Corporate Taxation and Sustainability, Department of Business Law

Corporate Taxation and Sustainability

DEPARTMENT OF BUSINESS LAW

Department of Business Law

978 91 7267 465-3

Corporate Taxation and Sustainability

Eds. Axel Hilling, Niklas Sandell, Amanda Sonnerfeldt and Anders Vilhelmsson

Coverphoto and illustrations by Amanda Knöös

Copyright the Authors individually

Lund University School of Economics and Management, Department of Business Law

ISBN 978-91-7267-465-3 (PDF)

Layout by Media-Tryck, Lund University, Lund 2022

Corporate Taxation and Sustainability

Sustainability, often expressed in terms of Environment Social & Governance, ESG, has an increasing impact on companies’ operations. Areas that were previously disconnected from traditional sustainability work, corporate taxation for example, are now clearly subject to a company’s overall sustainability strategy. The rapid development in this area has led to a great deal of uncertainty in many organizations as to how best to tackle these new challenges.

Lund University develops and disseminates knowledge for the benefit of society. Thus, to develop a course on corporate taxation and sustainability is fully in line with our mission. However, unlike traditional courses, which generally build on vast amounts of previous knowledge packaged in books and journals, tax and sustainability is a relatively unexplored academic subject area. Knowledge is spread among companies and their stakeholders, and there are constantly new rules and recommendations, making the area even more complex.

Our digital course - Corporate Taxation and Sustainability - is a course that includes contributions from many different experts. In addition to lectures from academics with expertise in various fields, such as accounting, finance, tax, corporate law, and sustainability, representatives from companies, NGOs, advisors, legislators, and policymakers are present in the extensive digital material. The course has been developed within the framework of the research project Tax Reporting in a Sustainable Society and is a collaboration between Lund University and CSR Sweden. Companies and private actors who are interested in taking part in the digital material can do so through CSR Sweden’s provision. Students who want to learn more about corporate taxation and sustainability can apply to the course, every summer, at the Lund University School of Economics and Management, earning 7.5 academic credits (Swedish hp) on completion.

In the summer of 2022, more than 1,000 students applied for the academic course, making it one of the most popular summer courses at Lund University.

After a tough admissions procedure and a series of rigorous tests during the course, 52 students completed it in August 2022. All students who passed the course have cutting edge knowledge in corporate taxation and sustainability. Those who received the highest grade have demonstrated knowledge that far exceeds what is found in many of the organizations that are now challenged by new requirements for sustainable corporate taxation. We have therefore chosen to publish their final papers as valuable input to these companies and organizations, and to society at large.

Contributions

The five contributions we publish deal with different areas of corporate taxation and sustainability. In the opening contribution, Taxation as a Sustainability Issue, Kajsa Hansson Willis examines the link between taxation and sustainability, and finds a strong connection that unquestionably positions tax as a sustainability issue. One of the biggest challenges for organizations that define tax as a sustainability issue is to formulate an appropriate tax policy. In her contribution, Formulating an Ethically Sound Corporate Tax Policy, Sofia Wallin discusses how a tax policy can be designed to satisfy all the company’s stakeholders without renouncing high ethical standards. A tax policy usually presents how companies approach tax planning. In her contribution Paying Taxes - A Question of Sustainability, Lykke Liljefeldt reflects on how tax planning and tax avoidance relate to sustainable corporate governance and social responsibility. Public communication around a company’s tax function is central, and one of the most current issues based on new EU regulations on public country-by-country reporting, and on upcoming regulations on corporate sustainability reporting (i.e., the EU Corporate Sustainability Reporting Directive, CSRD). Femke van der Zeijden examines the strongest arguments for and against public tax reporting in her contribution Do We Need to be Transparent About our Taxes? and finds more arguments against public reporting, but stronger arguments in support of such reporting. Finally, in the last contribution, Environmental Taxes to Achieve Environmental Sustainability, Alicia Löfgren draws attention to environmental taxes and discusses how companies with high sustainability ambitions should relate to differences in prices for emission rights and environmental tax rates between countries.

The essays form part of the Corporate Taxation and Sustainability examination and have been written based on the following guide lines:

Picture yourself as a member of the executive team in a multinational company. The Chair of the Board asks you one of the following questions (students have a limited number of questions to choose from). Answer the question in a 3,000word pro memoria (abstract included).

Before you write your PM, you have 100 words to present the (fictive) company you are representing, and your position in that company.

The contributions were reviewed before being published by the research team who have developed the course, and who are also responsible for this publication:

Axel Hilling, Department of Business Law, Lund University School of Economics and Management

Niklas Sandell, Department of Business Administration, Lund University School of Economics and Management

Amanda Sonnerfeldt, Department of Business Administration, Lund University School of Economics and Management

Anders Vilhelmsson, Department of Economics, Lund University School of Economics and Management

Enjoy your reading!

Table of Contents

Taxation as a Sustainability Issue 9 Kajsa Hansson Willis

Formulating an Ethically Sound Corporate Tax Policy 21 Sofia Wallin

Paying Taxes – A Question of Sustainability

Lykke Liljefeldt

Do You Need to be Transparent about your Taxes?

Femke Maria van der Zeijden

Environmental Taxes as a Means to Achieve Environmental Sustainability

Alicia Löfgren

Author presentations

Taxation as a Sustainability Issue

Kajsa Hansson Willis

Abstract

As our company is reviewing its tax policy, it is important to explore how taxation relates to sustainability. Therefore, this pro memoria investigates the impact taxation has on the five domains of sustainability, which are the material domain, the economic domain, the domain of life, the social domain, and the spiritual domain. Further, the four pillars of sustainability – human, social, economic, and environmental – are presented as an alternative perspective on sustainability, which the pro memoria also considers. Matters such as Pigouvian taxes, corporate attitudes and transparency toward taxation, a shifting economy to mobile

capital and its impact, and how taxation promotes human rights and freedom are discussed through a vast use of different sources. In most regards the relationship between taxation and sustainability is strong. With all sustainability domains taken together, taxation is shown to have a large impact on sustainability, implying that taxation should be a large part of any company’s sustainability policy. This implies that it is important for companies to contribute their fair share, or sustainability might be threatened.

Company Presentation

As the Chief Sustainability Officer (CSO) for Mind Solar, my role is to ensure that our sustainability practices are operating well, and our policy goals are achieved. Mind Solar is a business with focus on developing solar power solutions, and we have large operations installing them in Africa. Therefore, sustainability and green solutions are a large part of our business model, but it is my job to make sure it constantly improves and that we are a leader in sustainability.

Introduction

Close to 40% of multinational companies’ profits were shifted to tax havens in 2015 (Zucman 2020) and a 2017 study approximated that governments lose $500 billion annually from corporate tax avoidance (Eurodad 2017), but before one can understand how taxation might be a sustainability issue, it is of utmost importance to understand what sustainability is. Sustainability is a concept many companies are committed to, including our company to a great extent; it is thus crucial to understand what it is at a fundamental level in order to act in a way that is sustainable in every aspect, regardless of whether it is environmental or humanitarian. Taxes are yet another important element of our, and every other, company. In my role as CSO, I wish to ensure that the executive team, especially the Chief Financial Officer, and the board understand the role taxes have in sustainability, as the aim of this pro memoria is to explore how taxation and tax compliance impact sustainability. This will be beneficial for the execution of our sustainability policy, and we hope, be a guide in decision-making.

It is not sufficient to look at one single type of sustainability, as the entire concept must be considered. Sustainability can be defined as:

“a dynamic equilibrium in the process of interaction between a population and the carrying capacity of its environment such that the population develops to express its full potential without producing irreversible, adverse effects on the carrying capacity of the environment upon which it depends” (Ben Eli 2015, 3).

It can then be split into five domains, the material domain, the economic domain, the domain of life, the social domain, and the spiritual domain, where the spiritual domain sets the tone for the whole and helps integrate the other domains. However, all domains must be integrated and seamlessly affect choices and actions in society for sustainability to be reached completely and spontaneously (Ben Eli 2015). The material domain exhibits how entropy and flow of resources should be non declining, with the focus on tasks such as employing regenerative energy sources (Ben-Eli 2015). The economic domain considers the underlying economic perspective with, for example, true prices or perspective length (Ben Eli 2015). The domain of life focuses on lasting stability and ensuring diversity of life in the biosphere (Ben Eli 2015). The social domain emphasizes maximizing freedom and potential for selfrealization for individuals without adversely affecting others and is about diversity and equality in society (Ben Eli 2015). The spiritual domain is about development and evolution, ethics, and the mystery of life (Ben-Eli 2015).

An alternative way to view sustainability is through the four pillars, which are the human, the social, the economic, and the environmental (RMIT University 2017). For a company to be sustainable, it must integrate all four pillars by treating them equally. Human sustainability considers maintaining and improving human capital, with the emphasis on the well-being of communities and society and developing skills and human capacity. The social pillar considers preserving future generations opportunities and maintaining and improving social quality. Economic sustainability aims to keep capital intact, account for true costs, efficient use of assets, and improve standards of living.

The environmental pillar is about improving human welfare through protecting natural capital.

These perspectives on sustainability offer an alternative to a more common Environmental, Social and Governance (ESG) model (Nordea 2021). However, in this context the model seems to partly overlap with the models used, but it is also less suited to being broken down and not as specific.

Method

As can be understood, sustainability in general is too broad a concept to review, and therefore the broken-down domains and pillars will be used to understand how taxation may impact sustainability, with the five domains as the main basis. This will then be explored by studying and analyzing various research papers, as well as a range of other sources, in order to obtain as unbiased results as possible. The selection of these sources will be based on which of these answer the question at hand in the most extensive and reliable manner. By going through much literature, the best and most relevant can be identified and then implemented. With this, several types of perspectives and sources will be considered, each one fact checking the rest. These will then be assembled to draw a conclusion as to whether taxation is a sustainability issue.

Results

The Material Domain

In the material domain the environmental pillar has a dominating presence, as it mainly concerns not overusing assets. Additionally, this can be considered to be related to the environmental branch of the ESG model. Pigouvian taxes

— taxes on economic activities that generate negative externalities that create costs for third parties — deal with some of the inefficiencies this creates (Corporate Finance Institute 2020). This indicates that these Pigouvian taxes are necessary to create incentives for reducing environmental damage (Organisation for Economic Co operation and Development n.d.). Additionally, if corporations are to develop environmentally beneficial innovation, indicators that it is economically sound to do so are required; added costs for destructive behavior manages to do this, for a lower total economic cost. These taxes also have a less negative effect on investment and labor supply, further promoting a sustainable future with a focus on the human and economic pillars. Pressures to shift the tax system from labor to resource use can be observed, and a change could help save both the environment and humans, which would be similar to a more extensive take on Pigouvian taxes (Tedx Talks 2016).

The environmental taxes, which have a base in a physical unit with a proven negative environmental impact, are an important source of income; in the European Union, EUR330.6 Billions was collected in 2019 (Țibulcă 2021).

This green taxation could contribute to climate protection and a climate

friendly fiscal policy in the EU (Țibulcă 2021). Taxation is often regarded as the best tool that governments have (Tedx Talks 2016), and a fundamental transition to a sustainable path is seen as necessary (Sjåfjell 2018). This is something that also impacts the economic pillar, as climate change negatively impacts the financial sustainability of economies (Țibulcă 2021). The transition to a net zero carbon emission future has already begun, with much occurring in the tax sphere, creating a need for businesses to identify and prepare for incentives, navigate an increasingly complex environmental tax landscape, and manage increasing external tax disclosure, requiring us to be active in our tax management (Webber 2021a). The most common carbon pricing mechanisms used in over 40 countries are carbon taxes and cap-andtrade programs, which aim to limit the amount of carbon in the atmosphere by decreasing either demand or supply, which is important to reduce climate change (Webber 2021b). It is well established that corporations play an important role in responding to climate change, which requires a compliant response to these mechanisms (Deloitte n.d.). Governments then use the income from their sustainability tax measures to meet commitments on carbon neutrality, tackling climate change, and raising revenue to fund important policy objectives (EY 2022).

