Globalisation makes a fair corporate tax difficult to collect. But what is fair?

When the UK Chancellor of the Exchequer Gordon Brown stood up last month to deliver his pre-budget report, the main thrust of his cash generation plans for the government involved clamping down on corporate tax avoidance schemes.

Substantial revenue is expected from these moves, indicative of the extent both of the abuse believed to occur and the Chancellor's optimism that he can curb it.

The reality is that in the global economy, it is the multinationals themselves rather than national governments who, through techniques including transfer pricing and use of tax havens, determine the level of tax that they will pay.

Hardly surprising then that a debate has arisen around how much tax a corporation ought - morally - to pay. Framed in this way, and given the profound interest in taxes demonstrated by governments everywhere, tax could become the testing ground for international regulation of corporate responsibility.

That corporations should pay more is probably true, but that assertion is not a helpful starting point for identifying why or by how much.

There is no moral principle requiring corporations to pay tax, nor such a principle on which the absolute level of tax can be determined. Such certainties do not exist.

Floating Responsibilities

Corporate tax therefore floats on the sea of national competitiveness, with national tax rules determining whether or how a corporation will do business across a given tax jurisdiction.

The anchor may be corporate responsibility. One basis for determining how much a corporation should pay is by looking at a corporation's impacts on stakeholders in the round: what would it take to ensure that stakeholder communities receive a sufficient net positive benefit from the presence of that corporate activity?

The problem is that corporations are becoming adept at using their international manoeuvrability not simply to choose where they will do business but to get around national rules using techniques such as transfer pricing and debt dumping.

Rules-based systems in any event offer multiple opportunities to undermine the taxation intentions of the government, as the UK Chancellor knows all too well.

Tackling Abuse

Government tax authorities are slowly gaining the political will to deal with these issues.

The OECD is raising tax avoidance up its agenda, fostering disclosure and information swapping on tax matters between member states, which will help to identify the scale of the problem and create enthusiasm for reining in. One step open to any state, and already implemented by some, is enactment of a catch-all anti-avoidance rule.

In the global economy, it is the multinationals themselves who determine the level of tax that they will pay.

The difficulty of taxing multinationals using national rules, however, suggests a need for international regulation. Tax Justice Network advocates a system of unitary taxation to ensure that a multinational's total profit is taxed in all the places in which it does business, to the extent that business is done in that jurisdiction.

Such initiatives, though potentially worthwhile, are insufficiently comprehensive to address the corporate responsibility issue. Stakeholder pressure is building at the community level for corporations to provide an acceptable net benefit to the communities that they impact in the round. When Wal-Mart sets up shop in a community, attention is becoming focused not simply on what impact that has on the price of the communities shopping bills, but the extent to which wages in the area are depressed, the social cohesion of the town centre challenged, the indirect subsidies awarded through the social system to employees on a Wal-Mart wage.

Observers close to the Extractive Industries Transparency Initiative remark that once data is disclosed about revenues generated and taxes received in relation to resource exploitation, non-governmental organisations are first asking whether as a community or nation they are getting enough.

Such holistic perspectives produce precisely the calls for "tax in kind" - demands for corporate involvement in the provision of public goods - that permeate the corporate responsibility movement. Where business by virtue of its relationships with communities is uniquely well placed to improve their lot, they are expected increasingly to do so.

Transparency and better analysis of a corporation's net impact will lead to an assessment by stakeholders as to whether the corporation is maintaining its notional licence to operate, and so should continue to have access to the resources - physical or human - that the community has to offer.

Corporations that value long term relationships with communities will need to reassess their tax payments in the context of a bigger picture than has been suggested previously by rules-based systems - or even catch-all anti-avoidance provisions.






This article is reproduced with the kind permission of Ethical Corporation. For more articles like this please visit www.ethicalcorp.com.

To read another Global Envision article on the new global economy, see We Have to Make Globalization Work for All.

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