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SUSTAINABLE TAX GOVERNANCE AND TRANSPARENCY
Hans Gribnau & Ave-Geidi Jallai
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Tilburg Law School Research Paper, October 2018
Abstract: The relationship between tax and sustainability is not an easy one. Separately, both
topics are in general well-understood and given due attention in most corporations. Nevertheless,
tax specialists do not readily combine those two topics with regard to public tax governance, let
alone the tax governance of corporations. One thing that is troubling the relationship between tax
and sustainability is transparency.
For tax experts, at first sight, tax and sustainability meet in environmental taxation. On further
reflection the requirement of sustainability can be applied to tax legislation and the tax system as
whole - which both demand good tax governance. However, the concept of good tax governance
does also regard taxpayers. Taxation is a fundament for a well-functioning society and
sustainable development. Therefore, it will be argued that paying corporate taxes can be seen as
part of corporate responsibility to contribute to the sustainable development of society. Corporate
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This paper was originally published in S. Arvidsson (ed.), Challenges in Managing Sustainable Business:
Reporting, Taxation, Ethics and Governance, Zürich: Palgrave Macmillan 2018, pp. 337-369
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scandals and news on corporate aggressive tax planning practices have increased demands for
corporate accountability. The question is whether corporations’ tax planning policies are really
sustainable if they minimise the amount of tax they pay. This paper will look into this question by
exploring corporate taxation in the context of corporate social responsibility (CSR). It will be
argued that without greater transparency it is impossible to evaluate whether corporations are
truly sustainable, nor is it possible to hold corporations accountable for their tax behaviour.
This paper will deal with the calls for increased tax transparency. Public transparency with regard
to corporate tax is in many countries a rather new phenomenon. It will be argued that corporate
tax transparency is a key to good tax governance. Yet, it also entails various challenges. A first
step is the question as to relationship between tax and sustainability; sustainable tax governance
will first be dealt with from a governmental perspective which requires the state to pay due
attention to the quality of tax legislation. Following, it will be discussed how to relate
multinational tax planning practices to sustainability. It will be analysed whether paying taxes
could be seen as a company’s obligation towards society. Here, CSR is used as a proxy for
sustainability. A notion of good tax governance as a response to demand of sustainable and
responsible tax planning will be proposed. Furthermore, this paper relates such good tax
governance to transparency, which is considered as a necessary if challenging prerequisite for a
sustainable tax planning strategy.
Keywords: good governance, sustainability, multinationals, corporate social responsibility,
transparency
1. Introduction
The relationship between tax and sustainability is not an easy one. Separately, both topics are in
general well understood and given considerable attention in most corporations. Nevertheless, tax
specialists do not readily combine tax and sustainability with regard to public tax governance, let
alone the tax governance of corporations. One troubling aspect of this relationship is
transparency, which is also the central topic of this paper.
Recent tax scandals such as the so-called Paradise Papers, Panama Papers and Lux Leaks have
set international tax planning (tax planning with a cross-border dimension) in the spotlight. Many
taxpayers appear to pay very low or no (corporate) income taxes in the countries where they have
economic activities. Tax planning as such is quite normal and every taxpayer does it to a certain
degree. However, tax planning is morally not acceptable when it is aimed at minimising one’s tax
liability - enjoying a tax free-ride at the cost of other members of society. This kind of tax
avoidance is often called aggressive tax planning - a global problem with societal, political,
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economic, legal and moral dimensions. If some taxpayers pay less or no taxes, other members of
society have to pay more taxes or they have to face more expensive public goods and services or
are deprived thereof. Moreover, a situation where a selected group of members of society can
enjoy the benefits of society without paying for it is unjust and increases inequality.
Taxation plays an important role in society, for it supports societal cooperation and provides
resources to finance essential public goods and services. Taxation is an essential precondition for
the sustainable development of society. Sustainable development “involves meeting the needs of
the present without compromising the ability of future generations to meet their own needs”
(Ferrell et al., 2017, p. 347). For instance, in terms of sustainability, most of the countries in the
world (UN members) have agreed to contribute to Sustainable Development Goals (SDGs) that
are aimed at achieving a better future. Taxes are crucial for achieving SDGs. Therefore, it is a
responsibility of a state to create a legal system where every taxpayer pays his or her fair share of
taxes. Many countries and international organizations adopt general standards of good
governance agendas that “focus on reforming the relationship between the government, civil
society, and the market” and they mostly focus on topics such as “increased public accountability
and transparency”, strengthening of the rule of law, “increased civil society participation in
development,” and “respect for human rights and the environment” (Panayi, 2017, pp. 2-3). In the
same vein, good tax governance is about the relationship between the state, market and civil
society, but also transparency and cooperation between states. Moreover, an important objective
should be a fair and well-functioning tax system. Good tax legislation is a key element of good
public governance.
Legislatures bear the responsibility to establish a fair and well-functioning system of tax laws.
Having said that, no legal system is perfect. In a society, there are moral norms and values that
regulate the behaviour of the members of society beyond the law, for morality is wider than law.
That goes also for corporate members. Corporations (multinationals) nowadays accept their
moral responsibilities towards society in the frames of corporate social responsibility (CSR). In
general, CSR means that corporations accept responsibility toward society for the effects of their
actions. CSR-companies aim to go beyond strict compliance with the letter of the law (Carroll,
1991; McBarnet, 2007, pp. 48-50). Combining this understanding of CSR with the fact that taxes
are fundamental contributions to society means that aggressive tax planning conflicts with the
concept of CSR.
Corporate scandals and media attention on corporate tax behaviour have shown that society
expects them not to engage in aggressive tax planning. Moreover, there is an increased demand
for corporate accountability. Without greater transparency, it is however impossible to hold
corporations accountable for their tax behaviour. Therefore, in this paper we argue that a tax
strategy that views transparency as a key element of CSR can also be conceptualized as good tax
governance. More specifically, good tax governance that is future-oriented can be qualified as
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sustainable tax governance. Both public and private actors should commit themselves to this kind
of long-term governance, that is, sustainable tax governance.
