Taxing the Boundaries of Corporate Social Reporting

Steven Filling
California State University, Stanislaus
 
Prem Sikka
University of Essex, UK

Recent years have witnessed an explosion in writings on corporate social reporting (CSR) in accounting journals. The rich literature is informed by a variety of theoretical perspectives ranging from positivism, Marxism, critical theory, neo-classical economics, pluralism and institutional theory. The diverse range of topics covered includes issues relating to environment, employee reporting, pollution and gender. The main focus of the literature is to establish or problematize the extent of corporate accountability to stakeholders and good citizenship. However, little attention has been paid to issues relating to organised tax avoidance by companies and wealthy individuals.

Some marginal philanthropy may secure press headlines, accolades, subtle image advertising, media management opportunities and income tax deductions for companies and their executives. At the same too many companies and their executives have been busy avoiding taxes through artificial transactions. These have little commercial substance but enable companies to avoid taxes, effectively forcing others to either pay more, or accept poor social services.

Accountants, lawyers and bankers are central to organised tax avoidance. They devise avoidance schemes by placing novel interpretations on concepts of transfer pricing, residence, legality, transaction, jurisdiction, profit, loss, liability, equity and double taxation agreements. Sadly, the issues attract little attention from accounting and finance researchers even though legislators are increasingly concerned about such activities. For example, Senator Joe Lieberman told (18 November 2003) the Senate Committee on Governmental Affairs that "ranks of lawyers, accountants, and financial consultants have abused the law and their own professional ethics simply for the sake of huge sums of money to be made helping their clients evade taxes"¹.

With the aid of information technologies, networking, globalization and tax havens, companies are simply opting out of their social obligation to pay democratically agreed taxes. Because of poor financial reporting disclosures and secrecy, the full extent of corporate tax avoidance is impossible to measure. Details of tax avoidance schemes are rarely volunteered by companies or major accountancy firms. Global corporations, such as Boeing, Caterpillar, Coca-Cola, Daimler-Chrysler, Eastman, ExxonMobil, General Motors, Kodak, Intel, Microsoft, NewsCorp, Virgin and others have skeletal companies in secretive offshore havens to enable them to escape their tax obligations (Sikka, 2003). Enron used offshore subsidiaries to create opaque corporate structures. It paid federal taxes in only one of the years from 1996 to 2000 and also wiped out its taxes in India and Hungary. With advice from KPMG, WorldCom created "foresight of top management", a previously unheard of intangible asset. The company then licensed that 'foresight' to subsidiaries for royalties, which counted these royalties as tax deductible business expenses. The company receiving the US$20 billion was located in a Delaware and paid no tax on it (United States Bankruptcy Court Southern District of New York, 2004). Oil companies, such as, Chevron, Texaco and Caltex are estimated to have avoided $8.6 billion in taxes by novel design of accounting and tax transactions with domestic and foreign governments (Gramlich and Wheeler, 2003)

Some 60 percent of major US corporations did not pay any federal taxes for 1996 to 2000 (US General Accountability Office, 2004). 82 of the largest and most profitable US companies reported pre-tax profits of $1.1 trillion for the period 2001-2003, but paid no federal income tax in at least one of those years. 46 of these companies paid zero or less for the entire period whilst 28 had negative federal income rates (McIntyre and Nguyen 2004). The US may be losing more than $170 billion each year in taxes, large enough to provide free healthcare for all. The federal income tax take from corporations barely amounts to 1.3% of the US GDP, a marked reduction from earlier periods.

The UK government refuses to publish information about the extent of corporate tax avoidance and evasion (Hansard, House of Commons Debates, 8 January 2004, col. 425; 12 March 2003, col. 285). Some estimates suggest that Britain may be losing between £25 billion and £85 billion each year through organised tax avoidance (Mitchell et al., 2002). Corporate tax take now amounts to less than 2.5% of the GDP (Sikka, 2004). Developing countries could be losing more than $50 billion each year, large enough to make a real difference to social investment in education, transport, pensions, housing, healthcare and free people from poverty and squalor (Oxfam, 2000). Deprived of essential social investment, the average life span in some African countries has declined to just 33. The tax avoidance industry still manages to make profit out of it.