The Economic Domain

In the economic domain, which centers underlying economic perspective, it is very important to have an even playing field and ensure that information is reported correctly. For instance, businesses involved in e commerce have been shown to engage in tax avoidance to a greater degree than their counterparts, showing it may be easier in a shifting and more mobile economy (Fuadah et al. 2022). In general, the industry of the company has been proven to impact the rates of tax avoidance (Hardeck & Kirn 2016). This mobility of capital has also led to the phenomenon of tax competition, where countries lower their tax rates to attract businesses (Avi-Yonah 2020). However, this has been damaging to sustainability as it has initially shifted the tax burden from capital to labor, but also cutting government services. It has been shown that these “races to the bottom” do not prevent further tax avoidance, which is extremely damaging from a sustainability viewpoint (Eurodad 2017).

It is therefore important for a country to be as efficient as possible in collecting taxes to be able to use them to benefit society. A connection has been observed between economic growth and efficiency of environmental tax collection (Kotlán et al 2021). Additionally, administrative costs are lower when tax

avoidance is low, as governments do not have to fund loophole legislation (Bird & Davis Nozemack 2018). Further, because businesses, including ours, rely heavily on public commons that taxation creates, for instance judicial systems, it should be important to want to ensure that they can continue to function well (Bird & Davis-Nozemack 2018).

It is important to use true costs for a sustainable economic domain and the economic pillar; however, corporations frequently neglect tax related sustainability reporting, which means that the true costs are not accurately presented, and stakeholder pressure is not sufficient for comprehensive voluntary reporting (Hardeck & Kirn 2016). This means that taxation agencies and other government organizations need to intervene and ensure transparency. This has been reinforced by multinational enterprises (MNEs) increasing their sustainable tax behavior when international tax law started demanding critical information such as the global allocation of income, economic activity, and taxes paid among countries (Cho 2020). Although the incentives for tax avoidance have lessened recently, international taxation is growing more complicated as the sophisticated international business structures are increasingly able to shift income with tax strategies in a changing economy (Cho 2020). This shows how vital worldwide collective efforts are for sustainable international tax behavior, and how important voluntary compliance is. The Global Reporting Initiative is an international effort, and a promising venue for promoting sustainable tax compliance, which emphasizes the importance of taxation in sustainability analysis, especially for the economic pillar (Bird & Davis Nozemack 2018). This is not helped by the fact that about 50% of companies are silent on the matter of corporate taxation, and even if they are not, corporate social responsibility (CSR) in this context is seldom discussed (Hardeck & Kirn 2016).

As environmental taxes are not as distorting to economic behavior as labor or corporate taxes, have lower administrative costs than income or consumption taxes, and lower frequency of evasion, they are a good option for achieving a holistic all-inclusive policy approach and thereby improving fiscal space (Țibulcă 2021). The fiscal space, in turn, has a connection to fiscal stability and debt sustainability, and this taxation would additionally be advantageous in terms of environmental goals (Țibulcă 2021).

Interestingly, no economic thought is considered in the ESG model. The closest to this is the governance perspective, as it relates to controlling behavior related to or affecting the economic sustainability, such as bribery (Nordea 2021).

The Domain of Life

In the domain of life, lasting stability is a main concern for preservation. One aspect of this that has become apparent recently is regarding pandemic prevention. Unless appropriate measures are implemented, pandemics are expected to increase in frequency and severity, which would be devastating for the social pillar of sustainability (Larnder-Besner et al 2020). This is expected to have a disproportionate impact on the poor. As preventing communicable diseases and other illnesses is important if we are to achieve the UN Agenda for Sustainable Development, actions to prevent disease impacting the biosphere are necessary for a sustainable future (Larnder-Besner et al 2020). Here, taxation on the consumption and production of animal agriculture and wild animal products has been presented as a solution.

The difference between plain CSR and sustainability concerns the viewpoint, as CSR is about engagement from the firm’s viewpoint, whereas sustainability is about preservation of the resources impacted by firm activity (Bird & Davis Nozemack 2018). The official environmental policy goal of the European Union to achieve climate neutrality by 2050, but this has, unfortunately, had to take a backseat due to the Covid-19 pandemic and its costly outlays (Țibulcă 2021). In combination with the 2030 Agenda, taxation will be placed at the core of the discourse on implementing the environmental and social “new deal,” which puts pressure on companies to exceed compliance with tax legislation (Valsecchi 2021). Adding to the fairness principle, developing countries rely more heavily on corporate taxation, with taxes from foreign multinationals having twice the importance compared to developed countries; additionally, developing countries lack access to information that is needed to combat tax avoidance, thus aggravating the inequitable situation (Eurodad 2017). Globalization and tax competition are creating a fiscal crisis that threatens social insurance, as demographic factors, increased income inequality, job insecurity, and income volatility create an increased need for social insurance, which leads to an unstable system, where nations need more tax income (Avi Yonah 2019).

This domain, when compared to the ESG model, would show signs from both its environmental and social elements.

The Social Domain

Tax competition is a danger that leads to a retreat from globalization and a revival of nationalism, broadening the North South divide, which may even lead to a world war (Avi Yonah 2020). Companies’ tax aggressiveness is especially crucial in developing countries because the taxes are needed to provide public goods and reduce the extensive poverty and there are difficulties in enforcing legislation, relating to the social pillar (Hardeck & Kirn 2016).

With tax avoidance eroding social security and exacerbating social inequality, human rights are under threat (Bird & Davis-Nozemack 2018).

Reporting and transparency are also necessary in this perspective, since the market, or the public, needs to be aware of the true sustainability level of companies before being able to make sensible decisions, which is needed for a consistent cycle of sustainability, which relates to the economic pillar (Valsecchi 2021). The country conditions are also very important, since corruption has a large impact on the efficiency of taxes, the tax incidence and how the taxes should be implemented, especially environmental taxes, connecting the tax system to the level of social sustainability (Kotlán et al 2021). This might make bribes and so-called sweetheart deals between a specific company and a government very damaging. Further, voluntary conformity increases when taxpayers have a high level of government trust (Țibulcă 2021).

The social perspective is viewed as a main aspect in all of the models considered, which indicates how important the social aspect of sustainability is.

The Spiritual Domain

The spiritual domain may seem taxation oriented at first glance, but there are still plenty of connections, mainly connecting to the social pillar. For instance, according to the OECD, an Internal Control Framework is only effective if it starts with the moral and ethical values of management and how the values are implemented in everyday operations, which means that a sustainable spirit must come from the company top leadership in order to manage taxation sustainably (Valsecchi 2021). This is partly because sustainability is largely based on voluntariness, shaped mainly by soft law and private sector initiatives (Valsecchi 2021). Top leadership can create a beneficial company culture, which would work to promote sustainability.

When it comes to CSR, there is a widespread silence on tax issues and there is no uniform way to handle taxation in sustainability reports (Hardeck & Kirn

2016) and tax avoidance erodes the common spaces needed for a functioning regulatory compliance, organizational integrity, and society (Bird & Davis Nozemack 2018). Because of this, taxation must be at the heart of boardroom decisions, so tax leaders can contribute to both their own organization and the world journey toward a sustainable future (Webber 2021b).

This would mainly be considered a governance issue in the ESG model, but there are also some aspects of social.

Conclusion

Tax avoidance has gained public attention as tax is related to the sustainable growth of societies around the world (Cho 2020), which is shown through the five domains of sustainability which are all observed to be impacted by taxation. This may be because taxation is a welcome method to efficiently compel cost internalization to avoid the free-rider effect (Larnder-Besner et al. 2020), and an economy that secures social welfare and prosperity is necessary and must be financed (Sjåfjell 2018).

In the material domain, it is essential to stop the mistreatment of the environment, and Pigouvian taxes are a key part of the resistance, in order to shift the incentives toward more sustainable innovation and solutions. Income from taxation is also the primary source governments internationally use to combat the adverse effects of climate change. Here it is important for companies to act, as corporations will need to play an important role in the fight against climate change.

Regarding the economic domain, several taxation matters are of importance. The ability to avoid taxes needs to be addressed, since certain types of companies do this more frequently. This might be thought of as a phenomenon stemming from a shifting economy with more mobile capital. In the economic domain, pressure is put on the efficiency of collecting taxes, which has been proven useful for the overall economy. A special emphasis is put on true costs and correct reporting, which has been deficient in companies.

For the domain of life, diseases must be prevented in order to sustain both humanity and other parts of the biosphere in the long term and there must be pressures to achieve the long term goals for sustainability through tax revenue in order to sustain life comfortably. Additionally, these biological consequences disproportionately affect poor countries, which are also more vulnerable to tax evasion.

The social domain focuses on human rights and freedoms, which must be present, but are threatened by missing government funds. Here, corruption and similar adversities create extra vulnerability, which can be very detrimental to the social situation in a country. This must also be led by the ethics of top management, according to the spiritual domain.

All the reasons above create a large need for tax revenue to do much needed good, which is why we must do our part in contributing to society through our tax practices and compel others to do so as well. As it is quite clear that tax is a sustainability issue, future research on this may not be necessary, but it could be of interest to continue research on how companies treat taxation and if this is commonly seen as a sustainability issue by management.

References

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Ben Eli, Michael U. 2018. “Sustainability: Definition and Five Core Principles, a Systems Perspective.” Sustainability Science 13 (5): 1337 43. doi:10.1007/s11625 018 0564-3.

Bird, Robert, and Karie Davis Nozemack. 2018. “Tax Avoidance as a Sustainability Problem.” Journal of Business Ethics 151 (4): 1009 25. doi:10.1007/s10551016 3162-2

Cho, Hyejin. 2020. “Sustainable Tax Behavior of MNEs: Effect of International Tax Law Reform.” Sustainability 12 (18): 7738. doi:10.3390/su12187738.

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Fuadah, Luk Luk, Kencana Dewi, Mukhtaruddin Mukhtaruddin, Umi Kalsum, and Anton Arisman. 2022. “The Relationship between Sustainability Reporting, E Commerce, Firm Performance and Tax Avoidance with Organizational Culture as Moderating Variable in Small and Medium Enterprises in Palembang.” Sustainability 14 (7): 3738. doi:10.3390/su14073738.

Hardeck, Inga, and Tanja Kirn. 2016. “Taboo or Technical Issue? An Empirical Assessment of Taxation in Sustainability Reports.” Journal of Cleaner Production 133 (October): 1337 51. doi:10.1016/j.jclepro.2016.06.028.

Kotlán, Igor, Daniel Němec, Eva Kotlánová, Petr Skalka, Rudolf Macek, and Zuzana Machová. 2021. “European Green Deal: Environmental Taxation and Its Sustainability in Conditions of High Levels of Corruption.” Sustainability 13 (4): 1981. doi:10.3390/su13041981.

Larnder-Besner, Morgane, Julien Tremblay-Gravel, and Allison Christians. 2020. “Funding Pandemic Prevention: Proposal for a Meat and Wild Animal Tax.” Sustainability 12 (21): 9016. doi:10.3390/su12219016.