The structure of this paper is as follows. First, the relationship between tax and sustainability is
explored. Sustainable taxation traditionally refers to environmental taxes. Sustainable tax
governance is a broader concept. Sustainable tax governance from a governmental perspective
requires the state to establish and implement a fair, well-functioning and stable tax system (§ 2).
Next, tax governance is connected with sustainable development and SDGs (§ 3). As this paper
focuses mainly on the multinational corporation’s perspective it will be further analysed how to
connect multinational tax planning practices with sustainability (§ 4). It will be discussed whether
paying taxes can be seen as a company’s obligation towards society. Here, we will take CSR as a
proxy for sustainability. Multinationals are in this respect in a special position, because of their
(corporate) power. Their presence in many jurisdictions and their tax expertise offers
opportunities with regard to their tax planning. However, society increasingly demands
accountability in this respect (§ 5). Corporate accountability is impossible without transparency
(§ 6). As a result, tax administrations and investors increasingly focus their attention on corporate
reporting and disclosure rules with regard to corporate tax behaviour (§ 7). Then, CSR’s key
feature of going beyond compliance with the law is integrated into good tax governance (§ 8).
The last section (§ 9) concludes.
As for methodology, this article first explores legal and philosophical literature and policy
documents to show the close connection between taxation and sustainable development. From a
business ethics perspective it is then argued that sustainable corporate tax planning has to take
into account the moral dimension of taxation. Business should exercise self-restraint in their tax
planning practices. Finally, accountability and transparency as means to enable public evaluation
of the way power is exercised are translated to corporate tax planning As a result, accountability
and transparency constitute basic elements of sustainable tax governance.
Thus, this paper aims to make three contributions to academic theory. First, it investigates the
connection between governance, good tax governance and sustainable tax governance. Second, it
applies the latter concept to public authorities and (private) corporations. Third, transparency,
enhancing accountability, as a key element of sustainable tax governance is elaborated upon.
2. Sustainable Tax Legislation
When asked about the connection between tax and sustainability most tax experts will probably
answer by pointing at environmental taxes - taxes aimed at achieving a positive effect for the
environment. These taxes on carbon and energy actually are incentives in order to steer citizens’
behaviour to achieve positive effect be achieved for the environment. Such taxes are introduced
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to reduce negative externalities related to the environmental consequences of production and use
- the effects of (carbon) emissions on other people that are not included in the price of the (use) of
products such as cars. In a wider sense, environmental levies include charges for public services
(such as collection and incineration of waste, and water purification) and environmental taxes
aimed at internalising external cost (such as pollution or carbon dioxide emission) in the price of
goods and services ('the polluter pays' principle).
Environmental taxes have two objectives: to generate tax revenues for the government (at central
and/or lower, for example local, level) and to achieve a change in business behaviour, and
eventually consumer behaviour, in favour of the environment (instrumental use of taxation).
Public economists even see “green taxes” as an economic instrument with two different goals
resulting in a so-called double dividend: they discourage or encourage certain activities and raise
revenues which could be used to finance reductions in other kinds of taxes (Mastellone, 2014, p.
482). Environmental taxes do not distort behaviour - unlike many other taxes which introduce
“inefficiencies in the allocation of resources and hence a decline in social welfare compared to
the (undistorted) optimum” (Jaeger, 2012, p. 212). On the contrary, these taxes correct behaviour
in a way that eliminates the inefficiencies from environmental damage. Thus, they fit well in the
economic notion of optimal taxation which is about raising revenues necessary to finance public
expenditures in the most efficient, that is not distorting, way. Environmental taxes thus could be
set higher than it would be otherwise, not only resulting in a change of (environment-friendly)
behaviour but also generating revenues which enable a decrease in other distorting taxes (Jaeger,
2012).
There are alternative policy instruments aimed at protecting the environment. These instruments
include command and control regulation, permits, and subsidies (OECD, 1989). These
instruments have different distributive and (other) ethical consequences (Posner and Weisbach,
2010, pp. 41-58). Environmental taxes are but one example of the use of taxation to implement
government policies. The current prevalence of the instrumental or regulatory function often
causes shifts in the distribution of the tax burden among taxpayers, which may violate the
underlying value of everybody paying a fair share. Furthermore, instrumentalist legislation
usually underestimates the importance of legal principles in modern law such as the principle of
equality and the principle of legal certainty (Gribnau, 2012). Moreover, such incentives in tax law
are a means of exerting power and influence over taxpayers. They impact liberty, autonomy and
character. Consequently, they may be judged to be paternalist, manipulative or even exploitative
if not carefully designed (Grant, 2011).
With regard to environmental taxes, it should be noted that there is no internationally harmonised
notion of “environmental tax”. Several countries consider energy taxes on mineral oils (excises),
gas, coal and electricity as “environmental” or “green” taxes, although such energy taxes already
existed long before climate change became a main political issue (Kogels, 2016). From an
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international point of view, moreover, national businesses may choose suppliers of goods and
services in other countries with lower environmental taxes, and multinationals may decide to
replace (part of) their production activities to countries with lower environmental taxes, in order
to reduce the internalisation of external (environmental) cost in the prices of their final products.
After all, in a global economy, environmental taxes (as well as taxes on labour and profits) are
considered as costs, so from a global sustainability point of view such “environmental tax
avoidance” could (in theory) only be attacked by global measures (at least at UN level) restricting
the fiscal autonomy of individual countries. Looking at the (60 years old) EU, we learn that the
28 individual Member States want to keep their fiscal autonomy as much as possible, also with
respect to environmental taxes (Deak, 2017). There is hardly any harmonisation on vehicle and
road taxes and no agreement on levying excise on aviation fuel for international flights (for which
a fundamental change in the ICAO Chicago Convention (1944) would be required). It is to be
seen whether the Paris Climate Agreement (2015) will lead to (global) harmonisation of
environmental taxes.
