Is Paying Tax Part of the Social License to Operate?

By Hugh Breakey and Charles Sampford.

Much of the debate about Base Erosion and Profit-Shifting (BEPS) and global tax minimisation focuses on the current legal requirements to pay tax and amendments to ensure liability and responsibility to pay tax. But this is not, first and foremost, a legal issue. Even if the legal/illegal, avoidance/evasion dichotomies were clear-cut, public outrage is applied to both. Indeed, clever planning may make the actions that some call tax avoidance, tax minimisation or tax planning seem worse for the obvious premeditation, while the complex legal arguments claiming that the assault on the public purse is legal may merely extend the outrage to lawyers rather than excuse the clients.

The failure to pay tax is first and foremost a moral complaint about the corporations and their attitudes to the communities in which they operate and which grant them a legal presence. One might, therefore, suppose a concern for fair tax obligations would be well-represented in the discussions and formulations of corporate social responsibility (CSR). CSR speaks directly of moral principles requiring businesses to do more than obey the strict letter of the law (and, indeed, ‘beyond the bottom line’).

Yet, if one turns to the major codes, charters, compacts and guidelines for best business practice and CSR, a striking fact presents itself. Most of these important documents say nothing – literally nothing – about tax avoidance, minimisation or planning. This is despite the fact that, as Christensen and Murphy (2004) observe: “Paying taxes is perhaps the most fundamental way in which private and corporate citizens engage with broader society.”

The codes of conduct for corporations that fail to mention fair tax obligations include pre-eminent and otherwise-demanding charters like the Caux Round Table Principles, the UN Global Compact (as well as its Principles for Responsible Investment), The Earth Charter, the Guiding Principles of the World Forum for Ethics in Business, the UN OHCHR’s Guiding Principles on Business and Human Rights, Amnesty International’s Human Rights Principles for Companies, and the Equator Principles.

To be sure, some of these codes have particular agendas (such as an environmental focus) that might serve to push fair tax obligations onto the back-burner. Even so, the fact remains that explicit fair tax obligations are so rare in the CSR space that the International Standards Organization’s (ISO, 2010) analyses of both sectoral and cross-sectoral initiatives fail to even list such obligations as a potential CSR element in their taxonomies.

If we want corporations to start living up to their tax obligations, then this widespread silence needs to change. Almost all the above-mentioned codes contain principles that are relevant to, or can be interpreted to apply to, tax obligations. For example, the Caux Roundtable Principles include the broader community in a business’s stakeholders, and stress that responsible businesses must live up to the spirit and intent behind the law. Equally, the International Bar Association showed how strong tax obligations follow from the OHCHR’s Guiding Principles, at least in the context of multinational’s tax obligations to developing countries.

However, potential interpretation and glancing treatment of such obligations in other codes (such as in the ISO’s Guidance on Social Responsibility and in the Triple Bottom Line Approach) – are not enough. In an area that involves a corporation directly shouldering significant costs impacting on its bottom line, society needs to lay down clear and unequivocal commitments. The tax-related responsibilities following from general principles needs to be explicitly highlighted to any corporations who aims to comply with them.

All of these codes provide aspirations to good corporate citizenship: but few make a point of saying that good corporate citizens pay their share of tax as part of their ‘corporate social responsibility’ or ‘social license to operate’.

We see the ‘social license to operate’ as just one of several expressions of the responsibilities of business ‘above the bottom line’. However, this concept enjoys currency in debates about CSR across sectors, ranging from extractive industries to banking to the professions. It also puts the CSR arguments more simply and strongly.

The ‘social license to operate’ acknowledges that a corporation can only exist within a community if it is legally recognised by that community or its sovereign representatives. Likewise it can only have property if that possession is recognised by the community (which also provides some protection for that property). Some forms of property, especially intellectual property, only exists within a territory because of the operation of that territory’s property laws.