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Formulating an Ethically Sound Corporate Tax Policy

Abstract

Sofia Wallin

This paper aims to answer the question: Does a company have conflicting ethical obligations when it comes to paying corporate tax, and if so, how should these conflicts be considered in our corporate tax policy? Specifically, this paper discusses the ethical arguments underlying two different theories of corporate governance: shareholder theory and stakeholder theory. This is done in a corporate tax context. The issue is significant since the tax behavior of multinational corporations has been increasingly scrutinized in recent years. Governments are concerned with lost revenues, and many consider the tax rates paid by companies

unfair. This paper argues that a singlehanded focus on maximizing short term returns for shareholders is not ethically justifiable. Rather, many different interests must be considered when formulating an ethically sound corporate tax policy. This implies that multinational corporations should strive to formulate tax policies that comply with both the letter and the spirit of corporate tax law.

Company Presentation

I represent a multinational technology company that specializes in computer software and consumer technology. Recently, our company has been receiving heavy criticism from consumers and tax justice organizations for paying a minimal amount of corporate tax. Previous company tax policies have focused solely on financial objectives. As the newly appointed head of the tax department, I have been tasked with presenting the board with a more nuanced approach to corporate tax policy. The objective is both to improve the company image, and to formulate a tax policy more in line with the company ideals and values. I have decided to focus on the relationship between business ethics and corporate taxation.

Introduction

In recent years, the amount of tax paid by multinational corporations has been receiving increased scrutiny. Governments are concerned about lost tax revenues, a problem that is becoming more pressing in the face of the massive undertakings needed to meet the UN Sustainable Development Goals. Many consider the relatively low rate of tax paid by companies to be unfair. Taxation serves several important functions in society: it is a way for governments to finance necessary public expenditure, regulate social and economic behavior, and redistribute income and wealth within society (Hilling and Ostas 2017, 27). Consequently, it is necessary for companies to consider their tax behavior carefully. We need to explore the connection between business ethics and corporate taxation. How do we formulate an ethically sound tax policy?

A corporation’s chosen method and theory of corporate governance will have a substantial impact on its attitude towards corporate taxation. Therefore, this paper will discuss two major theories of corporate governance, namely

shareholder theory and stakeholder theory, in relation to ethics and corporate taxation. Specifically, it is important to explore whether these theories give rise to conflicting ethical obligations for corporate executives, and how these potential conflicts should be handled.

Key Concepts

Business Ethics

The term “ethics” is derived from the Greek word “ethos,” which refers to the customs and culture of a particular group, as well as to a person’s disposition and character (Dewey and Tufts 1908, 1). Ethics is concerned with whether certain conduct or behavior can be considered right or wrong, good or bad (Dewey and Tufts 1908, 1). “Business ethics” is an application of ethical theories to issues that arise in business settings (Hilling and Ostas 2017, 66).

The science of ethics has existed for millennia and is hugely complex, encompassing many different theories and systems. In this paper, the focus will be on three basic systems of ethical thought within western philosophy: deontology, teleology, and virtue ethics (Hilling and Ostas 2017, 66).

According to Hilling and Ostas (2017), these can be defined as follows: Deontology is centered around respecting the rights of others. The rights of others can often be identified through the application of the so called Golden Rule, “do unto others as you would have them do unto you.” Teleology refers to taking responsibility for the consequences of one's own actions. From a teleological perspective, one should act in a way that creates the greatest net good for society. Virtue ethics is concerned with the habits of good character. It requires the acquisition of virtues such as honesty, integrity, and trustworthiness, while avoiding vices such as slovenliness, greed, and spite.

Another way to describe business ethics is that people generally expect businesses to adhere to “legal, regulatory, professional and company standards” as well as “general principles like fairness, truth, honesty, and respect” (Moon 2001, 2). These “general principles” appear closely related to the habits of good character described above in relation to virtue ethics. Additionally, it seems likely that respecting the rights of others and creating a net good for society would be considered in formulating “legal, regulatory, professional and company standards.” Thus, this description is well-aligned with a combined application of deontology, teleology, and virtue ethics in a business setting.

Tax Evasion, Tax Avoidance, and Aggressive Tax Planning

It is important to distinguish between tax evasion and tax avoidance. Tax evasion violates both the letter and the spirit of tax law, while tax avoidance follows a literal interpretation of the law, although consciously circumventing its spirit (Ostas 2018, 83). Tax avoidance is carried out through aggressive tax planning. Tax evasion is clearly illegal, and a criminal offence. The legality of tax avoidance is more of a gray area. Definitions often emphasize that tax avoidance entails an organization of one’s affairs to minimize tax within the law (Frecknall-Hughes 2018, 12; Freedman 2004, 336). However, some tax authorities and tax courts seem to disagree. For example, according to the Ramsay Doctrine within UK Law, transactions carried out with the sole purpose of avoiding tax can be unlawful, even when they are technically legal according to a strict interpretation of the law (Tax Watch 2018). Consequently, courts can determine that a tax avoidance scheme has no legal effect, reversing the advantage that the taxpayer sought to gain and imposing a civil penalty (Tax Watch 2018).

Aim

The aim of this paper is to answer the following question: Does a company have conflicting ethical obligations when it comes to paying corporate tax, and if so, how should these conflicts be considered in our corporate tax policy?

Scope

Whether people have a basic ethical duty to obey the law is an interesting and complex issue. It is however beyond the scope of this paper to explore it in detail. Therefore, it will be assumed that people, including juridical persons such as corporations, have a duty to obey the law in a reasonably just society, and that this duty applies to tax law. However, it will be necessary to further explore what the ethical obligation to “obey” the law entails in a corporate tax context to formulate an ethically sound tax policy. Is it sufficient to apply a technical, literal interpretation of the law, which would imply that looking to exploit loopholes and inconsistencies in the law is ethically justifiable? Or should corporate tax executives consider the intentions of the legislator and the legal system as a whole (the so-called spirit of the law), even when this might mean lower returns to shareholders?

As outlined above, there is an ongoing discussion as to whether tax avoidance is legal. This paper is concerned with the ethical considerations executives need to make before carrying out tax avoidance through aggressive tax planning, rather than the possible legal outcomes of such behavior. Therefore, tax avoidance and aggressive tax planning as discussed below will be regarded as being within the limits of the law.

Method

This paper will examine the ethical considerations underlying shareholder primacy theory and stakeholder theory respectively, in the context of corporate taxation. The arguments traditionally made to support shareholder primacy theory and stakeholder theory will be presented and related to the theories of deontology, teleology, and virtue ethics.

The Case for Shareholder Theory

Shareholder theory, also referred to as shareholder primacy theory and shareholder value theory, promotes the idea that “the only responsibility of managers is to serve in the best possible way the interests of shareholders” (Castelo 2013). Milton Friedman, an influential proponent of this idea, outlined the basis of shareholder theory as follows:

“In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman 1970).

Under this view, corporate tax is generally treated like any other business cost, as it is difficult to find a connection between paying more corporate taxes and increased long term profits for the company (Timmonen 2008, 203). Consequently, corporate management should minimize taxes to maximize shareholder profits (Avi Yonah 2014, 26). A consequence of this line of thought is that tax avoidance through aggressive tax planning is not only justified, but expected, as paying more taxes than strictly necessary would be shirking the responsibility corporate executives have to shareholders.

From an ethical perspective, a cornerstone of shareholder theory seems to be that the corporate executive is regarded as an agent, or “employee,” of the shareholders, who are regarded as a principal, or “employer.” This can be related to the principles of deontology; the relationship between principal and agent gives rise to certain rights. Agents are generally expected to work to fulfill their principal’s goals, in return for receiving compensation. The agent has a responsibility to serve the interests of the principal. As described by Friedman above, the goal of shareholders is generally assumed to be a desire to make as much money as possible. There is some support for this assumption in corporate law. For example, Swedish corporate law can be interpreted to mean that the general purpose of a limited company is to provide and divide profits between shareholders.1 Therefore, a corporate executive applying the Golden Rule might reason as follows: “If I were a shareholder, I would want to see maximized returns on my share in this company. Therefore, I should work to maximize shareholder returns in any (legal) way possible. To maximize profits, the amount of corporate tax paid should be minimized through tax planning.”

The expectations that arise within the relationship between principal and agent can also be related to virtue ethics. In the context of an agent’s duty to his or her principal, virtues such as honesty and trustworthiness dictate a duty of loyalty. As a loyal agent, the corporate executive should place the shareholders’ interests first. Again, given that shareholders have a strong interest in maximizing the value of their shares, this implies a duty to minimize business costs. And if corporate tax is regarded in the same way as any other cost, it seems ethically justified to work to minimize the amount paid.

The Case for Stakeholder Theory

However, corporations and their shareholders do not exist in a vacuum. The behavior of businesses has a broader impact on society, and this may be especially true when it comes to corporate tax. This is where stakeholder theory comes into play. The term corporate stakeholder refers to “a person or a group of persons affected by decisions taken in corporate settings” (Hilling and Ostas 2017, 63). Examples of stakeholders are the corporation’s employees, customers, competitors, suppliers, creditors etc. (Hilling and Ostas 2017, 63).

Taken together, stakeholders thus represent many different parts of society. And there are real concerns that tax avoidance has a negative impact on society.

It has been estimated that governments worldwide lose out on a revenue of USD 500 billion every year due to corporate tax avoidance (Eurodad 2017, 17). Although stakeholders may not feel the impact of this loss immediately, it does affect them. Governments may choose to raise other taxes to compensate for the lost revenue. The average OECD VAT rate has risen over the last decades, which comes with a risk of increased inequality due to the regressive nature of VAT (Eurodad 2017, 16). Additionally, governments may need to implement austerity measures and cut spending on social welfare programs when tax revenue is lacking (Avi-Yonah 2019, 1). This may undermine the ability of governments to realize their citizens’ fundamental human rights (Action Aid, Oxfam & Christian Aid 2015, 11). The impact of lost revenue is particularly harsh for developing countries (Eurodad 2017, 17 18). Finally, sufficient government income is essential if governments are to meet the ambitious UN Sustainable Development Goals, as well as respond to the climate crisis (Eurodad 2017, 12).

Another perspective on the consequences of aggressive tax planning and tax avoidance is how it affects the company in non monetary terms. Companies that engage in aggressive tax planning may inadvertently encourage a corporate culture with an attitude of disrespect for following legitimate rules, which has significant potential consequences for the firm (Bird & DavisNozemack 2016, 1021). This can be referred to as an ”erosion of the organizational commons,” meaning that “shared spaces within the organization that rely upon a foundation of mutually shared social capital upon which trust, honesty and integrity are based” will not function properly (Bird & Davis Nozemack 2016, 1014). If corporate executives do not respect the intentions of tax authorities, why should they expect employees to respect corporate management as an authority? Aggressive tax planning thus risks contributing to a toxic work culture within the company.

A tax policy centered around minimizing corporate tax through aggressive tax planning therefore has negative consequences for several corporate stakeholders, and consequently has the potential to impact society at large negatively. It could be argued that a single corporation does not have a large enough impact on government tax revenues to make a difference. However, the attitude of one business will affect others, as it may be difficult for companies that choose not to minimize corporate tax to stay competitive with those who do. As shown above, the net effect of corporate tax avoidance is negative for society. Therefore, it is difficult to justify a policy of tax minimization from a teleological perspective; aggressive tax planning, although potentially enriching shareholders, clearly does not create the greatest

net good for society. It may also be argued that companies indirectly disrespect the rights of stakeholders when engaging in aggressive tax planning. For example, employees may lose access to important social welfare programs because of diminished government revenues. From a virtue ethics perspective, it can be argued that tax avoidance is motivated by the greed of shareholders at the expense of other stakeholders, rather than by the loyalty of corporate management. Further Discussion of Shareholder Theory

– does it hold up to scrutiny?