An example may explain the many complexities of environmental taxation. In the Netherlands
car taxes were used to incentivise consumers to buy hybrid cars. Car buyers started to buy hybrid
plug-in cars which were a real bargain thanks to the tax incentives with serious budgetary impact
for the state. Its success in terms of car sales made it too costly and therefore this tax incentive
was changed repeatedly. Some car manufacturers reacted on these incentives by gaming the rules.
They carefully engineered hybrid cars, which fulfilled just the statutory conditions, and enabled
in this way car buyers to exploit the available tax subsidies as much as possible. Some cars could
for example drive on electricity but only for a (very) limited number of miles (the 1.930 kilo
Volvo XC90 T8 Twin Engine, driving only 25 miles on the rechargeable battery, is an well-
known example; Kleijwegt, 2016, p. 28; Love, 2016) - not exactly a good example of a
sustainable business policy to counter climate change.
Thus, tax incentives promoted creative compliance. Car manufacturers enabled car buyers
(taxpayers) to comply with the letter of the law, while actually undermining the rationale behind
the rules. Thus, these car manufacturers indirectly engaged in creative compliance which “may
pass the test of legality but fail on the test of social responsibility” (McBarnet, 2007, p. 51). In
practice many car owners drove their hybrid cars, often SUVs, hardly on electricity, thus
increasing rather than reducing the emission of carbon dioxide. In a 2016 interview, the Dutch
State Secretary of Finance concluded that the climate effect of tax incentives amounting to 6
billion euros over the past six years was nil (Kleijwegt, 2016, p. 28).
The tax legislator responded to this such calculating behaviour by changing the legislation. For
several years the legal rules were changed quickly and frequently partly due to changes in
environmental policy objectives and in response to calculating behaviour of taxpayers and car
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producers that played with the rules in a very creative way (Kogels, 2015). The regulation that
tried to incentivise (corporate) citizens to behave in a sustainable way thus was not durable.
People who want to plan their activities with foreknowledge of its potential legal implications
cannot rely on this kind of ever-changing regulation. As a consequence, the legislature became
less reliable, less trustworthy.
Such all too frequent changes of rules point at an important meaning of sustainability with regard
to taxation: sustainable, reliable law or regulation. In a state under the rule of law government
should exercise power via general legislation. This requirement of general legislation serves as an
important protection against arbitrary interferences with individual rights and liberties by the
public authorities. Predictability of law protects those subject to the law from arbitrary state
interference with their lives. The value of legal certainty enables people to plan their future. This
also goes for taxation for the levying of taxes is a way of exercising power (Gribnau, 2010).
As shown above, tax legislation used as a regulatory instrument to change citizens’ behaviour is
not very stable. It changes (too) frequently due to ever changing policy preferences and due to the
calculating use of the (incentivising) rules by (corporate) citizens. This interplay between tax
legislatures and taxpayers results in unstable, not sustainable, tax legislation. Of course, states
have the primary responsibility for a fair and stable tax system, setting the rules of the game.
Good tax governance (see § 8) requires careful law-making and law-application, and international
cooperation in these matters (Végh and Gribnau, 2018; Panayi, 2017). But there is no denying
that rules can often be used in different ways. Citizens enjoy a certain freedom of choice, which
entails responsibility.
Responsible behaviour adds to durable legislation, for irresponsible, calculating behaviour lead to
quickly changing legislation. Responsible behaviour thus contributes to the stability, and in this
sense, sustainability of tax legislation. Corporations may thus show responsibility by not gaming
the rules. This does not only apply to the use of domestic tax incentives but also to the use of the
international tax system. Corporations choosing for good tax governance should not engage in
irresponsible international tax planning practices as will be shown (§ 8). However, before it will
be explained what the concept of good tax governance exactly means it is necessary to
understand what kind of responsibility tax paying involves in a larger picture. In other words,
how is paying taxes related to sustainability.
3. Sustainable Development and Taxation
Taxes are means to provide public goods, such as the military to protect the country, education,
health care, legal system, and infrastructure. Taxation serves also distributive justice, as it is an
important means to redistribute wealth between citizens (Gribnau, 2017, p. 13). Distributive
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justice is based on principle where society is responsible for taking care of the less well.
Distributive justice and public goods are indispensable for a sustainable society.
Taxes thus enable government to provide a (legal) framework for the functioning of society and
economy. Enforcing contracts for instance supports trust in markets without which corporations
could not operate. But taxes also contribute to the well-being of corporations in other ways for
the state fosters innovation, encourages investment for sustainable growth, boosts worker
productivity, and stimulates the efficient use of scarce resources. This is done by subsidies paid
for by taxes but also by tax (dis)incentives. Taxation is thus an important fundament for well-
functioning and sustainable societies and markets.
Also, the UN Sustainable Development Goals are aimed at achieving well-functioning and
sustainable societies and markets. In recent years, SDGs have received much attention in the
context of state as well as corporate responsibilities. SDGs are 17 goals to fight against poverty,
inequality and climate change, adopted in 2015 by UN member states. SDGs are built on
Millennium Development Goals (MDGs) and they “call for action by all countries, poor, rich and
middle-income to promote prosperity while protecting the planet”. SDGs “recognize that ending
poverty must go hand-in-hand with strategies that build economic growth” (UN, The Sustainable
Development Agenda). It is governments’ responsibility to establish regulatory frameworks in
order to achieve SDGs by 2030.
Achieving the ambitious SDGs is dependent on taxes. Most SDGs, such as ending poverty,
developing infrastructure or reducing inequality, are (based on) essential public goods that are
financed thanks to taxation (Sepúlveda Carmona, 2014, p. 1). Therefore, achieving the SDGs is in
large part dependent on government’s sustainable tax legislation as described in the previous
section (§ 2). Indeed, “taxation has a key role to play in financing the SDGs” (Platform for
Collaboration on Tax, 2018, p. 1). Achieving SDGs depends on whether and how governments
succeed in improving and enforcing their tax systems (Lustig, 2015). In order to achieve and
implement effective tax laws to fight against aggressive tax planning practices (as will be
explained in section § 4), states also need to strengthen the cooperation on the international level
(e.g. OECD, 2013b or EU ATAP). States are, however, not always eager to eliminate all possible
tax planning gaps because they want to stay attractive for multinationals and foreign investment
which may contribute to the goal of sustainable development. In practice, states therefore have to
balance these two goals (see § 5). Creating the fiscal system that allows states to deliver on the
SDGs is one of the key challenges of sustainable governance (Christian Aid, 2014; Kagan, 2016).