The ‘social license to operate’ recognises that corporations enjoy a number of privileges – from limited liability to some very special privileges granted to particular industries or companies such as the exploitation of mineral resources and the lender of last resort to banks. The society also provides access to its consumers, which are the cashflow, or lifeblood, for the likes of Google, Apple and Starbucks. More generally, companies are entrusted with the bulk of the economy. Finally, all organisations involve a combination of power, people and resources to secure a range of ends. That power can be used to further those ends but it is always subject to capture and those powers being used (abused) against the community in which it operates.  The American founding fathers recognised the risks with governments. They were not aware of the risks of joint stock companies which were smaller and less numerous than those of our time (though their Glaswegian contemporary, Adam Smith, did recognise the risks and warned against them).

Communities do not provide all of the above benefits (let alone take the above risks) for the good of corporations. They do it for the benefit flowing from the latter’s incorporation. This is not to deny that corporations should seek profits. However, companies are expected to do so in ways that benefit the community rather than damage it. The social license to operate suggests that corporations need to justify themselves to the communities in which they operate on the basis of the benefits they deliver – and commit themselves to delivering them rather than paying lip service to the ideal.

The ‘social license to operate’ is analogous to the ‘social contract’ approach to government legitimacy (but far more practical to implement because limited liability joint stock companies are the product of legislation which was passed on the basis of claimed benefits to the community and duties established and varied by legislation.

Of the various duties corporations might be expected to take on, the payment of tax would surely be one of the most prominent.

Two good starting points that are specific to taxes are the principles offered by Tax Justice Network’s Code of Conduct (Murphy 2007) and the OECD’s Guidelines for Multinational Enterprises (OECD, 2011). Both codes set down the fundamental responsibility of living up to the spirit and intentions of tax codes. They also take care to explicitly prohibit some of the more egregious tax-minimisation strategies, such as those surrounding transfer pricing and beneficial ownership.

Corporations that abuse their social license to operate by minimising, avoiding or evading tax are putting at risk the license given to all and secure a competitive advantage over companies that are unable or unwilling to avoid tax in the same way as others. It is in the interests of the latter to work with taxation authorities and civil society organisations to work through fair tax principles and incorporate them in updated CSR principles.

Notes:

John Christensen, and Richard Murphy. "The Social Irresponsibility of Corporate Tax Avoidance: Taking CSR to the Bottom Line." Development 47, no. 3 (2004): 37-44.

This article was first published at: Australian Tax Policy. http://www.austaxpolicy.com/is-paying-tax-part-of-the-social-license-to-operate/ (11 July 2016). The work profited from the spirited discussions at the Regional Ethics Forum, the Red Chamber, Queensland Parliament House, 27 May 2016.

The Paris Regime’s Global Stocktake, and the COP/APA Climate Equity Review Process

The dust has long settled from December’s Paris climate summit, which hammered out the first truly global deal to reduce emissions. But the negotiations ended with widespread acknowledgement that the deal needs significant strengthening if its overall goal of keeping warming well below 2℃ is to be met.

The Paris Agreement therefore requires countries to ramp up their efforts significantly over the coming years and decades.

That job arguably begins today, with the opening of an 11-day meeting in Bonn, Germany, featuring the first session of the Ad Hoc Working Group on the Paris Agreement (APA).

The APA functions rather like a much more modest version of the Paris conference. Parties to the Paris Agreement send delegations, and small groups can be tasked with resolving specific issues before reporting back to the larger group for decision-making.

Among the most important items on the meeting’s agenda is the Global Stocktake to assess overall progress towards fulfilling the Paris Agreement’s goals. This stocktake will kickstart the process of five-yearly reviews to strengthen the Paris Agreement, the first of which will happen in 2023.

A new approach

The Paris Agreement sets down a new model for confronting global warming. Unlike the Kyoto Protocol, which imposed emissions targets on each country in a “top-down” way, the Paris process allowed countries to pledge their own climate targets.

This approach has been credited for the Paris negotiations' success, in contrast with previous talks which descended into recriminations over the burden that each country should bear.