From the opposing theories discussed above, it can be concluded that corporate management faces competing ethical obligations when deciding on corporate tax policy. On the one hand, there is a duty to serve the interests of shareholders. On the other hand, maximizing shareholder returns through tax avoidance may, in the long term, damage society at large. The question then becomes how corporate executives should prioritize between shareholders and other stakeholders. This dilemma is difficult to solve, but it is necessary to attempt to do so to formulate a policy that is ethically sound.

A major tenet of shareholder theory seems to be that shareholders, having contributed financial capital to the corporation, are regarded as its owners, which means that corporate executives have a stronger, more immediate duty to them than they do to other stakeholders. However, this interpretation is not uncontested. Some argue that as corporations are independent legal entities, they own themselves (Stout 2012, 43). Shareholders, rather, own shares of stock, and each share of stock represents a contract between the shareholder and the corporation, giving the shareholder certain rights under certain circumstances (Stout 2012, 44). According to this interpretation, a shareholder is just one of many stockholders that has a contract with the corporation, meaning that they are not very different from, for example, bondholders, suppliers, and employees (Stout 2012, 44). Furthermore, it can be argued that shareholders are not the only ones making decisive contributions to a corporation. For example, governments play a central role in providing many of the necessary conditions for businesses to thrive, including infrastructure, a healthy and educated workforce, and enforceable property laws. Employees provide human capital, creditors necessary financing, and so on.

Furthermore, no corporate law system insists on corporate management focusing only on returns for shareholders; rather, they are expected to ensure legal compliance (Sjåfjell, 2017, 10). As discussed above, compliance, as interpreted by tax courts, often goes beyond a literal interpretation of tax law. Therefore, corporate executives’ duty to shareholders, as expressed by the law, does not necessarily take primacy over the duties a corporation has to other stakeholders. Rather, shareholder primacy is a social norm (Sjåfjell 2017, 11).

Finally, shareholder theory assumes that all shareholders share the same interest: maximizing returns on their stock, often within a short-term perspective. In reality, shareholders are not a homogenous group; shareholders are “real human beings with different investing time frames; different liquidity demands; different interests in other assets; and different attitudes to whether they should live their lives without regard for others or behave ‘pro-socially’” (Stout 2012, 86). This means that shareholders may have internal conflicting interests, for example depending on their investing time horizons (Stout 2012, 102). A long-term shareholder may be concerned with the reputational risks that tax avoidance brings, as a diverse range of stakeholders, including consumers, now has expectations about a company’s behavior on tax (Action Aid, Oxfam & Christian Aid 2015, 12). Therefore, long term shareholders may desire a less aggressive approach to tax planning, to avoid the decrease in stock value that a bad reputation can bring. A short term shareholder, meanwhile, may have no such concerns, and want the company to maximize stock value in the short term by aggressively minimizing the amount of tax paid. In recent years, short term investors have become a larger, and increasingly powerful, group (Stout 2012, 97). However, from an ethical perspective, this does not necessarily mean that they should be prioritized over other shareholders.

Conclusions

In conclusion, a corporation has ethical obligations to fulfill in relation to many different stakeholders. Shareholders are a certain type of stakeholder. The relationship between shareholders and corporate management gives rise to certain rights and expectations, meaning that corporate executives have an obligation to act in the shareholders’ interests. However, the basis of shareholder theory is not as sound as it first appears. Corporate law does not indubitably declare that shareholders “own” corporations, nor does it state that corporate management owes a duty to shareholders alone. This paper has found no convincing argument for prioritizing shareholder interests at any cost

to other stakeholders. Furthermore, shareholders are a diverse group with different interests. Therefore, it seems clear that a tax policy centered only around minimizing corporate tax paid in order to maximize short term profits is not ethically sound. Rather, we should strive to formulate a policy that ensures compliance both with the letter and with the spirit of corporate tax law.

References

Action Aid, Oxfam and Christian Aid. 2015. Getting to Good: Towards Responsible Corporate Tax Behaviour. https://www cdn.oxfam.org/s3fs public/file_attachments/dp getting to good corporate tax 171115 en.pdf

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Frecknall Hughes, Jane. 2018. “Historical and Case Law Perspective on Tax Avoidance.” In The Routledge Companion to Tax Avoidance Research, edited by Nigar Hashimzade and Yuliya Epifantseva, 11 25. London: Routledge. https://doi -o rg.ludwig.lub.lu.se/10.4324/9781315673745

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Paying Taxes – A Question of Sustainability

Lykke Liljefeldt

Abstract

It is widely known that companies, especially the big ones, in many instances seek to minimize taxation, and tax avoidance is now at a magnitude where it impacts the development of society at large. This paper addresses tax avoidance and its implications for a sustainable future, and lays out the moral arguments and potential long-term profit maximizing arguments for fair corporate tax contributions.

The paper is based on a review of relevant literature and, in summary, these sources show that tax avoidance causes

significant tax losses for states globally. In addition, competition between states for investment has historically meant large reductions in corporate taxes, as well as agreements on tax advantages with individual actors, which together have reduced tax revenues even further. At the same time, lack of funds is claimed to be one of the main reasons behind the slow progress toward long term sustainable societies. From a company viewpoint, short-term benefits of tax avoidance may be superseded by long term drawbacks caused by insufficient government funding. This is because the company, as part of society, needs infrastructure and educated personnel to be able to operate, but also because the company risks, not least, losing employees to more ethical companies.

In conclusion, corporations can and should construct tax plans with all stakeholders affected by the company in mind. Abstaining from short-term profit-maximizing tax avoidance practices is not only moral, but may also be beneficial for the company in the long term, particularly if it is seeking to stand out as a sustainable business with a genuine interest in its customers and society at large. Such an approach to tax strategy could also increase tax revenue and thereby enable a more sustainable development.

Introduction

The world is facing a climate crisis which, in addition to the direct environmental effects, also risks exacerbating previous global problems of poverty, hunger, and inequality. Recently, awareness of this has increased, and many companies now present themselves as green and sustainable. In order to do so, superficial actions such as switching to digital receipts and paper bags are insufficient, and companies need to acknowledge more far reaching obligations towards society.

The purpose of this paper is to address the issue of tax avoidance and its implications for a sustainable future and tax strategies. To achieve the purpose, sources including articles, books, and websites have been researched, evaluated and collated.

How Tax Avoidance Relates to Sustainability

This main section of the paper first summarizes the global goals for sustainable development and the lack of funding for them. Next, the problems of a reduced tax base and lost tax revenue are described. Then the concept of tax avoidance and consequences of the phenomenon are explained. Finally, the role and responsibility of companies in society is addressed, and theories that can influence company decision-making with regard to tax strategy are described.

Global Goals Toward Sustainability and the Need for Funding

Taxation of income is vital for financing societies’ common expenses (Hilling and Ostas 2017). Some important, urgent initiatives in need of financing are those required to achieve the United Nations (UN) seventeen Sustainable Development Goals (SDGs), as well as the Paris Climate Agreement. The SDGs include eradicating extreme poverty and hunger, reducing global inequality, preventing the extinction of threatened plants and animals, and ensuring free education for all children (Eurodad 2017; Nature 2020). The Paris Agreement aims to combat climate change through implementation of science based obligations accepted by the contracting countries (UNFCCC 2022).

Poorer countries are generally more exposed to climate change, while having historically contributed the least to carbon dioxide emissions. Unfairly, richer and more polluting countries are often less affected (ActionAid 2021), partially due to their ability, through greater means, to construct societies with better resilience to the effects of climate change. The world’s governments have committed to meeting the SDGs within fifteen years, i.e., no later than the year 2030 (Nature 2020). With less than eight years remaining, it seems that most of the goals will not be met, and based on an article in Nature (2020) it can be deduced that the path toward a protected climate and biodiversity has completely lost direction. According to the UN, between USD 5 trillion and 7 trillion per year will be required to achieve the SDGs, but there is a financing gap of at least USD 2.5 trillion (UN 2019; Nature 2020).

Base Erosion and Profit Shifting (BEPS)

There are several reasons many countries have a shrinking tax base. One is longstanding tax planning that goes beyond what the legislator thought would be possible. Another lies with the states themselves, as they compete for corporate investments using low corporate taxation as a perceived way to get ahead in the global competition.

A Shrinking Tax Base and Lost Revenue

The term base erosion refers, in this context, to the erosion of the tax base in a state through various types of tax planning strategies that exploit loopholes and flaws in tax rules (OECD n.d.). Base erosion can, for example, be realized by deducting interest or royalties within a multinational corporate group. Profit shifting is achieved when income is artificially moved from states with relatively higher taxes to states with lower or no taxes (OECD n.d.). It is artificial because the profit shifting methods involve some kind of made up element. For example, they may include an unnecessary loan at a high rate of interest, intangible assets which have no geographical location and can easily be moved on paper to a tax haven, or artificially raised or lowered prices of services transferred within an MNE (Janský and Palanský 2019). Most of the tax planning strategies are, however, not explicitly illegal. Additionally, base erosion and profit shifting (BEPS) gives multinationals an unjust competitive advantage over companies that operate at a national level (OECD n.d.).

According to an article in ICIJ (McGoey 2021), governments are annually unable to collect nearly USD 500 billion of intended tax revenue globally, of which 60% is estimated to be due to tax abuse by multinational enterprises (MNEs). Further, the so-called race to the bottom among countries competing for investment by MNEs also causes indirect losses due to declining corporate tax rates. The race to the bottom effect has been estimated to constitute at least three times the quantity of the direct losses (McGoey 2021). Tax abuse is not defined in the ICIJ article, but according to the OECD (2021), USD 240 billion in tax revenue is lost every year due to tax avoidance by MNEs. It is important to emphasize in this context that developing countries are more dependent on corporate income tax and are therefore more greatly affected by the loss due to BEPS (OECD 2021).

The Race to the Bottom

Since the early 1980s, the average global corporate tax rate has fallen from just over 40% to below 25% (Eurodad 2017). In addition to falling tax rates, countries sometimes give companies tax advantages, either openly and offered to all

companies, or through secret tax agreements that have been made public in various leaks (Wayne et al. 2014). The so called LuxLeaks showed that companies paid less than 1% in tax after agreements regarding tax relief with Luxembourg authorities. For example, the FedEx agreement meant that they paid only 0.25% corporate tax in Luxembourg (Wayne et al. 2014). Another example of tax benefits is Ireland’s treatment of Apple which meant their effective corporate tax rate came down to 0.005% (European Commission 2016).

The argument governments make for lowering the tax rate is often that it is necessary in the competition for investments with other countries (Eurodad 2017). In addition, it is usually claimed that lower corporate tax rates mean that employees receive higher wages and that products become cheaper for consumers. However, according to several surveys (see Eurodad 2017), there is no clear connection between tax incentives and investments. In many cases, it has been shown that investments would have been made anyway. In addition, experience from the United States has shown that even when profits have increased for companies that have managed to obtain a low corporate tax rate, this has not rubbed off on employees’ wages and, moreover, the difference between consumer price and production cost has increased (Eurodad 2017).