For achieving SDGs, states need to ensure the “sufficiency of resources, equality in distribution
of burdens and benefits of resourcing, and accountability over all levels of domestic and global
policy making” (Christian Aid, 2014).
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It is often argued that states are responsible for the tax system and its fairness. “Fairness in
corporate taxation is not a corporate responsibility; it is the responsibility of the nation states”
(De Wilde, 2015, p. 22). Corporate taxpayers may thus deftly bend the rules, because states fail to
create a perfect tax system. To our minds, not only states but also multinationals bear
responsibility when it comes to achieving SDGs. Companies should show positive commitment
in this respect. Indeed, as a group of leading companies maintains, “fairer, more transparent tax
systems, should be supported and upheld by business” (The B Team, 2018, p. 1). Multinationals
are often capable to play around tax legislation and avoid paying their fair share of taxes. This
goes at the expense of public revenue and shifts the tax burden to less expert taxpayers (see § 4).
Tax avoidance has an important influence on achieving SDGs. For instance, corporate tax
avoidance can negatively affect human rights of socio-economic nature that are related to
poverty, such as right to education or other elementary public goods and services that should be
provided by means of tax money (IBA, 2013). Such deprivation occurs especially with regard to
poor (developing) countries when they are involved in tax planning schemes (Weyzig, 2013, pp.
75-80; Pogge and Mehta, 2016, pp. 2-5). Taxation is “instrumental to state-building” (Panayi,
2017, p. 22); by not contributing his or her fair share to the society, a taxpayer limits the state’s
possibility to provide essential public goods and services. This, in turn, has a negative effect on
achieving SDGs. In other words, “tax abuses deprive governments of the resources required to
provide the programmes that give effect to economic, social and cultural rights, and to create and
strengthen the institutions that uphold civil and political rights” (IBA, 2013, p. 2).
Moreover, it is morally unacceptable that corporations, driven by profit-maximization, erode
living standards of other members of society (Gribnau and Jallai, 2017, pp. 71-75).
Multinationals have the power (see § 5) to avoid tax regulations that would impose higher costs
on companies. Such behaviour is in conflict with corporate sustainability. Defining the concept of
sustainability is challenging for it is culture-bound but in general it is related to CSR,
“maximizing positive and minimizing negative impacts on stakeholders” (Ferrell et al., 2017, pp.
347-348). RobecoSAM, a sustainable investment research organization, defines corporate
sustainability as “a business approach that creates long-term shareholder value by embracing
opportunities and managing risks deriving from economic, environmental and social
developments” (RobecoSAM). What kinds of corporate tax practices can be considered as in
conflict with social norms and sustainability will be discussed next.
4. Corporations and sustainable tax governance
The upshot of the foregoing is that states bear primary responsibility for good tax governance and
sustainable taxation but that taxpayers also bear some responsibility in this respect. This demands
some further explication on the nature and function of taxation. Why does taxation entail
responsibility for different actors? The answer is that taxation is a moral phenomenon, for the tax
system reflects important values such as liberty, reciprocity, solidarity and distributive justice.
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Taxation embodies fundamental societal values (Gribnau and Jallai, 2017, pp. 71-73). Taxes are
the main funding for society and for individual liberty to flourish. Moreover, they are an
important means to enhance distributive justice, reducing the unequal distribution of income and
wealth. Taxation however first and foremost aims at raising revenue to pay for public goods such
as defence, the legal system, health care, public education, infrastructure for transport and
communications, social security, culture, clean energy, and sustainable development (Brauner
and Stewart, 2013; The B Team, 2018, p. 3).
Thus, paying taxes can be seen as an investment but there is more to it, for it is also a matter of
moral responsibility. Paying taxes is an obligation towards society because it is a contribution
towards society which enables corporations to thrive. The principle of reciprocity demands
members of society who enjoy the benefits of this kind of social cooperation to do their fair
share. This principle applies also to corporate members for corporate citizens are part of society,
engaging with other citizens (Gribnau, 2017). This goes all the more for corporations that endorse
CSR because they voluntarily accept ethical obligations beyond (strict) compliance with the law
(Carroll, 1991, pp. 39-48).
This view must have tax consequences. A company that takes its social responsibility seriously
should extend this responsibility so as to include taxation, thus paying its share to sustain
societies in which it exists. Of course (corporate) taxpayers may plan and structure their affairs to
achieve a favourable tax treatment within the limits set by law. They are under no obligation to
pay as much tax as possible. CSR-companies, however, should interpret such limits from an
ethical perspective. Hardly paying any (corporate) taxes at all by strictly complying with the
letter of the law is clearly inconsistent with professing to accept ethical obligations beyond what
is required by the law.
Every company has to engage in tax planning. Tax planning is a legal way to take into account
the tax effects of various laws and rules, and adapt one’s actions accordingly. This is something
that every taxpayer does to a certain extent whether this is intentional or not. Tax planning means
that a taxpayer is in control of his/her finances by being aware of the impact of taxation and by
adjusting the behaviour accordingly, for instance to avoid double-taxation (Gribnau, 2015a, p.
226). Also the European Court of Justice has repeatedly confirmed that “taxpayers may choose to
structure their business so as to limit their tax liability” (ECJ Halifax case, 2006). A company can
also opt for tax avoidance which refers to the behaviour of taxpayers designed to reduce tax
liability by legal means, it is not just about adapting one’s behaviour but actively looking for
possibilities to diminish one’s tax liability within the legal framework.
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Some multinationals,
however, go very far when engaging in tax avoidance; they exploit inconsistencies and loopholes
of legal systems in such a way that they eventually pay almost no tax in any country in which
2
We assume that a responsible company will not engage in tax evasion which refers to illegitimate actions to reduce
tax (Filipczyk, 2017, pp. 15-66).
