ESG’s accounting frontier – corporate tax avoidance

October 21, 2022


While tax policy has always been a long-standing issue, especially around major offshore data leaks such as the Panama and Pandora Papers, the topic re-entered the limelight in 2020 and 2021, as countries sought to identify new revenue streams to handle debt taken on during the Covid-19 pandemic.

The shutdown of economies severely diminished the capacity of policymakers to raise adequate revenues. In response, governments globally accelerated discussions about the implementation of an internationally harmonised corporation minimum tax rate of 15% for large multinationals.

Corporate tax has especially been targeted, due to its vulnerabilities to a slew of legal loopholes, with multinationals exploiting complex accounting phenomena such as base erosion and profit shifting, transfer pricing, and a range of highly technical financial products such as shell companies, trusts and foundations. These products and practices, many originating from tax haven jurisdictions, are ring-fenced for large corporations, making them a crucial target for policymakers.

By October 2021, 136 nations had committed to a proposed tax targeting businesses with annual revenues of €750 million and over in the countries they operate. This level of global co-operation is unprecedented in the fiscal space, and continues today even as economies reel from the effects of the pandemic.

For developing countries, the need to address the fiscal gap is more severe. In 2008, the Organisation for Economic Co-operation and Development (OECD) found that developing countries lose to tax havens almost three times what they get from developed countries in aid. This is exacerbated by the fact that developing countries’ tax revenues are more dependent on corporation taxes, as they are often easier to collect, compared to tax collection in disparate rural areas. Corporation taxes can provide revenues of up to 20% in developing countries, contrasting to developed countries, where revenues rarely exceed 10%.

On a human level, estimates by NGO Christian Aid, found that transfer price abuses (a corporation tax loophole) cost the lives of 350,000 children annually, as a result of lost revenues to developing countries. Oxfam estimates that the poorest developing countries lose out $100 billion in revenues annually to corporate tax avoidance. This is the same as providing education for 124 million children and preventing the deaths of almost 8 million mothers, babies and children a year.

While the OECD’s 15% minimum tax rate has seen a revised schedule for 2024, multinationals have an opportunity to act now, to implement ethical accounting practices that do not utilise offshore secrecy jurisdictions.

Highly publicised tax haven data leaks have shifted public opinion on tax, with large corporates facing chronic consumer boycotts over tax affairs. Starbucks suffered persistent boycotts and protests in 2012, after it was revealed the company was avoiding tax, forcing it to shut down several stores. Criticisms of the company’s tax practices continue to sour its brand, ten years on.

Other companies are increasingly having to face tax-related resolutions at AGMs, as investors criticise opaque tax practices as financially material risks. Institutional investors at Amazon demanded greater tax transparency, claiming its tax practices exposed the company to regulatory scrutiny, adjustment risks and vulnerability to changes in tax rules.

And with governments set on legislating parameters on profit booking, through one of the largest reconstructions of cross-border tax in a generation, businesses must now recognise the risk in sticking to what will become dated tax practices.

Alongside the risks of major criticism and exposure to growing investor pressure, companies are presented with an opportunity to individually take a stance on their corporate tax policy, and demonstrate an approach to tax compliance that accounts for the interests of stakeholders across the business. This ensures companies follow an informed approach to tax, and prepares them for forthcoming regulatory changes expected in 2024.

Author: James Moir