Tax. What responsibility do businesses have to the governments where they operate?

A sustainable approach to tax sees it not as a cost to be avoided, but as “a legitimate payment from wealth created to the countries and communities that contributed to the wealth creation” (ActionAid, Fairfood and FairPensions, 2011). Despite the legality of aggressive tax planning, it is often viewed as an unethical practice and in conflict with the notion of a sustainable economy. In this context, it would therefore seem that aggressive tax planning (i.e. the use of tax shelters or havens) is not compatible with acting sustainably.

This can be examined from multiple angles…

• Government infrastructure: It is commonly understood that companies flourish in a business environment where there is high investment in political and social infrastructure (Avi-Yonah, 2000). Public services are funded by the tax system and companies that use aggressive tax products are perceived to be “economic free riders”; i.e. distorting the normal competitive pressures of a market economy.
• Business reputation: Many companies adopt varying levels of ‘aggressiveness’ in tax planning due to other costs which may result from this activity - including the cost of maintaining a responsible business reputation (Dyreng, Hanlon and Maydew, 2008). This is most apparent for companies that capture a share of socially responsible investment or consumer markets (Dean, 2004).
• Public perception: Aggressive tax planning is often referred to in the media as “increasingly unacceptable to ordinary people” (Guardian, 2012). Researchers have also indicated that the public’s interpretation of a business’s sustainability is inversely related to the company’suse of aggressive tax planning products (Dyreng, Hanlon and Maydew, 2010).
• Corporate Sustainability: As corporate sustainability gains influence as a framework for corporate decision-making, its proponents are likely to view the most aggressive tax planning as an irresponsible business practice. Such companies face greater costs if they are perceived by stakeholders to have made irresponsible decisions, with stakeholders boycotting the company’s products or refraining from investment (Arya and Zhang, 2009).

Aggressive tax planning has recently come to the fore of stakeholder attention in relation to corporate sustainability, and a variety of groups have begun reviewing their approach - including investors, government regulators, NGOs and other members of the business community (Beloe, 2006). The June 2012 G20 Summit highlighted this through its commitment to enforce greater tax transparency (G20 Leaders’ Los Cabos Declaration, 2012), and to increase domestic resources by strengthening the tax base,tackling tax havens and non-cooperative jurisdictions (G20 Development Working Group Progress Report, 2012). With stakeholder scrutiny focused on businesses adopting aggressive tax planning, it would seem that tax is firmly on the sustainability agenda for the foreseeable future.