Tax Avoidance

Here follows a brief explanation of what usually characterizes tax avoidance, and a handful of such procedures are exemplified. The legality of tax avoidance is then briefly addressed. The legality is relevant because strategies categorized as tax avoidance can be claimed to be approved of, as they often do not violate a literal interpretation of the law. Finally, direct and indirect consequences of tax avoidance are described, both consequences for society at large of reduced tax revenues and consequential effects for the citizens of society when governments lack funding, as well as an example of how tax avoidance can actually have a negative impact on the companies themselves.

Definition

Tax avoidance implies tax planning strategies that may follow the literal interpretation of the legal text and are, therefore, not explicitly illegal but challenge the boundaries. Tax planning can further include taking advantage of loopholes or deficiencies in the legal text in one country or in the combination of several countries’ rules. What can be said to characterize this type of tax practice is that it goes against the spirit of the law (Eurodad 2017).

Tax avoidance can manifest itself through the creation of a subsidiary in a low tax country. The idea is that the subsidiary, as the owner of an intellectual property right, can then use licensing agreements to charge royalties from other subsidiaries. These other subsidiaries, usually situated in jurisdictions with higher tax rates, then make no, or an exceedingly reduced, profit due to the deductible royalty payments, while the subsidiary that collects the royalties will pay a minimum rate of tax. It is, however, difficult to question the royalty paid, because intellectual property is so hard to value (Eurodad 2017).

Corporations can also use offshore jurisdictions either as “sinks” or as “conduits.” Sinks are used by corporations to store capital due to low or zero corporate tax in these jurisdictions; Luxembourg, Cyprus, and Bermuda are three examples. Conduits are countries that enable companies to move capital from sinks to other countries where they conduct real business without paying much or any tax; the Netherlands, Ireland, and Switzerland are examples of conduits (Eurodad 2017).

Legality

It is often claimed that tax avoidance is a legal practice, and thus one cannot criticize it by saying it is illegal. The argument that companies should abstain from exploiting the tax rules is therefore claimed to be a moral one (TaxWatch 2018). The legality of tax avoidance is questioned in an article published on TaxWatch (2018). The article says that courts in the United Kingdom have frequently viewed tax avoidance methods as unlawful, which in practice means that a company is treated for taxation purposes as if the transaction or transactions conducted for the purpose of tax avoidance had never happened. In addition, a civil penalty may be applied.

In Sweden, it is possible to examine procedures that may have been carried out mainly for tax reasons, via a specific law, lag (1995:575) mot skatteflykt.

According to the law, the basis for taxation for a certain taxpayer shall be determined without regard to a legal act, undertaken by the taxpayer, under certain conditions. The prerequisites are that the legal act was part of a procedure that entailed a substantial tax benefit for the taxpayer, that the taxpayer in some way participated in the legal act, that the tax benefit can be assumed to have constituted the predominant reason for the procedure, and, finally, that it would be contrary to the purpose of the legislation, to determine the tax base on the basis of the procedure.2 If all these criteria are deemed to 2 2 §, SFS 1995:575. Lag mot skatteflykt. https://www.riksdagen.se/sv/dokument lagar/dokument/svensk forfattningssamling/lag 1995575 mot skatteflykt_sfs 1995 575.

be met, the court can either ignore the legal act when determining the basis for taxation, or, if the chosen procedure is considered a detour compared to a procedure that is closer to hand, then a decision on taxation can be made as if the alternative procedure had been used instead. Ultimately, the taxation can instead be determined according to what is deemed reasonable.3

The bottom line is that whether or not a method is expressly prohibited by law, whether or not it follows a literal interpretation of the law, and whether or not it is criminally punishable, does not imply that a method is “perfectly legal.”

That is because the method can still be disapproved of by the law, because it is seen as immoral, or in conflict with public order, and therefore unlawful (TaxWatch 2018).

Consequences

Tax avoidance can force governments to cut back on overall spending, such as education, health care, infrastructure, environmental work, investment in green energy, and adaptation efforts to prevent or adjust to climate change (Eurodad 2017). When it comes to promoting development, education is seen by many as a main solution, and the UN has estimated that an extra investment of merely USD 50 billion annually would provide access to, for example, universal elementary education (Avi Yonah 2020). Furthermore, Avi Yonah (2014) describes in an article how important government funding is for companies’ operations because the state provides the companies with educated personnel and infrastructure. Thus, apart from the consequences government cutbacks entail for society at large, this could also have an indirect negative effect on the tax-avoiding company if recruiting educated workers becomes a problem.

The reduced tax revenue might also result in the government having to tax others more. In this case, those who would be paying might be workers and consumers, which can cause increased inequality in society (Eurodad 2017).

Corporate Social Responsibility Within Taxation

There is a rising tendency in business to acknowledge that companies are part of society and therefore have a moral obligation to contribute to a positive societal development (see, for example, Colombo’s article in Forbes 2021). A company’s attitude and actions in the taxation space may have a profound

3 3 §, SFS 1995:575. Lag mot skatteflykt. https://www.riksdagen.se/sv/dokument lagar/dokument/svensk forfattningssamling/lag 1995575 mot-skatteflykt_sfs 1995 575.

impact on its reputation and ultimately impact future business opportunities. The approach to taxation is, in turn, influenced by which stakeholders the company management deems it appropriate to account for. These topics are further elaborated upon in the following sections.

Explanation of the Concept

Corporate social responsibility (CSR) is achieved when a company acts to contribute to the social well being of those whose lives are affected by its activities. The idea is that there should be a balance between a company’s economic activity and society’s ambitions and welfare requirements (Frederick 2018).

The word corporate includes businesses of all sizes, not only the corporate forms of business organizations (Carrol and Brown 2018). The word social means human society or societal welfare. Society can be a community, a state or nation, or the world, depending on context. Society includes all stakeholders, that is, all that is affected by the company’s actions. Society is also considered to include animals, plants, and the natural environment. Responsibility implies an obligation, and means that companies are responsible, and therefore can be held accountable by society, for things over which they have control or power (Carrol and Brown 2018).

The Complexity of Corporate Tax Governance

In an article, Jallai and Gribnau (2018) state that tax planning scandals have received a lot of negative attention, and people generally do not think it is right for large companies to minimize their tax due to questionable corporate tax governance. According to the authors, taxation can be seen as one of the most important aspects of CSR, because tax is fundamental for financing society. Corporate tax governance is, however, complex, in part because of conflicting interests. Tax is a cost for the company and may, at least in the short term, run counter to maximizing profits and shareholder value. The other side is that overly aggressive tax planning risks the company’s reputation, because it is considered immoral not to pay one’s fair share of tax (Jallai and Gribnau 2018).

According to a study by Lee et al. (2021), disclosed tax avoidance in companies gives employees a more negative perception of their workplace. The reason for the changed perception is that the employees believe that tax avoidance is socially irresponsible and that they do not see that they themselves gain anything from the reduced tax payment (Lee et al. 2021).

The Managerial Elbow Room and Shareholder vs. Stakeholder Theory

Corporate governance comprises business management, distribution of power and the decision making process (Jallai and Gribnau 2018). But there are different definitions of the scope of the concept, ranging from the view that responsibility for governance applies only to the interest of the shareholders, to the view that governance must be carried out from the ethical perspective, with all stakeholders in mind.

There has long been a widespread opinion that the most important objective is to maximize profits for shareholders (Jallai and Gribnau 2018). Two theories are usually discussed when talking about corporate governance and tax governance: the shareholder and the stakeholder theory (Jallai and Gribnau 2018). The shareholder theory focuses on shareholder interest and on increasing shareholder value. The stakeholder theory, on the other hand, considers the interest of all stakeholders, not just shareholders. As stated above, stakeholders include a wide spectrum, but might be employees, customers, the company’s neighbors, or just those who are affected by the company’s operations. The rules for corporate governance vary by country. In the United States and the United Kingdom, company management has a fiduciary duty to the shareholders. In Germany and the Netherlands there is no legal duty to maximize shareholder value, and in Sweden it is possible to look beyond shareholder value, leaving greater room for management judgements (Jallai and Gribnau 2018).

Stakeholder theory puts the stakeholders at the center, and places the company clearly as part of society at large, where society allows and enables the company’s operations but expects the company to create stakeholder value in return. Stakeholder theory need not be seen as the opposite of shareholder theory, but takes the theory much further and is about a company’s deeper purpose. Consequently, stakeholder theory goes well with CSR and gives managers adequate elbow room in decision making (Jallai and Gribnau 2018).

Shareholder theory can, according to Jallai and Gribnau (2018), give managers discretion in such a way that they may be forced to act in the company’s best long-term interest. The authors further argue that this managerial discretion could be used to perform a social responsibility that voluntarily goes further than compliance with the legal rules. In fact, most MNEs have stated CSR strategies. However, it is difficult to define what good CSR entails. Jallai and Gribnau believe that good enough CSR is, at the least, not corporate social irresponsibility (CSI), that is to say what a company should not do. CSI generally means that one party, the decision making company, benefits from a

decision that causes a greater loss to others, or to society at large, than to the benefiting party. The authors mean that, regarding the shareholder theory, managers have elbow room in decision-making to take stakeholder interest into account, as long as this does not go against the long-term interests of the shareholders (Jallai and Gribnau 2018).

The Connection between CSR and Tax

As members of society, companies can take part in many societal benefits and with that, you could argue, comes an obligation to contribute, among other things, through fair tax payments (Jallai and Gribnau 2018). Jallai and Gribnau (2018) claim that it is therefore not enough to pay tax according to a literal interpretation of the law while at the same time violating the spirit of the law. The authors further argue that a strong CSR strategy should include a tax strategy that goes beyond compliance with the letter of the law, includes ethical concerns, and refrains from aggressive tax planning at the expense of society (Jallai and Gribnau 2018).

Concluding Remarks

The fulfillment of the global goals for sustainable development and the Paris Agreement are probably crucial for the existence of humanity in the long term. It is in everyone’s interest that we work together for sustainable development. For that to be possible, the required measures must be financed. This financing is threatened by companies, especially the big ones, that pay virtually no part of their profits in tax and thus do not contribute, at least through tax, to a sustainable future. When you see the vast sums required, financing the fulfillment of the SDGs seems impossible until you look at the large sums that tax planning strategies exclude annually from the tax revenues. One can therefore make the connection between corporate tax avoidance and the financing gap. Together, the direct loss due to tax avoidance and the indirect loss due to “the race to the bottom,” which were three times larger than the direct loss, should cover a substantial part of the USD 2.5 trillion gap.

It is possible for companies to adopt the broader perspective in their tax strategy, where the interests of stakeholders other than the short-term interests of the shareholders are taken into account. There is room for such considerations, at least if it can be said to be in the company’s long term interest – and it can, because without a future with a livable climate,

biodiversity, maintained infrastructure, functioning health care, education for employees, and customers who can afford to spend, there is no business.

References

ActionAid. 2021. Climate Change and Poverty. https://www.actionaid.org.uk/ourwork/emergencies disasters humanitarian response/climate change and poverty Accessed July 26, 2022.

Avi-Yonah, Reuven S. 2014. “Just Say No: Corporate Taxation and Corporate Social Responsibility”. University of Michigan Public Law Research Paper No. 402, University of Michigan Law & Economics Research Paper No. 14-010. Available at SSRN: https://ssrn.com/abstract=2423045.

Avi Yonah, Reuven S. 2020. “Taxation and Business: The Human Rights Dimension of Corporate Tax Practices”. University of Michigan Public Law Research Paper No. 678, University of Michigan Law & Economics Research Paper No. 20-014. Available at SSRN: https://ssrn.com/abstract=3576538.

