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Tax avoidance and its implications for corporate responsibility.
Context lunch June 2004

Attended by:
Edward Bickham - Anglo American
Bill Boyle - BP
John Christensen - Tax Justice Network
Roger Cowe - freelance CSR journalist
Julia King - GSK
Rob Lake - Henderson
Bobby Leach - Vodafone
Francis Sullivan - HSBC
Leigh Tomkins - Sainsbury's
Mark Weintraub - Shell
Richard Aldwinckle - Context associate
Peter Knight - Context

We discussed the implications of tax avoidance on corporate responsibility. Stimulating the conversation was John Christensen of the Tax Justice Network (www.taxjustice.net).

Background
Corporations minimise their tax payments by using legal avoidance programmes. These schemes take advantage of legal loopholes and are marketed by tax specialists.

While perfectly legal, the morality of the exercise is questioned by some stakeholders and supported by others. For example, some investors see the minimisation of tax obligations as essential to maximising the returns on investment. But governments, who risk losing tax revenue, see avoidance practices as ethically questionable because they break the social contract.

The UK government, for example, is campaigning against avoidance schemes and now insists that all new schemes must be approved by the Inland Revenue before they can be marketed. Government departments have been leaking information about their investigations into the use of corporate tax avoidance schemes, to embarrass companies in the hope that this will dissuade them from using the schemes.

Such embarrassment is based on potential damage to corporate reputation because most companies claim to be good corporate citizens and do not want to be seen to break the social contract.

Tax avoidance (as opposed to tax evasion, which is illegal) is a CSR issue because it can damage corporate reputation, especially if a company claims to take its social responsibilities seriously but wilfully breaks the social contract.

Discussion
John Christensen argued that tax revenues are the lifeblood of democratic government and the social contract. But most multinational businesses are structured to avoid tax wherever they operate, undermining national tax regimes. Policy measures are needed to correct this. Businesses should adopt CSR standards on taxation, such as publishing the necessary accounting information, and avoid the use of profits-laundering vehicles that have no substantial economic purpose.

Our discussion highlighted the complexity of many of the issues.

These included:

• The most effective way to tax. Is taxing capital (corporations) the best way, given the ease with which corporate tax can be avoided? Should we not find a more efficient method?

• What is the moral difference between avoidance and evasion, especially when governments themselves provide legal mechanisms (e.g. tax-free national savings) to avoid taxation?

• To what extent do elaborate tax avoidance measures undermine transparency (e.g. Enron), therefore being detrimental to investors?

• Should the Board be paying more attention to the corporation's tax strategy, its impact on transparency and its potential for reputational damage?

What should the CSR manager do about the issue?
• Understand the issues and the potential for reputational risk
• Ensure that the board is aware of the risks
• Track the issue.

[Please make contact if you would like to join us for lunch].