Socially Responsible Corporations Will Pay Windfall Taxes: Law must be agile and Governments must know how to ask

ExxonMobil and Chevron . Shell . BP . Barclays PLC and HSBC . The list may increase. While there is no law against profiting from one’s losses and indeed there should not be, the initial losses occasioned by readjustments to Brexit, the supply-side constraints exacerbated by the Covid-19 pandemic, and the energy crisis arising from the sustained war in Ukraine, have evidently adjusted to profits for big corporations, globally.

A company is a legal person, with the same rights and obligations in society as far as is practicable, with natural persons. Fair taxation is essential for every working society; It is a social and moral responsibility and paying tax is a legal obligation. The fairness of taxation cannot only be about making sure everyone on income pays, it also has to ensure that those who earn enough to make additional contribution are persuaded by the law to do so. If individuals are obliged to contribute tax at point of pay on main jobs, additional jobs and additional earnings without tax concessions for housing, feeding, transport, and other costs of living, it is clearly deficient that corporations with the capacity to make additional contributions do not see it as their moral and social responsibility to do so.

Governments appear unsure on what to do for fear of antagonising the rich and the corporation. The hesitation with asking corporations to pay more or even to make exceptional payments by way of windfall tax, is in our view, a misapprehension. It is also an unhelpful swallow of yet another theory - the race to the bottom.

Corporations do not race to the bottom on every issue, they will race to the top if they have to most certainly if it is a race to the top of an economically viable society (advanced or not) that will bring them more profit. After all big corporations, in particular those with trans-national interests despite their opacity, are not completely abstract robot entities – there are people, men and women, natural persons who are behind the corporate veil. Those persons know where they must go to make profit. They also being human beings, are not unaware of the socio-economic difficulties in the societies where they operate – they choose to ignore them or act responsibly, voluntarily. The oft-quoted position that companies and the richest people will leave a society/country if they are taxed more, is appealing but it is not always true. What is true however is that the law is not agile and robust enough to catch up with the maverick exploitation of legal loopholes that allow for people and corporations to pay less when they can pay more. Governments/Politicians also neglect their greater bargaining power – the enabling environment they create to attract and retain socially responsible investors.

Governments worrying solely about corporate and capital flight are focusing on the wrong things. Corporations and rich individuals need to and will stay in an enabling environment – one where they can sell their goods and services and where they can access security, stability, less bureaucracy and unreasonable regulation, and justice. Sun sea and sand may be appealing but not forever – those who flee taxation still hanker after the comforts of an efficient and stable secure society.

This is why those societies that offer options on efficient workforce, lower costs, access to justice or dispute settlement, stability and security of businesses, employees and premises, efficient banking and lending systems; their governments should be more concerned with making their social environments and their workforce even more competitive and attractive for business.

The point is that corporations will not leave a society that has an enabling environment for them to thrive – as noted earlier, the people who take decisions on behalf of a company know that much. If they do leave, it is to their detriment.

Granted, an ‘enabling environment’ can mean different things at different times, to corporations. It depends on what the corporation is looking for– lower productions costs, cheap labour, expert labour, efficient financing systems, land, water, natural resources – corporate needs vary. This is why outsourcing for manufacturing, foreign call centres, offshore banking, oil and gas explorations in places with poor human rights and environmental protection records, remain attractive - a corporation may seek a positive or negative enabling environment but it definitely wants to make more money and it wants not to go out of business. ?

What does not vary for any corporation however is the pursuit of profit and a desire for sustainability. Even charities and social enterprises if they deny profits, need sustainability. These two, profits and sustainability, should be the focus of governments in negotiations with corporations over windfall taxes. If the government is able to create an enabling environment, and one would stress that such an environment should be a positive one i.e. for the common good, then surely corporations should wish to take advantage. Having done so and made vast profits, how can they not wish to contribute more to sustaining that society and in turn, themselves?

The law by means of clear legislation must encapsulate this position. Windfall taxes should not be about punishing corporations for making higher profits than expected. They should be about drawing on the equivalent nature of the corporation as a legal person who has a social and moral responsibility to make contribution by way of taxes for the common good.

Therefore, governments must have a more pragmatic approach. A few benchmarks are necessary:

1.???Identifying the category of corporations that a windfall tax would apply to, and by how much. It is not only energy companies that make huge profits or windfalls. A fair system may mean that taxes are increased across board for all corporations earning over a certain amount in excesses, in a financial year.

2.???A clear period of taxation, a minimum of 2 years extending to 5 years with the option of renewal or of no further taxation when those excess profits are not made in subsequent years.

3.???Tax agency and government follow-through on profits – there would have to be closer co-operation between governments and corporations as the latter declare domestic or global profits, to determine how and whether such excess profits are subject to tax irrespective of any existing corporate investments.

4.???A stronger push for corporate social responsibility in legislation – corporate legislation could include mandatory financial and economic contributions by the corporation in times of public emergencies and in crisis situations. It is not so easy to dismiss such an action if one is realistic about human crises across history – the present living crises will not be the last and corporations will still be able to make profits out of losses. Legislation must be agile to meet this inevitability.

5.???Leadership by socially responsible corporations and their shareholders accepting to support the very environment that makes it possible for the businesses to make profit and thrive.

6.???Joint action by governments. The fear is always that if one country refuses to raise taxes, then by doing so, a country applying a windfall tax will lose investment. It need not be so although as one can see from the UK position post Brexit, it is far easier to influence many from within, than from without.

7.???For the UK in particular, a more competitive and efficient workforce, access to wider markets, reduced regulation, expanding the production of goods and expanding the UK services market - tackling the problems of Brexit, are urgent imperatives to alleviate the economic burden on individuals including the most vulnerable.

Will corporations object to a windfall tax? Will governments apply them? Only time will tell. The US is rethinking windfall taxes. ?There are arguments for and against taxing unexpected profits , with CEO divided on this point. A Shell CEO had earlier, according to a news report, ‘flung open a door on windfall tax’ but Exxon and Chevron have notably shut it .

Be that as it may, for governments to overlook excess corporate profits and resort instead to government borrowing and increased taxation on ordinary workers not only increases inflation (another topic on its own), but it is also unsustainable on the long run; government spending on essential services and an enabling environment for all, matched with more income in personal pockets, is a more ideal situation. Excessive and unguaranteed government borrowing is more likely to damage agency (government’s bargaining power) than to improve relations on the long run, with corporations. The evidence is there from the economic woes of debtor countries who do not attract investment and have to rely heavily on borrowing and aid - much across the developing world.

Unless that is the intention, plugging the black hole of government finances requires political pragmatism, and legislative backing to ask politely but firmly, that corporations should pay tax on additional, unexpected profits whenever they are well able to do so, as is the case today. If they are socially responsible, corporations will pay windfall taxes but governments must know how to ask.

?Thank you for reading and sharing.

Best wishes,

Elimma.