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they operate. The OECD points out that even though such arrangement could be strictly legal it is
considered as in conflict with the intent of the law it purports to follow (OECD Glossary of Tax
Terms). Such tax planning is in tax literature and discussions often addressed as aggressive tax
planning.
Although, there is no commonly agreed upon definition of aggressive tax planning, for the
purpose of this paper we need not go in detail. We use the definition that has been given by the
European Commission stating that “it exploits the differences in tax systems by taking advantage
of the technicalities of a tax system or of mismatches between two or more tax systems for the
purpose of reducing tax liability” (European Commission, 2012).
Tax planning practices can therefore be more or less responsible. Tax laws leave taxpayers
leeway to structure their affairs in a tax favourable way. Many multinationals expertly exploit the
international tax system so as to minimise their tax liability. Shifting the tax burden to other
taxpayers may seriously impact distributive justice, solidarity and society’s sustainability.
Choices made have impact on society and other taxpayers’ well-being. This suggests that taxation
has a moral nature; it is necessary for sustaining society, liberty and other important human
values. Therefore, by definition CSR companies who accept ethical obligations towards society,
should integrate tax in their CSR-philosophy. Multinationals engaging in aggressive tax planning
deprive countries of financial means necessary to sustain society and shift the tax burden to other
more compliant taxpayers, impacting their liberty. For these reasons, aggressive tax planning is
irresponsible behaviour.
Companies that acknowledge (moral) obligations towards society can opt to implement social
responsibility policies (we refer them CSR companies). CSR can have many different definitions
depending on the context and subject from which viewpoint the definition comes. According to
the European Commission, CSR “refers to companies voluntarily going beyond what the law
requires to achieve social and environmental objectives during the course of their daily business
activities” (European Commission CSR). The OECD (CSR FAQ) refers to “the mutual
dependence of business and society” where corporate responsibility concerns the corporate role
in this relationship. Moreover, the OECD expects that businesses comply next to the written laws
also with the “societal expectations that are not written down as formal law” (CSR FAQ).
These elements of the OECD and EU definitions both signal the significance of (voluntarily)
moving beyond pure compliance with the law, which fit with Carroll’s pyramidal framework on
CSR (Carroll, 1991). According to Carroll are corporations expected to pursue their economic
missions within the framework of the law, but that also conform to ethical responsibilities that go
beyond the law and profit making. The ethical responsibilities – which are seen as the obligation
to do what is right, just and fair – should be fulfilled (Carroll, 1991, p. 42). Ethical considerations
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go beyond compliance with the law. Behaving ethically should be fundamental in all business
matters, including tax planning practices.
How corporations could promote good tax governance will be discussed in § 8. It is, however,
clear that sustainable tax governance entails tax planning practices that follow ethical
considerations. Multinationals possess corporate power that places them in a position to steer
sustainable development. Such power means, however, also increased accountability;
multinationals need to account for their choices and actions.
5. (Corporate) Power and Accountability
Large corporations can have an immense impact on the societies in which they operate. The fact
that multinational is one economic organization means that multinationals are in position to
combine “the most favourable regulations of different countries within a single contract”
(Ruggie, 2017, p. 12). This has caused, as also Hirst and Thompson (1996, p. 11) point out, that
transnational corporations “could no longer be controlled or even constrained by the policies of
particular nation states”. Instead, such corporations “could escape all but the commonly agreed
and enforced international regulatory standards” (Hirst and Thompson, 1996, p. 11). This can be
called a regulatory vacuum, which means that national regulations cannot tackle international
problems and international rulemaking is not sufficiently developed yet (Scherer and Palazzo,
2008, p. 423). Such regulatory vacuum of international standards has created for transnational
corporations a possibility to use mismatching national tax laws to extremes, as explained in
previous section (§ 4).
Such phenomenon where corporations can achieve their goals against the will of governments,
for instance, can be called corporate power. In political science, power is typically defined as “the
ability of A to get B to do something that B otherwise would not do” (Ruggie, 2017, p. 5).
Multinationals are among the most powerful organisations. This is not an autonomous
development for many governments have ceded power to markets. They have for example
privatized state-owned industries or provided various (tax) incentives which have boomed the
success of private corporations. As a result, powerful corporations impact people’s lives
increasingly and are more visible than ever before and are more likely to attract criticism in case
of perceived misbehaviour (Tapscott and Ticoll, 2004, p. 184).
In the context of international tax planning the multinationals’ corporate power is
multidimensional. It appears, for instance, in a form of knowledge and possibilities to (ab)use
mismatching national tax laws to extremes. Multinationals have sufficient possibilities for
moving (parts of their operations) to other jurisdictions that would allow them to plan their taxes
as they wish. They are often mobile or they can reshape their business operations by setting up a
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“letterbox company” in certain states for escaping some applicable rules – for instance, by setting
up various business entities in different countries for taking advantage of various tax treaty rules
and involving therefore in so-called treaty shopping. This creates next to competition distortion a
situation that is perceived as unfair. Multinationals have also power to affect the law making
process by engaging in corporate lobbying (Corporate Europe Observatory; Ruggie, 2017;
Christians, 2017). In relation to corporate tax planning, multinationals often lobby very
effectively, which according to Christians (2017, p. 152) “results in tax policy as favourable as
possible to those who have recourses to shape it”. There is evidence that lobbying activities result
in significant tax benefits for companies. In addition, multinationals can use their knowledge and
strong negotiation position in the law enforcement phase when they have to deal with tax
authorities (Muchlinsky, 2007, p. 8). For instance, the so-called Lux Leaks scandal revealed that
many multinationals (nearly 340) such as Pepsi, IKEA, and Deutsche Bank had “secured secret
deals from Luxembourg that allowed many of them to slash their global tax bills” (ICIJ Lux
Leaks). When negotiating for such favourable deals, multinationals have a strong position for
they are very mobile, which means that if they do not get the deal from one state they can always
turn to another state.