But one obvious weakness of the new model is that the countries' voluntary commitments will not deliver anything like the necessary emissions reductions to prevent dangerous warming.

The five-yearly review mechanism thus aims to ensure that nations ramp up their commitments in coming years.

The question of fairness

As the Paris regime’s core review mechanism, the Global Stocktake will consider many aspects of the parties’ collective progress. While it will focus mainly on practical and scientific issues, the Paris Agreement also requires it to assess the collective progress “in the light of equity”.

In international climate negotiations, “equity” refers to an array of moral principles developed by the parties since 1992. These principles flesh out ethical priorities, such as ensuring the sustainable development of poorer countries.

They also inform burden-sharing decisions – for example, requiring countries that are more able to fight climate change, or that bear greater historical responsibility for it, to shoulder more of the burden.

As such, those five short words – “in the light of equity” – are arguably the first ever attempt to formalise the idea of countries doing their fair share when considering their contribution to the global fight against climate change.

What will the meeting achieve?

It is too early to know exactly how the APA will implement its mandate. However, in order to cover equity appropriately, the stocktake will need to include an official consideration of how well each country’s climate efforts accord with the Paris goals and principles. This means considering two key questions:

• Is each country doing what it promised?
• Is it promising enough?

This is not what normally happens when parties discuss ethics and fairness. Because the climate negotiations have had no principled system of moral evaluation and deliberation, countries can make implausible and inconsistent ethical claims as they defend climate targets that were actually chosen on the basis of national self-interest.

In the ideal case, the stocktake will encourage countries' delegates to talk in a reasonable and structured way about the ethical principles that inform their national climate targets. It will hopefully prompt them to be clearer about what principles they think are important, and how those principles justify their contribution.

As well as encouraging laggards to lift their game, the stocktake could clarify the application of specific equity principles. This could lead to improved overall ambition, more fairness in burden-sharing, and a greater shared belief in the regime’s legitimacy. Indeed, the process leading up to the stocktake can itself realise important procedural values, such as inclusiveness, reciprocity and deliberation.

In time, the process may prove to be an essential part of a functioning Paris regime.

What could possibly go wrong?

Opening up an official space for moral appraisals offers perils as well as promises. We must bear in mind that the Kyoto model failed precisely because it proved impossible to get consensus on questions of burden-sharing. An equity-based review might just reignite these past disagreements.

Indeed, any appeal to ethics carries some risks. Sometimes it’s better to speak of collective risk reduction rather than taking an adversarial position of preaching, lecturing or blaming others.

Despite these dangers, the Paris model desperately needs a principled mechanism for reviewing national climate targets so as to scale up the overall level of ambition to what’s needed globally.

The task is not impossible. The drafting of the Universal Declaration of Human Rights shows that, with clear structures and strong leadership, constructive international moral deliberation is possible.

Crucially, the stocktake will not need to take a single authoritative position on what equity requires. It can still drive improved ambition even if it allows coutries substantial flexibility in how they understand and apply equity principles.

While 2023 may seem a long way off, if the APA wants to ensure a constructive process, it will need to start laying the groundwork soon. It can start engaging states on equity issues in small meetings at the upcoming annual climate summits, starting with this year’s talks in Marrakech, or more formally at the Facilitative Dialogue scheduled for 2018.

After all, any assessment of this type does its best work long before it happens. In signalling that an ethical reckoning is on the horizon, it can encourage countries to start seriously considering whether their current commitments are fair, and what they could do better.

[This blogpost was initially published in The Conversation. It is based on a workshop presentation: Hugh Breakey. “Five Short Words and a Moral Reckoning: The Paris Regime’s COP/APA Equity Review Process,” presented at: ‘From Commitment to Implementation: Carbon Integrity post Paris?’ New Delhi, India, 14 March 2016. Scholars or practitioners who would like a copy of this conference paper, which provides more detail on the above themes, are welcome to email me at: h.breakey@griffith.edu.au.]