Tax Abuse as a Business and Human Rights Issue

Corporate tax abuses have been increasingly in the media and political spotlight in recent months. Think of the CEOs of Google, Amazon and Starbucks being called in front of a British House of Commons committee to defend their “immoral” tax practices—said to involve the use of complex tax structures to avoid paying taxes in the UK despite having highly profitable operations in that country. While such tax practices may be technically legal, it appears they are less and less socially acceptable.

To date, the discussion about corporate tax abuses has been framed primarily in moral and legal terms. For example: Don’t companies have a moral obligation to pay a “fair share” of taxes and contribute to the societies in which they operate? On the other hand, why should a corporation not take full advantage of all legal means to minimize its tax burden?

Particularly when dealing with multinational corporations that operate in developing countries, questions are also being raised about the implications for poverty and development: How can governments effectively combat poverty when more money flows out of developing countries through corporate tax avoidance than flows in through development assistance? How can companies claim to be champions of sustainable development when they aggressively lobby for tax holidays or structure their affairs through “secrecy jurisdictions” and tax havens?

In addition, corporate tax abuses can be framed as a human rights issue. That is the key message of a new report from the International Bar Association’s Human Rights Institute (IBAHRI), entitled “Tax Abuses, Poverty and Human Rights.” The IBAHRI convened a Task Force that consulted with a wide range of stakeholders for over a year and examined the forms of potential tax abuses that are of greatest concern to developing countries: transfer (mis-)pricing; negotiation of tax holidays; (non-)taxation of natural resources; and the use of offshore investment accounts. All of these can seriously deprive governments of the resources needed to address poverty and to finance programs seeking to protect and fulfill internationally recognized human rights.

The UN Guiding Principles on Business and Human Rights provided the Task Force with an important analytical framework for exploring the human rights implications of corporate tax abuses. Indeed, the key findings of the report are structured in terms of the UN “Protect, Respect and Remedy” Framework, as outlined below.

State Duty to Protect

Considering the negative impact that tax abuses can have on human rights and poverty reduction efforts, the IBAHRI report observes that states have a number of obligations when it comes to tax abuses. These flow from their obligations to use the maximum available resources to progressively realize economic, social and cultural rights—arguably including an obligation to confront tax abuses as part of an overall plan to strengthen financial and tax governance.

Further, states are expected to strive for coherence between corporate, fiscal, tax and human rights laws and policies, both at the domestic and international levels. This includes the corollary expectation that they avoid corporate, fiscal or tax measures that have retrogressive impacts on human rights. The Task Force argues that states’ obligations to protect economic, social and cultural rights should be understood to include the obligation to assess and address the domestic and international impacts of corporate, fiscal and tax policies on human rights.

Corporate Responsibility to Respect

While business enterprises are important partners in the fight against poverty and can make significant contributions to sustainable development, they also have the responsibility to respect human rights throughout their operations. Business enterprises—including tax advisors and financial institutions—need to understand that their tax planning strategies and services can negatively impact on human rights, and conduct appropriate human rights due diligence.

Looking at tax practices through a human rights lens also reveals the potential for companies to make significant positive contributions to sustainable development and human rights. For example, in order to confront the “resource curse” (whereby resource-rich developing countries can fail to realize adequate economic and social benefits from resource extraction), new legal and policy initiatives are requiring greater transparency about revenues from natural resource projects. These include regulations under the Dodd-Frank Act in the United States, the European Union Accounting and Transparency Directive, as well as the protocols developed under the multi-stakeholder Extractive Industries Transparency Initiative. Moreover, there is increasing pressure for country-by-country reporting of payments by all multinational enterprises to governments, which can be a key component in giving tax authorities (and the public) the information they need to confront cross-border tax abuses, corruption and other illicit financial flows.

Lawyers have a special role to play in addressing tax abuses, given their involvement in drafting tax laws, structuring transactions and advising corporate clients on tax planning matters. As business enterprises, law firms also have a responsibility to respect human rights according to the Guiding Principles. Structuring a transaction to obtain the maximum tax benefits that an investor can extract from an extremely poor country (such as through tax concessions or tax holidays) can have significant human rights impacts because doing so may deprive the country of revenues needed to address the human rights impacts of poverty. In such cases, mere tax compliance is unlikely to satisfy the responsibility of a company, or its tax advisors, to avoid being involved with negative human rights impacts. The responsibility to respect human rights applies in situations where lawyers are involved with third parties’ actions that negatively impact on human rights—typically through their clients. In such situations, lawyers should use their leverage (or influence) to encourage their clients to refrain from tax abuses.

Access to Remedy

Both states and businesses have roles to play in helping ensure greater access to effective remedies for those negatively impacted by corporate tax abuses. Currently, the most effective remedies remain in the realm of domestic tax authorities. Consequently, it is important to strengthen good fiscal and tax governance and enforcement capacity, especially in developing countries where impacts can be particularly severe.

Transparency and access to information are important human rights principles that can support more effective remedies for tax abuses. In particular, these principles are at the heart of the emerging multilateral framework for automatic exchange of information between tax authorities that is being promoted by the G20 and implemented by the OECD Global Forum on Transparency and Exchange of Information. These principles also support states’ individual and collective initiatives to require business enterprises to disclose financial and non-financial information about their operations on a country-by-country basis.

At present, there are few human rights mechanisms that can deal effectively with tax abuses. However, several UN mechanisms have the mandate, and potential, to help articulate the links between tax abuses, poverty and human rights. Further attention and debate on tax abuses from a human rights perspective is important for developing more coherent international standards and good practices for states, multinational enterprises and their advisors and financiers. In the short-term, applying a human rights lens should also help bring greater public and political attention to this fundamentally important issue.

The report of the IBAHRI Task Force is novel in that it begins to connect the dots between tax abuses, poverty and the role of legal advisors from a human rights perspective. The UN Guiding Principles provide an important touchstone for making this “human rights case”—particularly with respect to the issue of corporate tax abuses. This is an immensely complex subject, but hopefully the Task Force’s report will stimulate discussion within the legal and corporate community, as well as among other interested stakeholders, and encourage the development of better tax laws, policies and business practices that are in line with states’ existing human rights obligations and companies’ responsibility to respect human rights.

The author was a Rapporteur for the IBAHRI Task Force.

Proposed Amendments to European Commission Reporting Directive

In January 2017 the EU non-financial reporting Directive goes into effect, including reporting on human rights. | Our Viewpoint on the Directive | All of our resources on communication on human rights

On April 16, 2013, the European Commission adopted a proposal for a Directive on non-financial reporting with the objective of increasing EU companies’ transparency and performance on environmental and social matters, including human rights. Shift together with our Chair, Professor John Ruggie, submitted amendments to the proposed Directive to enhance its alignment with the Guiding Principles. 

Also see: John Ruggie’s 2014 letter to the UK Secretary of State for Business, Innovation and Skills on reasonable but robust provisions that would be necessary to achieve an effective EU non-financial reporting Directive.