Carrol, Archie B. and Jill A. Brown. 2018. “Corporate Social Responsibility: A Review of Current Concepts, Research, and Issues”. In Corporate Social Responsibility, edited by James Weber and David M. Wasieleski, 39 69. Emerald Publishing Limited

Colombo, Laura. 2021. “Corporate Social Responsibility Is Not Only Ethical, But Also A Modern Business Tool”. Forbes. https://www.forbes.com/sites/forbeshumanresourcescouncil/2021/04/05/corpor ate-social-responsibility-is-not-only-ethical-but-also-a-modern-businesstool/?sh=14abe30d1bfa.

Eurodad. 2017. Tax Games: The Race to the Bottom – Europe’s role in supporting an unjust global system. Avaiable at Eurodad: https://www.eurodad.org/tax games 2017.

European Commission. 2016. State Aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion. https://ec.europa.eu/commission/presscorner/detail/en/IP_16_2923. Accessed August 2, 2022.

Frederick, William C. 2018. “Corporate Social Responsibility: From Founders to Millennials”. In Corporate Social Responsibility, edited by James Weber and David M. Wasieleski, 3–38. Emerald Publishing Limited

Hilling, Axel and Daniel T. Ostas. 2017. Corporate Taxation and Social Responsibility. Wolters Kluwer.

Jallai, Ave-Geidi and Hans Gribnau. 2018. “Aggressive Tax Planning and Corporate Social Irresponsibility: Managerial Discretion in the Light of Corporate Governance”. Tilburg Law School Research Paper No. 05/2018. Available at SSRN: https://ssrn.com/abstract=3119552

Janský, Petr and Miroslav Palanský. 2019. “Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment”. International Tax Public Finance, p. 1048 1103. https://doi.org/10.1007/s10797 019 09547 8. Accessed August 9, 2022.

Lee, Yoojin, Shaphan Ng, Terry Shevlin, and Aruhn Venkat. 2021. “The effects of tax avoidance news on employee perceptions of managers and firms: Evidence from Glassdoor.com ratings”. The Accounting Review, vol 96, 343 372. DOI: 10.2308/TAR 2019 0148. Accessed August 10, 2022.

McGoey, Sean. 2021. “Nearly $500 billion lost yearly to global tax abuse due mostly to corporations, new analysis says”. ICIJ. https://www.icij.org/inside icij/2021/11/nearly 500 billion lost yearly to global tax abuse due mostly to corporations new analysis says/. Accessed July 25, 2022.

Nature 2020. “Get the Sustainable Development Goals back on track”. https://www.nature.com/articles/d41586-019-03907-4. Accessed August 1, 2022

OECD (Organisation for Economic Co operation and Development). 2021. Understanding Tax Avoidance. https://www.oecd.org/tax/beps/. Accessed August 2, 2022

OECD. n.d. What is BEPS?. https://www.oecd.org/tax/beps/about/. Accessed August 2, 2022.

TaxWatch. 2018. “Is Tax Avoidance Legal?” https://www.taxwatchuk.org/is_tax_avoidance_legal/. Accessed August 4, 2022.

UN (United Nations). 2019. Citing $2.5 Trillion Annual Financing Gap during SDG Business Forum Event, Deputy Secretary-General Says Poverty Falling Too Slowly. https://press.un.org/en/2019/dsgsm1340.doc.htm. Accessed August 9, 2022

UNFCCC (United Nations Framework Convention on Climate Change). 2022. What is the Paris Agreement? https://unfccc.int/process and meetings/the paris agreement/the-paris-agreement. Accessed July 26, 2022. Wayne, Leslie, Kelly Carr, Marina Walker Guevara, Mar Cabra, Michael Hudson, Margot Williams, Edouard Perrin, Emilia Díaz Struck, Delphine Reuter, Frédéric Zalac, Harvey Cashore, Lars Bové, Kristof Clerix, Julia Stein, Titus Plattner, Mario Stäuble, Minna Knus Galán, Matthew Caruana Galizia, Rigoberto Carvajal, Christoph Lütgert, Neil Chenoweth. 2014. “Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg”. ICIJ https://www.icij.org/investigations/luxembourg leaks/leaked documents expose global companies secret tax deals luxembourg/. Accessed August 2, 2022.

Do You Need to be Transparent about your Taxes?

Femke Maria van der Zeijden

Abstract

This memorandum demonstrates the importance of being transparent about taxes. Further, it gives recommendations on how to be transparent about taxes and identifies areas for further research once a company decides to publish disclosures about its tax position. It focuses on the perspective of the company’s investors.

Introduction

This memorandum should help to decide whether or not to improve or increase transparency on taxes in a company’s annual report. This question is addressed from the perspective of a company’s investors. The method applied to investigate this question is collecting and comparing arguments for and against transparency in stakeholder communications and literature. The perspective I have limited myself to is the perspective of investors. I chose this method and limitation because they are an important stakeholder in a company and the group of stakeholders for which the annual report is predominantly written.

85% of investors are interested in ESG (Morgan Stanley, 2019), and tax is part of - at least - the G of ESG (Paul, 2020). This is also demonstrated by the fact that rating agencies such as MSCI reduce ESG scores of companies that face legal action regarding tax issues, pay little tax or have aggressive tax structures (Ram, 2016). As such, tax is, or should be, part of the investors’ interest when deciding to invest.

But why is that? What are the arguments of the remaining 15%? And does this mean companies should provide their investors with full transparency on their tax position?

This memorandum is to answer these questions. After an introduction, I will provide you with a number of arguments for and against transparency on taxes from the perspective of investors, which will be assessed individually. Based on this assessment, I have identified stronger arguments for transparent reporting on tax transparency, than the arguments against doing so. Before we start…

Before going over to the stakeholder arguments for and against tax transparency, we need to agree on what tax transparency actually is.

Albu and Flyverbom (2019) discuss the concept of transparency from two different perspectives: Firstly, the verifiability, which is basically the pure provision of data that can be verified. Secondly, they mention performativity. Performativity is more than just providing information; it is also about shaping the data for the purpose of giving the recipient a particular impression of the provider of the data.

I recognize that there will always be an element of performativity when information on one’s tax position is shared based on the discretion of the taxpayer (as opposed to the disclosure of information, e.g., in tax returns which can be verifiable only, rather than also performative). This is because this

discretional reporting leaves room for the company to pick and choose which data to present and therewith to steer the conclusion that a recipient of this data draws from this data. This performativity can be used for a company’s benefit.

When speaking about tax transparency below, I will refer to the full disclosure of information related to a company’s contribution to tax, including tax policies and (planning) strategies, that goes beyond the regulatory required disclosures and is thus based on the company’s discretion. This means both the verifiable parts as well the performative parts.

Stakeholder Arguments

There are various sources describing the perspectives of investors on tax transparency. Some key sources of information that I have identified from or in relation to those stakeholders are:

• Principles of responsible investments (UNPRI 2020)

• The rise of ESG investing: How aggressive tax avoidance affects corporate governance and ESG analysis (Fonseca 2020)

• How Do Investors Value the Publication of Tax Information? Evidence From the European Public Country-by-Country Reporting (“CbCR”, Müller 2021)

• Do investors care about corporate taxes? (Brooks 2016)

• Corporate Tax: What Do Stakeholders Expect? (Hillenbrand 2017)

I have selected these sources as they present arguments both in favor of and against tax transparency. Further, all the above sources focus on the perspective of the investor when it comes to taxation, tax responsibility, and tax transparency, as per the limitation of the perspectives described in the Introduction.

From the abovementioned sources, I have distilled the arguments below. The color coding for these arguments shows how convincing these arguments are based on my own analysis and review of literature. Green means I believe the argument to be convincing, yellow means the argument is partly convincing, and red means the argument does not convince me. Below the table, I will explain the reasoning behind the color coding of the different arguments.

Table

Overview of Arguments

Arguments in favor of tax transparency

1- It is important for the assessment of tax risks and opportunities and identification of best practices.

Arguments against tax transparency

1- Enhanced tax transparency is a means to an end and does not say anything about the tax position itself.

2 It shows to what extent a company improves or severs economic inequality and sustainable development.

3- It avoids tax avoidance strategies which can create governance and reputation risks as well as risks of fines.

4- It improves the information to investors so they can better predict their earnings.

2 There is a disadvantage on being a first mover.

3- It is not a priority compared to all regulatory requirements.

4- The costs involved exceeded the value added.

5 CbCR data helps investors to evaluate how efficient tax avoidance strategies are and thus how management is able to increase shareholder value.

6- It shows to what extent a company contributes to and develops the society it needs to be able to operate its business.

7 It shows to what extent companies are paying their fair share of the ever increasing tax gap.

5 Detailed reporting could compromise competitive advantage.

6- The broader stakeholder group does not have the technical expertise needed to interpret complex tax data so will not be able to draw the right conclusions.

7 Public reporting is not a priority as tax authorities already have all the information they need.

8 Tax transparency can lead to reputational costs or adjustments of tax structures increasing tax costs and therefore decrease the shareholder value.

9- Tax is not the best or the only way to contribute to society, so information on tax is not relevant.

10 A company’s role in the system is to earn profits for the shareholders, which increases economic growth for society as a whole. Tax or transparency on tax does not help with that.

Balance and assessment of arguments

Arguments in Favor of Tax Transparency

1. It is important for the assessment of tax risks and opportunities and identification of best practices (UNPRI 2020 and Müller 2021).

In order to be able to assess risks and opportunities in a certain field, such as taxation, it is reasonable to state that investors would need to be able to receive adequate information on this topic.

2. It shows to what extent a company improves or severs economic inequality and sustainable development (UNPRI 2020).

It is true that taxation is a way to redistribute wealth and develop the society in which the tax is collected. Therefore, one’s tax contribution helps to reduce inequality and to sustainably develop that society.

3. It avoids tax avoidance strategies which can create governance and reputation risks as well as risks of fines (Fonseca 2020).

It is proven that tax avoidance strategies can cause reputational risks (Austin 2017). There are, however, also authors who believe that tax avoidance strategies are financially a good thing: Shareholders may believe that tax avoidance shows that management is committed to enhancing the value of their investment (Brooks 2016).

Furthermore, I am not convinced that tax transparency is a good (or bad) thing, because it leads to the reduction of reputation risks. It is refraining from tax avoidance strategies that brings us this result.

In relation to governance risks, I am not even convinced how tax avoidance strategies can cause governance risks, and the author does not clarify this.

Lastly, as per the first element of this argument: It is the tax avoidance strategy that causes the risk of fines. Removing the tax strategy, not removing the transparency, is what causes the elimination of this risk.

4. It improves the information of investors so they can better predict their earnings (Müller 2021).

Details on the tax profile and position of a company can help investors to predict the tax line on a P&L and tax assets or liabilities on a balance sheet.

5. CbCR data helps investors to evaluate how efficient tax avoidance strategies are and thus how management is able to increase shareholder value (Müller 2021).

CbCR data shows the geographical spread of employees, assets and liabilities, revenues, and taxes accrued.4 This is just one example of tax transparency, but I believe the argument applies to more ways to be tax transparent than only CbCR. Information published under CbCR does not necessarily, in my opinion, give an insight into how efficient tax avoidance strategies are. For example, the information shows profit and tax that is reported, but not necessarily the amounts that have been confirmed by the tax authorities: the reports and filings may be challenged. It can, however, give indications of one type of tax avoidance strategy, namely transfer pricing planning. Such a strategy may imply that profits are shifted from a jurisdiction with higher tax rates to a jurisdiction that has lower tax rates. Tax transparency in a broader meaning may also shed light on other applied tax avoidance strategies.

