament, which at the time of writing is considering equalising its tax system in order to make companies pay taxes in the place where they make their profits (think of Royal Dutch Shell, which pays most of its taxes in the Bahamas and Singapore), and in the short term to collect €600 million extra to support the country in the fight against Covid-19.
- Companies pursuing responsible tax strategies are viewed more favourably by sustainability investors, who recognise the risks associated with tax optimisation strategies
- Investors increasingly appreciate when a company is well prepared for the aforementioned future changes in tax policies.
- Concerns about rising levels of inequality have sharpened the public’s (and thus policymakers’) scrutiny of its drivers, and aggressive corporate tax optimisation is often seen as a major contributing factor
- Avoid risks in terms of reputation, regulation and ultimately financial performance.
If you’ve read this far, you’re inevitably wondering how to implement the necessary policies and practices into your company’s tax approach. No worries, we’ll get you going with a “Responsible Tax Strategy Starter Kit”.
Step 1 – Commit to it
Have your legal department draw up a statement saying that your company intends to comply with all tax laws and regulations, but then be bold and go beyond this standard commitment by also saying specifically that you will also comply with the spirit of the law. Think of them as commandments to live by:
- I shall not transfer value that has been created to low-tax jurisdictions
- I shall not use structures intended for tax avoidance
- I shall not transfer pricing using the “arm’s length” principle
- Finally, under no circumstances, shall I use secrecy jurisdictions or so-called “tax havens” for tax avoidance purposes
Repeat after me: “The Bahamas and Cayman Islands are for leisure time only.”
Step 2 – Report it
To demonstrate that you practise what you preach, you’ll go on to proudly publish your company’s tax figures in the annual report, as detailed as possible to show your investors how beautifully you’ve been applying the previously mentioned principles in all the countries you operate in.
Step 3 – Show it
Your effective tax rate will speak for itself on your sustainable tax practices and their impact on the world around them. And what’s more, it will demonstrate how you compare to your industry peers – a fantastic opportunity to set yourself apart and consolidate your position as a Responsible Corporate Citizen. See our Tax-Time for Action, a guide for companies on responding to the tax debate here.
Barbara Lammertink, Senior Researcher, Corporate Citizenship LatAM
Germán Saenz, Associate DIrector, Corporate Citizenship LatAM