'Transfer pricing' gets a mention in most management accounting text books. However, little is said about its key role in capital flight and tax avoidance. It enables multinational companies to siphon off profits by deliberately over-pricing imports and under-pricing exports (Pak and Zdanowicz, 2002). US examples include paper transactions showing purchase of plastic buckets from the Czech Republic at $972.98 each, fence posts from Canada at $1,853.50 each, a kilo of toilet paper (about four rolls - unused) from China for $4,121.81, a litre of apple juice from Israel for $2,052, a ball point pen from Trinidad for $8,500 and a pair of tweezers from Japan at $4,896 each. The artificially low prices which shuffle profits to other countries include selling a toilet (with bowl and tanks) to Hong Kong for $1.75, prefabricated buildings to Trinidad at $1.20 and bulldozers to Venezuela at $387.83 each. For the years 1998 to 2001, such techniques may have enabled US companies to avoid an estimated $175 billion in taxes.

The extent of organised tax avoidance problematizes notions of corporate citizenship. Are companies really committed to communities, employees and other stakeholders or is a quick buck their sole objective? A considerable volume of the literature on goal congruence, corporate governance and agency theory legitimises the latter, with serious consequences for equality, democracy and social stability.

A kind of a reverse socialism has been established where the poor subsidise companies and a wealthy elite. Companies are happy to accept public subsidies, tax incentives, export credit guarantees and all the benefits of the social infrastructure but are unwilling to pay their share of democratically agreed taxes. Organised tax avoidance enables footballers, movie stars, millionaires and companies to avoid taxes while people on the minimum wage, nurses, teachers, labourers and debt-ridden graduates pay a higher proportion of their income in tax than many companies and their executives.

Tax avoidance seriously undermines local communities, businesses and national tax policies. The ability of major companies to structure their affairs via complex avoidance schemes, often involving tax havens, does not create any additional wealth. However, by shifting costs of social infrastructure to private individuals, companies operating via tax havens or through tax shelters acquire a significant tax advantage over their nationally or locally based competitors. Local competition, no matter whether it is more efficient or innovative than its tax dodging rival will be competing on an uneven field. The logic of this uneven competition requires either that all businesses ultimately move offshore or develop novel tax avoidance schemes in order to compete on a level basis, or that onshore tax authorities adjust their tax regimes to place a greater burden on other factors of production (particularly labour) and onto consumption.

Corporate tax avoidance and the role of banks, accounting and law firms should be a matter of concern to scholars of all persuasions. The tax avoidance industry poses major challenges to the very nature of democracy. Citizens may elect a government committed to investing in healthcare, housing, education, pensions, transport and other essentials, but the tax avoidance industry is always in a position to override that by ensuring that companies do not pay their democratically agreed share of taxes.

We encourage scholars to expand the boundaries of CSR. Studies focusing upon tax avoidance have a potential to draw attention to the funding of social goods, corporate power, possibilities of democracy and ethics of accountants, lawyers and bankers.

¹http://govtaff.senate.gov/index.cfm?Fuseaction=PressReleases.View&PressRelease_id=580&
Affiliation=R

References:

McIntyre, R.S., and Nguyen, TD.C., (2004). Corporate Income Taxes in the Bush Years, Washington DC, Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Gramlich, J.D., and Wheeler, J.E., (2003) How Chevron, Texaco and Indonesian Government Structured Transactions to avoid Billions in US Income Tax, Accounting Horizons, Vol. 17, No. 3, pp. 107-122.

Mitchell, A., Sikka, J., Christensen, J., Morris, P. and Filling, S., (2002). No Accounting for Tax Havens, Basildon, Association for Accountancy & Business Affairs.

Oxfam, (2000). Tax Havens: Releasing the Hidden Billions for Poverty Eradication, London, Oxfam.

Pak, S.J., and Zdanowicz, J.S., (2002). An Estimate Of 2001 Lost U.S. Federal Income Tax Revenues Due To Over-Invoiced Imports And Under-Invoiced Exports, Working paper, Pennsylvania State University, 30 October 2002.

Sikka, P., (2003). The role of offshore financial centres in globalization, Accounting Forum, Vol. 27(4), pp. 365-399.

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