However, it is not clear to me to what extent such strategy will increase shareholder value. A tax avoidance strategy may decrease tax as a cost, but it is not a stand alone line item in the profit and loss account of a company. A strategy is often created together with tax advisors who charge fees. Further, if the strategy is challenged by the tax authorities, it may result in additional advisory fees and, possibly, fines and interest. Also, a strategy may be challenged in the press or by public opinion, which can reduce shareholder value.

6. It shows to what extent a company contributes to and develops the society it needs to be able to operate its business (Hillebrand 2017).

Indeed, tax is one way to contribute to a society that one operates in. However, it is not the only way. Further, for this argument to be valid, it must be ensured that not only the taxes paid are reflected on in the notes to the public, but also the public means that are needed or used by the company.

7. It shows to what extent companies are paying their fair share of the ever-increasing tax gap (Hillenbrand 2017).

Disclosures on tax payments provide information on the contribution of companies and can form a proper basis to assess to what extent companies do 4 33 a chap. 10 § 1 SFL (Swedish implementation of the CbCR rules)

or do not pay their “fair share” - albeit the reader needs to use his or her own frame of reference to assess whether this share is actually fair.

Arguments Against Tax Transparency

1. Enhanced tax transparency is a means to an end and does not say anything about the tax position itself (UNPRI 2020).

This is not an argument against tax transparency but instead something that may take away a potential argument in favor of transparency. In other words, it does not say that transparency on taxes is a bad thing, but the argument says that transparency does not need to be a good thing.

2. There is a disadvantage in being a first mover (UNPRI 2020).

There is definitely a first mover disadvantage in the field of tax transparency. For example, one first mover can face all the criticism for not contributing more, while the majority of its competitors actually contribute less. Another example could be that competitors await the public’s response to a disclosure and subsequently copy and improve the disclosure for their own benefit.

However, today we are no longer first movers. Good examples of this are KKR, Blackstone, and Blackrock, all of which are active in the UK and therefore have to publish their tax policy.5

3. It is not a priority compared to all regulatory requirements (UNPRI 2020).

Further, this is not an argument against tax transparency but, rather, something that could counter an argument in favor of transparency.

4. The costs involved exceeded the value added (UNPRI 2020 and Müller 2021 and Brooks 2016).

It is true that there are costs involved in the transparent reporting on taxation. For example, a tax advisor should review or even draft the disclosure statements. However, the statement that the costs involved exceed the value added is a conclusion that we should only draw after considering the arguments for and against tax transparency and is, therefore, not an argument in itself.

5 See for example

https://www.kkr.com/_files/pdf/UK_Tax_Strategy_Statement_20211231.pdf, https://www.blackrock.com/corporate/literature/publication/uk corporate tax strategy.pdf.%20Last%20reviewed%20August%202, 2022.

5. Detailed reporting may compromise competitive advantage (UNPRI 2020 and Müller 2021).

I can imagine that certain information on a company’s performance being published for the company’s competitor, without the company having this information about the competitor, can create a competitive disadvantage for the company. However, it is not in the scope of this article to assess whether the publication of tax information would have this effect.

The biggest discussions on this topic have been held around public CbCR. As mentioned earlier, CbCR is simply an example of tax transparency, but arguments used in relation to CbCR may be valid in a broader context. As a result of this discussion on CbCR, Transparency International investigated the competitive effects of such publications based on several European companies that either voluntarily, or based on the Capital Requirements Directive,6 published their tax data, as well as Indian companies that were subjected to the Subsidiary-by-Subsidiary Reporting rules. The result of the investigation by Transparency International was that there is no relationship between the competitive position of a company and the publication of its tax data (Transparency International, 2016). I was not able to find evidence to the contrary.

6. The broader stakeholder group does not have the technical expertise needed to interpret complex tax data so will not be able to draw the right conclusions (UNPRI 2020).

It is true that tax data can be complex and there may be many relevant aspects. I have, however, two issues with this argument:

First of all, there is nothing stopping us from providing the conclusions that we believe to be right, together with the data, so as to help layman readers draw the conclusions we believe should be drawn.

Secondly, the complexity does not necessarily put pressure on the skills of the reader (something that we cannot control) but may equally put pressure on the skills of the presenter, and this is something that we can control. I truly believe that nothing is so complex that it cannot be explained.

6Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevance, OJ L 176, 27.6.2013, p. 338 436.

7. Public reporting is not a priority, as tax authorities already have all the information they need (UNPRI 2020).

It is true that the tax authorities in most jurisdictions already have the information they need, or the means to request and obtain this information from the taxpayer. I would also tend to agree that the fact that the tax authorities have the relevant information is more important than the public having all relevant information. However, the statement that public reporting is therefore less than a priority can only be made if all the benefits and downsides of public reporting have been considered. I, therefore, believe that this statement is not an argument in itself.

8. Tax transparency can lead to reputational costs or adjustments of tax structures increasing tax costs and therefore decrease the shareholder value (Müller 2021 and Brooks 2016).

Although this is a relatively old study, Hanlon and Slemrod demonstrated in 2009 that a company’s share price, and thus shareholder value, can indeed go down based on revelations about tax sheltering activities (Brooks 2016). However, I believe it is not the transparency that caused the shareholder value to fall, but rather the fact that the transparency revealed tax sheltering practices. Also, reputational costs will only be incurred in case the tax profile that is revealed by the transparency does not meet the expectations of the public as it is tax aggressive or evasive.

Further, tax aggressiveness can lead to lower ESG ratings, and tax transparency to higher ESG ratings. As ESG investing is growing exponentially as one of the world’s most important investing strategies, tax transparency can have a positive impact on shareholder value and reputation (Fonseca 2020).

Lastly, tax transparency should only result in an adjustment of structures and an increase in tax costs if a taxpayer has structures that are evasive or aggressive. In other cases, there is no need to adjust the structures. There again, it is the tax profile that causes these effects, and not the transparency.

For all three aspects above, it should be noted that transparency can be the result of voluntary disclosure, but also of involuntary attention from the press or the authorities.

9. Tax is not the best or the only way to contribute to society, so information on tax is not relevant (Hillebrand 2017).

Indeed, taxes are in part meant to contribute to society. Whether this is the best way to do so is not part of the scope of this article, but there are other reasons for paying tax. Socrates gave four reasons: Firstly, living in a country shows acceptance of the local law. Secondly, he does indeed mention making a contribution to the society he benefited from. Thirdly, he believed it was unfair towards other people living in the society who would be the victims of him not paying taxes while he has enjoyed the fact that they were obeying the law. Last but not least, he mentions rule utilitarianism; if everyone would disobey the law, then the society would fail (Ostas 2020).

And, inversely, the government also has multiple reasons to levy tax, which involve more than simply gaining a contribution to society: Firstly, of course, there is this contribution; the collection of revenues to finance public expenditures. Secondly, there is the regulation of social and economic behavior, and, thirdly, there is the redistribution of income and wealth (Hilling 2017).

As such, the fact that tax is not the best or the only way to contribute to society may be true - I cannot judge if it is the best way as I am not aware of any alternative ideas on the part of the taxpayer - but it is definitely not the only purpose of taxation. As I am not aware of other means to achieve the same goals, I can only partly agree with this argument.

10. A company’s role in the system is to earn profits for the shareholders, which increases economic growth for society as a whole. Tax, or transparency on tax, does not help with that (Hillebrand 2017). The last argument in the reviewed literature is that the role of a company is to make profits for its shareholders. This is essentially what Beate Sjåfjell calls “the myth of shareholder primacy” (Sjåfjell 2017).

Literature describes how shareholder value maximization is incompatible with an efficient economy and social welfare, elements that are required for each and every business in the long run. Instead, economists promote the stakeholder theory, an environment where society and the interests of society are valued at least on an equal level as the pure economic interests of the company and its shareholders (Jallai 2018).

Conclusion and Recommendations

Based on the above, there are more arguments in favor of non-transparency, but the quality of the arguments in favor of transparency is higher. I therefore recommend reporting transparently on taxes.

I would recommend considering the following in the reporting:

• CbCR is a popular way to give better insight into transparency, and public CbCR seems tried and tested (see Arguments Against Tax Transparency). This can, therefore, be a good and recognizable manner to report on our taxes in investor reports.

• In order to avoid investors drawing incorrect or undesired conclusions, we need to provide them with the conclusions we stand for and support (see Arguments Against Tax Transparency). This can be done by showing the weighted average of the statutory tax rates and clarifying any differences between that tax rate and our effective tax rate, and why we believe such differences are justified.

Following the publication of our tax disclosures, we might consider measuring investor responses in the following manner:

• Differentiation between different types of investors (e.g., stock exchange investors and investors in private equity funds)

• Quantitative responses in stock exchange responses and speed of fundraising

• Non quantitative responses at shareholder meetings and investor committees

This could be an interesting area for further research to both effectively steer our own transparency and to create a positive movement in the industry.

References

Albu, O.B. and Flyverbom, M., 2019. Organizational transparency: conceptualizations, conditions, and consequence. Business & Society, 58 (2), 268 297.

Austin, Chelsea Rae, Ryan J. Wilson. 2017. “An Examination of Reputational Costs and Tax Avoidance: Evidence from Firms with Valuable Consumer Brands”, Journal of the American Taxation Association (2017) 39 (1): 67 93.

Brooks, Chris, Chris Godfrey, Carola Hillenbrand, Kevin Money. 2016. “Do investors care about corporate taxes?” Journal of Corporate Finance, 38 (2016) 218 248.

Hilling, Axel, Daniel T. Ostas, Reuven S. Avi Yonah. 2017. Corporate Taxation and Social Responsibility. Stockholm: Wolters Kluwer.

Morgan Stanley. 2019. “Individual Investor Interest Driven by Impact, Conviction and Choice” https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sust ainableinvesting/Sustainable_Signals_Individual_Investor_White_Paper_Final. pdf. Last accessed July 16, 2022.

Ostas, Daniel T.. 2020. “Ethics of Tax Interpretation”. Journal of Business Ethics 165:83 94.

Paul, Deborah and T. Eiko Strange. 2020. “Tax and ESG”, Harvard Law School Forum On Corporate Governance. https://corpgov.law.harvard.edu/2020/02/22/tax and esg/. Last accessed July 16, 2022.

Ram, Aliya. 2016. “MSCI takes aim at corporate tax avoidance”, Financial Times. https://www.ft.com/content/b12b120c a80b 11e6 8b69 02899e8bd9d1. Last accessed July 16, 2022.

Transparency International. 2016. “Do Corporate Claims On Public Disclosure Stack Up? Impact Of Public Reporting On Corporate Competitiveness”. https://transparency.eu/wp content/uploads/2016/10/Impact_of_Public_Reporting_FINAL.pdf. Last accessed August 2, 2022.

Environmental Taxes as a Means to Achieve Environmental Sustainability

Alicia Löfgren

Abstract

This paper aims to explain the relationship between environmental taxation by country and environmental sustainability. For this purpose, related statistics datasets and literature were analyzed.

Environmental taxes have proven their effectiveness in halting climate change. Accordingly, European countries with high environmental taxes and carbon prices show low carbon emissions, while Japan and South Korea, with low carbon prices, have been unable to effectively decrease carbon emissions. Because of the

connection between the economy and environment, pollution cannot be limited to one area. As a result, the European Union suggests the Carbon Border Adjustments Mechanism as a means to cover this price gap and increase the effectiveness of environmental taxation. However, as environmental taxes follow the polluter pays principle, paying the taxes without making efforts to reduce pollution and environmental taxes cannot be justified. More importantly, corporations should not exploit the gaps in prices and systems in order to pay lower taxes.