The special character of multinationals allows them to operate on a global level where often
exists a regulatory vacuum – a situation where multinationals are involved in problems that
cannot be eliminated on the nation-state level due to the transnational nature of the problem.
However, in such transnational situations, global governance is usually weak (Scherer and
Palazzo, 2008, pp. 423-425). This is also happening with international tax planning. Moreover, it
is clear that societal expectations for multinationals in this arena are changing; the general public
nor regulatory authorities are accepting that multinationals do not contribute – in the form of
taxes – in the societies in which they operate. Therefore, corporations need to be accountable to
the societies in which they operate. Corporate accountability stands for the fact that the excessive
corporate power needs to be tamed (Valor, 2005).
The business dictionary defines corporate accountability as the obligation “to account for its
activities, accept responsibility for them, and to disclose the results in a transparent manner”
(Business Dictionary). Valor argues that “accountability should be understood as social corporate
control” because “corporations are accountable for the creation of organizational wealth for its
multiple constituents” (Valor, 2005, pp. 196-197). Accountability requires transparency for
“organisations should account for their actions through the provision of information to
stakeholders and society” (Swift, 2001, p. 16). Swift claims that “essentially accountability is
about the provision of information between two parties where the one who is accountable,
explains or justifies actions to the one to whom the account is owed” (Swift, 2001, p. 17). Thus,
for keeping multinationals accountable towards the societies in which they operate, transparency
is very important; it is a primary requirement of accountability. Without information it is hardly
possible to acquire the knowledge needed to hold those who wield power over others
14
accountable. Accountability enables people to check the exercise of power.
6. Transparency
In the international law context, transparency is “is universally perceived as a positive value,”
whereas “the opposites of transparency, such as secrecy and confidentiality, have taken on a
negative connotation” and “although they remain paradigmatic narratives in some areas, overall
they are largely considered as manifestations of power and, often, of its abuse” (Bianchi, 2013, p.
2). Thus, transparency is necessary to tame the corporate power (Tapscott and Ticoll, 2004, pp.
13, 225). Naturally, “transparency” is a broad and complicated concept (Schnackenberg and
Tomlinson, 2014). In this contribution, transparency is considered as a principle of being open
about one’s tax planning practices.
In the fight against certain types of tax planning, transparency is often considered to be a key
principle (Peters, 2017, pp. 218-231). The European Commission, for instance, states that
“transparency is a crucial element in securing fairer taxation”, adding that the Commission has
“given high priority to improving tax transparency in the Single Market” (European Commission,
2015a). One of the reasons why various international regulatory approaches aim to create more
transparency in tax planning discussions is to minimize the information gap between corporations
and other interested parties such as tax authorities, states or society at large. In economics, such
information gap is referred to as information asymmetry, which describes situations in which one
party to a transaction or agreement has less information than the other (Stiglitz, 2002, pp. 469-
470; Hood, 2006, p. 18). Multinationals, as described, possess corporate power that gives them a
favourable position in relation to information asymmetry. Therefore, transparency is an important
door to corporate accountability. Transparency in itself is never a goal in itself but rather a means
towards a certain outcome – accountability in this case.
The demand for transparency in tax affairs has become very urgent. This is clearly visible in the
2013 OECD report to the G20: “Leaders, civil society and everyday taxpayers are renewing
demands for greater transparency and (…) changes to the international tax rules to restore
fairness and integrity of their tax systems and the global financial systems more generally. The
message is clear: all taxpayers must pay their fair share” (OECD, 2013a, p. 2).
Transparency as one of the principal democratic values should help citizens to gain a clear insight
and understanding of the democratic decision-making processes. “It allows citizens to control the
activity of their elected representatives, to verify respect for legal procedures, to understand
decision-making processes, and to trust politicians” (Innerarity, 2016, p. 89). More generally,
transparency enables citizens to hold to account those who exercise some kind of power over
them, such as politicians or corporations (Florini, 1999). “In a transparent world with
15
unprecedented access to information, employees, shareholders, business partners, and even, to a
degree, consumers want evidence that firms are trustworthy and behaving according to their
values” (Tapscott and Ticoll, 2004, p. 19). Stakeholders want information in order to assess
corporations’ conduct.
But there are also limits to transparency. Transparency refers first of all to public access to
information which is relevant for democratic decision-making (Fung et al., 2008, pp. 24-25). But
access to public data as such does not guarantee public understanding. Moreover, it should not be
taken for granted that people will use the information they obtained to make rational judgements
and decisions. Leaks such as Paradise Papers or Lux Leaks do not by definition lead to rational
debate among people who are not tax experts. Nonetheless, they create a sense of urgency for
multinationals (and states) to reflect on the propriety of their tax behaviour. Individuals, groups
and organizations are prone to cognitive distortions (bounded rationality). Consequently,
mandatory information disclosure entails incentives for organizations to “game” the release of
information to take advantage of common cognitive distortions (Fung et al., 2008, p. 34). It is
sometimes hard to tell what information is trustworthy.
Nonetheless, without information no evaluation of the way power is exercised is possible.
Though transparency is not a panacea, it still is a precondition for accountability to the people.
Decision-making procedures and their results should be transparent. Such transparency can be
either mandatory (disclosure rules § 7) or voluntary (part of good tax governance § 8).
7. Tax, transparency and disclosure obligations
The requirement of transparency is well known in tax matters, for example in the relationship
between taxpayer and tax authorities. Information-asymmetry is a fundamental feature of this
relationship. The tax inspector depends on the taxpayer for his knowledge of the facts and
circumstances relevant to determine the taxpayer’s tax liability. Information gathering powers,
for example, enable the tax authorities to request information needed for the assessment –
information which is available to the taxpayer and/or third parties such as employers, banks and
insurance companies. The taxpayer (and other parties) has many corresponding statutory
obligations to disclose the information needed for assessment, e.g. to file a tax return, to provide
data and information on request, and to make available books, documents and other data carriers
for audit (Gribnau, 2015b, pp. 201-202). International exchange of information enhances
transparency, diminishing information-asymmetry.
Tax authorities exchange data with regard to income and wealth of taxpayers. This exchange can
be done upon request but many data are exchanged automatically between the tax authorities in
an increasing number of countries. By way of transnational tax information exchange networks
16
tax administrators can cooperate actively with administrators from other countries and achieve
the capacity to enforce national tax laws in respect of multinational and mobile capital and
labour. Exchange of tax relevant information is an important means for tax authorities to combat
tax evasion and tax avoidance (Grinberg, 2016, pp. 14-30; Zucman, 2015, p. 92). Tax
administrators must cooperate actively with administrators from other countries and work to
build inclusive transnational institutions and networks. The legitimacy of these transnational
information networks based on, e.g. accountability to democratic institutions, professional
expertise, and procedural fairness and effectiveness, will be crucial for their sustainability and
effectiveness in the long term (Stewart, 2013; Mosquera Valderrama, 2016). Transparency may
also be achieved by mandatory disclosure rules for taxpayers who are involved in “aggressive or
abusive transactions” (OECD, 2015a, p. 9).
The latter measures are part of initiatives launched by G20/OECD and European Commission to
coordinate among countries measures against to base erosion and profit shifting, a particular form
of aggressive tax planning (Hilling and Ostas, 2017, pp. 46-54). Good tax governance requires
these kinds of measures. In practice, regulatory attempts to promote sustainable tax governance,
such as the OECD BEPS Action Plan (OECD, 2013b) and the EU Action Plan (European
Commission, 2016a). The European Commission, for instance, “promotes the three principles of
good tax governance – namely transparency, exchange of information and fair tax competition –
in relations between states” (European Commission, 2011). Also enterprises are encouraged,
where appropriate, to work towards the implementation of these principles.
The European Union (EU) is fighting against tax avoidance with its action plan for fair corporate
taxation in the EU,
3
which focuses among others on transparency between the Member States in
order to eliminate information and knowledge gaps (European Commission, 2015b). For
instance, the EU has introduced the country-by-country reporting by corporations and sharing this
information with Member States' tax authorities to enhance transparency (European Commission,
2015c, and 2016c). The EU’s country-by-country reporting is largely based on the OECD
country-by-country reporting (CbC reporting) measure as developed under Action 13 of the
BEPS Action Plan (OECD, 2013b). The aim of CbC reporting is to increase taxpayers’
transparency towards tax authorities for tackling aggressive tax planning issues (OECD, 2015b).
Moreover, as a consequence of Panama Papers scandal (ICIJ) in April 2016 there is a proposal
for public country-by-country reporting to enhance public scrutiny of corporate income taxes
borne by multinationals which will “further foster corporate responsibility” (European
Commission, 2016b, p. 9; Panayi, 2017, p. 17, p. 36).
4
3
See European Commission’s Agenda for the Fair Corporate Taxation in the EU information chart:
http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/company_tax/anti_tax_avoidance/timeline_w
ithout_logo.png . Accessed 02 March 2018.
4
For more detailed discussion of CbC Reporting, see OECD, 2015a, and European Commission, 2016b.
17
Next to disclosure rules, corporations often face also disclosure rules from private actors. Private
standardization actions such as VBDO Good Tax Governance (VBDO, 2014, and 2017) and ISO
26000 focus on transparency. Many investors also put growing attention to corporate
sustainability. RobecoSAM that conducts corporate sustainability assessment for investors puts
much attention to “media and stakeholder commentaries and other publicly available information
from consumer organizations, NGOs, governments or international organizations to identify
companies’ involvement and response to environmental, economic and social crisis situations
that may have a damaging effect on their reputation and core business” (RobecoSAM, 2015, p.
10). With regard to corporate tax planning, this might be important for media as well as NGOs
and governments have in recent years put much (negative) attention on corporate tax practices
(e.g. Starbucks case in the UK). According to RobecoSAM, which is a part of Dow Jones
Sustainability Index, as a result of recent financial crisis that “exposed significant risks associated
with short-termism”, there is a growing demand amongst investors for “long-term oriented
strategies that integrate economic, environmental and social criteria within their portfolios”
(RobecoSAM, 2015, p. 16). Therefore, sustainability considerations have become an important
part of investors’ decision-making (Dixon and Sharma, 2018). Such (external) stimulus should,
nevertheless, not be the only motivation for corporations to switch to good tax governance.
8. Good Tax Governance and Transparency
The concept of good tax governance does not only regard states but it also regards taxpayers.
“Governance” is indeed a broad concept that applies to the purpose, management and functions
of nations, governments, communities, and organizations such as corporations. With regard to
companies, corporate governance is according to Charkham “about the way companies are
directed and controlled, and relate their source of finance” (Charkham, 2005, p. 1). As for the
purpose of the company, he argues “that this is to provide ethically and profitably the goods and
services people need and want” (Charkham, 2005, pp. 2, 21). Corporate governance, which
determines in general “a pattern of relationships between a company’s management, its board, its
shareholders and stakeholders” should include tax - requiring tax governance.
Indeed, tax governance is for businesses an element of corporate governance. According to
Williams, tax governance is “the answer, or the totality of the various answers, that the board of
directors of a company gives to the questions ‘What responsibilities and opportunities are we
presented with in relation to the tax affairs of the company? and ‘How can we best respond to
those responsibilities and opportunities for the benefit of the shareholders and of others to whom
we have an obligation?’” (Williams, 2007, p. 4).
Bronzewska and Van der Enden (2014, p. 636) elaborate on the implementation of tax
governance. It is a board responsibility. They argue that “[T]he role of the board is to set general
guidelines for the company’s global tax philosophy and the framework for the governance of tax
18
issues and processes”. Such tax philosophy should in their opinion be integrated into “the overall
business mission and vision”. Multinationals that aspire to be regarded as responsible corporate
citizens are expected to have “an internal validation system” (Tax Control Framework) in place
in order to “explain their tax strategy, what the tax risks are and how these are managed”
(Bronzewska and Van der Enden, 2014, pp. 635-636).