Keywords: Environmental tax, carbon pricing, environmental sustainability

Company Presentation

As CEO, I represent Bookhouse, incorporated in South Korea. Our company publishes paper and electronic books in over 20 languages, manufactures merchandise, and sells online and in offline stores. We have over 50 offices worldwide and hundreds of stores in over 60 countries, including developed countries such as Sweden and developing countries. Our paying members can borrow unlimited books from our e book libraries. We abide by the laws in every country in which we provide our service, pay our fair share of taxes for local revenue, and work to high moral standards. In addition, we are pursuing industrial sustainability for the next generation.

Introduction

Is an e book better for the environment than a paper book? Which emits less carbon when produced and used by consumers? There are debates about this, but neither is free from the carbon emission problem. Scientific developments have made our lives more convenient and given us more choice alternatives, but environmental issues such as climate change have not been solved. Instead, climate change has accelerated with industrialization. Who is responsible for these environmental issues, and how can we improve them? Many governments and international organizations have tried to halve the pace of climate change. Although the value of this planet and the environment cannot be estimated in currency, speed control humps can have prices. Taxation is related to sustainability issues because these prices for sustainability policies

are paid from taxes, including the environmental taxes. Moreover, the effect on environmental sustainability would also be different because of the gap and mismatch in the international tax system.

Purpose of This Paper

This paper aims to answer the following question: How can the world’s environmental taxes, including carbon pricing, work effectively for environmental sustainability? For this purpose, statistical datasets and literature are analyzed.

Environmental Taxation and Expenditure

The Organization for Economic Co-operation and Development (OECD) says that environmental taxes lead to environmental effectiveness, economic efficiency, public revenue, and transparency, and they have also been used to address various environmental issues successfully (2011). Environmental tax is distinguished from other taxes such as Pigouvian tax. For example, corporate tax is imposed according to a corporation’s profit and is used when the government allocates the budget. However, environmental taxes not only levy the expenses for recovering pollution from the people and corporations who pollute, but also stimulate taxpayers’ behavior to reduce pollution. The EU defines environmental tax as “a tax whose tax base is a physical unit (or a proxy of a physical unit) of something that has a proven, specific negative impact on the environment, and which is identified in ESA[European System of National and Regional Accounts] as a tax.” For example, when you purchase a train, bus, or flight ticket, you can see environmental tax included in the price statement. It is an energy tax, a kind of environmental tax. Another example of the environmental tax is the charge for plastic bags for vegetables or fruits at grocery stores. Transportation and plastic bag use are directly connected to pollution, so those who use them pay environmental taxes. Consumers pay for the cost to recover the pollution that the use of plastic bags or transportation causes, but more importantly, they reduce their use of plastic bags, or choose an alternative vehicle, to reduce the expenditure.

In 2020, the Swedish government collected €9,616.21 million in environmental tax revenue (Eurostat 2022). The OECD and the EU show the environmental tax share in the total tax revenues or the Gross Domestic Product (GDP) by country

to compare them. According to Eurostat, the environmental tax revenue in 2020 was 4.73% of Sweden’s total tax revenue and social contribution. It is not only slightly less than 5.57%, the average of the EU countries, but has also gradually reduced every year. This is not only about Sweden. Other Scandinavian countries, Norway and Denmark, show similar results (Figure 1). The European Environment Agency explained that other tax revenues, such as taxation on labor, are increased in line with inflation (2022). Scandinavian countries, known for high tax rates and environmentally friendly cultures, levied environmental tax sooner than other countries, and the number was significant. The percentage is merely an illusion with high total tax revenues. In the same vein, the environmental tax revenue in the Swedish GDP was 2.02%, which was less than the 2.24% average of the EU countries (Eurostat 2022a). However, the absolute amounts of the environmental tax revenues are above the mean among the EU member countries and are collected steadily. This illusion is the reverse in developing countries. For instance, the environmental tax revenue in Romania in 2019 was equivalent to 6.76% of the total tax revenues, which shows a higher share ratio than Sweden’s. However, the figure, USD 4,508.48, is less than half the Swedish environmental tax revenues.

The Share of the Environmental Tax Revenues (%) in the Total Tax Revenues

Sweden (share)

(share)

(amount) Denmark (amount)

(share)

(amount)

Amount of the Environmental Taxes (million euros)

The bar chart shows the environmental tax revenues (%) in total tax revenues and the social contributions in the same year. The same color line data shows the amount of the environmental tax revenues (million euros).

Figure 1 Environmental tax revenues in Scandinavian

To sum up, environmental tax revenues in developing countries are not as significant as in developed countries. In other words, the effect of environmental taxation appears to be less in developing countries. However, the environmental tax revenue percentage in their total tax revenues is more significant than in developed countries because their tax revenue is much less than in developed countries.

Carbon Pricing by Country

Environmental taxes consist of taxes on energy, transport, pollution, and resources. In most countries, energy taxes account for the most significant source. A carbon tax is one of the energy taxes. Carbon dioxide (CO 2 ) is the primary greenhouse gas that traps heat in the atmosphere and is mainly emitted through human activities, so there have been efforts to reduce carbon emission through carbon pricing, such as a carbon tax and the Emissions Trading System (ETS). Pricing carbon emission follows the polluter pays principle, meaning those who emit carbon dioxide should pay the price to recover the pollution. The carbon tax is a payment to the government for the amount of carbon dioxide emissions, and the ETS cap and trade means limiting the cap on pollution and trading allowances to other emitters (EPA 2022). Governments can adopt either or both, because they do not conflict. As the OECD announced that carbon pricing is “a very effective decarbonisation policy,” it has contributed to environmental sustainability. However, how many countries are pricing carbon dioxide emissions?

For now, 27 nations impose a carbon tax (Peccarelli 2022) at different tax rates, from USD 0.81 per ton in Ukraine to USD 137.89 per ton in Uruguay, based on the exchange rate on August 2, 2022 (the World Bank 2022). Unlike the carbon tax, ETS is adopted at regional, national, and subnational levels. As of July 2022, nine countries, including Austria, implement ETS nationally. There are combinations at national and subnational levels. For instance, China has the national and subnational ETS without a carbon tax, while Japan levies a carbon tax and operates a subnational ETS in Tokyo. In Canada, a carbon tax is levied by the federal and some state governments, while operating national and subnational ETS. The United States has no national level carbon pricing, with only some states operating each ETS. The only regional trading system, EU ETS, is being operated for all EU and EEA-EFTA states such as Iceland, Liechtenstein, and Norway; Germany and Austria also have their national ETS instead of carbon taxes. Like carbon taxes, all ETS have different prices. Of course, the effectiveness of the carbon pricing policies appears different by country.

Japan was one of the first countries in Asia to implement a carbon tax, but the price is as low as USD 2.36, and it is less effective than in European countries (Gokhale 2021). Carbon emissions have reduced slightly since 2013. However, the carbon emissions in South Korea are still increasing, even after the Korean ETS was implemented in 2015. The carbon price has decreased since 2018 (OECD 2021), and the price for a ton of carbon emissions is USD 18.75 in 2022 (the World Bank, 2022). Although it is still higher than in many other developing countries or the carbon tax in Japan, it is not very effective.

Carbon Border Adjustment Mechanism

The World Bank says the prices of carbon emissions between different initiatives are not comparable because each initiative covers different numbers of sectors and apply different methods, and currency fluctuations affect the comparison. Nevertheless, it seems evident that European countries tend to put high prices on carbon emissions, and the number of countries with carbon pricing is also higher in Europe than on other continents. There is no doubt that prosperous European countries have focused on sustainability earlier than others, while developing countries have tried to make an economic leap. However, climate change has progressed quietly, and environmental sustainability goals such as net/zero carbon emissions and being climate neutral cannot be achieved without global cooperation and efforts.

This global world is connected economically and environmentally. In this era, products, labor, and capital can be moved over borders. Many companies from developed countries have built factories in China and India and used their cheap labor. The carbon price could be one of the benefits in developing countries. However, when the products are sold and used worldwide, who is responsible for the carbon emissions? Moreover, no matter where the environment is polluted, it affects the whole planet. The environment does not have any borders.

For this reason, the EU proposed Fit for 55 packages as a means to update EU law to pursue the EU climate goals, including the Carbon Border Adjustment Mechanism (CBAM) policy to encourage non EU producers to reduce CO 2 emissions (European Council 2022). Under the CBAM policy, companies which manufacture cement, fertilizers, aluminum, electricity, iron, and steel should purchase CBAM certificates to cover the price gap between the EU and non-EU countries. Other industries, such as manufacturing paper and electronic books, are not included in the current plan, but the EU states that the scope of CBAM will be extended to other industries. Therefore, corporations,

regardless of the industry, should try to reduce carbon emissions and the carbon price, even though they do not currently pay it.

A Fair Share of Taxes for Environmental Sustainability

A transportation tax, which people pay when they buy tickets for travel, is paid mainly by households, whereas the energy tax, which accounts for 75% of the total environmental taxes in Sweden, is paid mainly by corporations (Eurostat 2022b). This means that fair taxation of corporations is essential for environmental taxation. Most individuals or households do not perform aggressive tax planning, but a few wealthy individuals and many large corporations do. In many ways, multinational enterprises (MNEs) have exploited the international tax system for their aggressive tax planning in order to pay much less tax than they should, or none at all, and they can also try to use the loophole between the different environmental tax rates or prices in the trading systems. Environmental taxes are not very different from other corporate taxes. Just as taxation is used to pay for social welfare in society, such as education, infrastructure, solving poverty, and human rights, in the end, environmental taxes are spent to recover the pollution human beings have caused. Just as corporations cannot last without society, humans cannot survive without the environment and this planet. Tax evasion or tax avoidance is not only against the spirit of the law; it interrupts the efforts of those struggling to save our living sites.

Conclusion

Carbon emissions from manufacturing paper or electronic books are not massive compared to other industries, such as metal manufacturing, and are not included in the CBAM target. However, the majority of corporations, if not all, should not be free from the responsibility of pollution. Therefore, we should all consider how to be eco friendly and contribute to environmental sustainability.

Tax regulations are considered malum prohibitum, meaning taxpayers do not need to pay more than they should, because a fair share of tax payment meets their ethical needs (Hilling and Ostas 2017). Similarly, taxpayers do not need to pay more environmental taxes. In particular with the polluter pays principle, taxpayers should prevent pollution more and pay less in environmental taxes. However, a lower carbon price does not mean less pollution. The environment

is not separated by country, and regional pollution affects our planet in the end. Corporations should not exploit the gap in carbon prices between countries, and governments should operate their carbon pricing systems to achieve the environmental Paris Climate Agreement goals. Consequently, environmental sustainability is not achieved without proper taxation.

References

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The World Bank. 2022. “Carbon Pricing Dashboard.” The World Bank. April 1, 2022. https://carbonpricingdashboard.worldbank.org/map_data. Accessed August 2, 2022.

Author presentations

Kajsa Hansson Willis, Student at Industrial Engineering and Management, Lund University.

Lykke Liljefeldt, Student at the Law programme, Umeå University, and Tax Consultant at EY Umeå from December 2022.

Alicia Löfgren, Student at LL.M program in Comparative and International Tax Law at Uppsala University 22/23.

Femke Maria van der Zeijden, Tax Director, PwC. Educated at the International and European Tax Law, Maastricht University.

Sofia Wallin, Student at the Law programme, Lund University.