Corporations have to deal with moral and societal choices when planning taxes. The society has
“certain expectations for appropriate business behavior and outcomes” (Wood, 1991, p. 695).
According to Ruggie, “social norms exist over and above compliance with laws and regulations”
(Ruggie, 2013, p. 91). Therefore, businesses are not free to do as they wish to increase their
income, market share or alike. Corporations that use the power to minimize their tax liability as
much as possible behave irresponsible in the eyes of the public (Jallai, 2017; Jallai and Gribnau,
2018). The fact that taxation is a moral phenomenon places tax also at the heart of the notion of
CSR. Corporate commitment to CSR should be consistently applied to all of the company’s
dealings and activities. For companies that present themselves as sustainable corporations, there
are also ethical considerations in addition to legal and economic ones when defining and
implementing a business strategy and making decisions. Multinationals that claim to be CSR
companies should not engage in fiscal engineering in order to pay (almost) no corporate income
taxes in the societies in which they operate.
Socially responsible, sustainable companies should pay their fair share of tax (or at least not
unfair), and they should be willing to discuss their tax planning, which demands certain openness
on their part. Thus, one could distinguish a substantive approach and a procedural approach to
sustainable tax governance. A substantive approach focuses on the amount of tax that a company
pays, and asks whether this is more than is demanded by mere compliance with the letter of the
law (stripped to the bone by gaming the rules; § 4). A procedural approach provides information
on a company’s tax strategy, for instance on how much corporate income tax it pays in all
countries it operates. Here transparency, going beyond compliance with legal disclosure
requirements and reporting obligations, is key (Gutmann, 2010, pp. 546-547).
When a corporation is convinced that its tax planning practices are legal and legitimate
(responsible), it should be able to report this openly to the public. If a corporation does feel the
need to hide something, it should be seen as a red flag. Naturally, companies are economic
entities and will not actively search for the possibilities to pay more tax. Full transparency over
its payments and tax choices is usually even opposed by companies that have nothing to hide.
There can namely be many downsides to this, such as threat to taxpayers’ privacy, weakening its
competitive position or risking with misinterpretation of information by misinformed receiver.
However, it is also not acceptable that multinationals use their corporate power at the
considerable cost of society’s welfare. Therefore, multinationals have their role to play in taking
into account the effects of their tax planning practices. If they fail to do so, they may suffer for
19
instance reputation damage (Gribnau and Jallai, 2017, pp. 77-79). Therefore, they need to
communicate their tax strategy.
Indeed, it is unclear which tax practices exactly are considered as illegitimate and it is
government’s responsibility to provide more guidance in this matter. However, transparency from
the corporations’ side opens a door for discussion in order to establish what are legitimate or
acceptable tax planning practices. Transparency and openness, from the perspective of
corporations, are a precondition for a focused discussion, for it is necessary to get the facts right
and take on board different perspectives. This, in turn, helps corporations to protect (or where
necessary to re-establish) or advance their reputation. Furthermore, transparency and the
inclusion of tax in CSR reporting would help to minimize the information asymmetry gap that, in
current debates, seems to confuse the understanding of the problem. One of the most significant
procedural elements of CSR is reporting and openness (see e.g., McBarnet, 2007, pp. 32-37; GRI
Sustainability Reporting). Transparency should ideally be driven by an intrinsic motivation to do
consistently the right thing. Inconsistent reporting is not sustainable, and business should not
engage in opportunistic reporting (cf. Holland, Lindop and Zainudin, 2016, p. 338). Of course,
transparency is never an end in itself; it is always a means to some other value, for example
accountability. In any case, transparency and openness are first steps towards moral tax
behaviour. Moreover, for transparency is a precondition for accountability and open debate it is
crucial in creating a better tax compliance environment. A debate promotes a better
understanding of factors business take into account in their tax decisions and the moral
acceptability of tax planning practices. A fruitful debate is indispensable for developing standards
of substantive good tax governance.
Behaving ethically should be fundamental in all business matters, including tax planning
practices. However, in order to foster a debate regarding what exactly is ethical, companies
should communicate about their practices in tax matters, as this opens a door to discussion and
paves the way towards a better understanding of tax morale. At the end of the day, aggressive tax
planning cannot be resolved merely by changing the laws, for all laws can be gamed; it demands
also that the mind-set and attitude are changed (McBarnet, 2007, p. 48).
9. Conclusion
This chapter focused on the relationship between tax and sustainability. The central issue was that
many taxpayers appear to pay very low or no (corporate) income taxes in the countries where
they have economic activities. This kind of aggressive tax planning is a global problem with
societal, political, economic, legal and moral dimensions. It is unjust and undermines sustainable
development of societies for taxation supports societal cooperation and provides resources to
finance essential public goods and services.
20
Both public and private actors should commit themselves to sustainable tax governance, long
term future-oriented (good) tax governance. Sustainable tax legislation and enforcement as well
as sustainable tax planning are essential preconditions for achieving SDGs. States should create,
implement and enforce a fair, well-functioning and stable system of tax rules. Legislatures bear
the responsibility to establish a fair and well-functioning system of tax laws. With regard to
international taxation enhanced cooperation among states is required. Having said that, no legal
system is perfect and business therefore have to uphold it.
Consequently, multinationals have to accept their moral responsibilities towards society. Here,
corporate social responsibility is used as a proxy for sustainability. Corporate scandals and media
attention have shown that society expects corporations not to engage in aggressive tax planning.
Moreover, an increased societal demand for corporate accountability requires more transparency
with regard to corporate tax behaviour. Corporate taxpayers that want to show moral leadership
should balance their right to structure their affairs to achieve a favourable tax treatment within the
limits set by law with the obligation not to abuse the inevitable imperfections of the legal system.
They should account for their tax behaviour. Companies willing to engage in sustainable tax
governance need to be transparent about their tax strategy and discuss it with their stakeholders.
These companies have to take up the challenge to develop innovative strategies with regard to tax
transparency evidencing sustainable tax planning.
Acknowledgement:
The authors wish to thank Han Kogels for his valuable suggestions with regard to environmental
taxation.
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