Red Flag 24. Aggressive tax-minimization strategies

• The International Bar Association’s Human Rights Institute (IBA-HRI) found that in the context of the developing world, tax practices considered most relevant to potential human rights impacts include transfer-pricing and other cross-border intra-group transactions (see Lipsett). Multi-national enterprises may “take advantage of gaps in the interaction of different tax systems to artificially reduce taxable income or shift profits to low-tax jurisdictions in which little or no economic activity is performed” (see OECD). The Task Force also identified the following as areas of greatest concern: the negotiation of tax holidays and incentives, the taxation of natural resources, the use of offshore investment accounts and, finally, secrecy jurisdictions due to their role in facilitating tax abuses. (See Lipsett).
• Highly digitized business models have been associated with challenges to existing taxation frameworks, including where the business is highly involved in the economic life of a jurisdiction without any significant physical presence, as well as where a high number of assets are intangible (such as algorithms and software). (See OECD).
• Aggressive taxation practices such as those identified above can “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.” (See Lipsett). Lost revenue from taxation can lead to decreased funds available for spending on “services such as health, education, housing, access to water and other human rights.” It has been noted that countries in the global south lose much more money to tax evasion and illicit financial flows than they receive in international aid.
• The connection between tax and inequality has been explored by the IBA-HRI, which has noted that “the global shadow economy is contributing to a growth in global inequality, which is also having a major impact on democracy.”

• Reputational Risks: “Over recent years, the tax affairs of major businesses have been subject to unprecedented levels of scrutiny, debate and controversy.” The FT, has noted that despite the “dry, complex nature of corporate tax planning,” campaigners have begun to focus on the issues with “zeal.”
• Regulatory Risks: Concerns over the facilitation of base erosion and profit shifting through uneven legislation has led to a multilateral international tax policy initiative under the OECD, resulting in a multilateral convention, the sharing of information between tax administrations, disclosure of previously secret tax rulings and “legislative changes made to amend/abolish 110+ [‘harmful preferential tax regimes’].”
• Operational Risks: Public outcry over taxation inequality has “contributed to significant political instability in many developing countries” which has also been to the detriment of companies operating in these areas. Such outcry has not been limited to developing countries: in the UK several companies have appeared before the Public Accounts Committee or had their high street stores occupied by protestors, and US companies have been the subject of major news investigations.
• Legal, Financial and Operational: Risks also arise where public outcry leads to a re-examination of tax settlements. Calvert Investments, referencing the International Accounting Standards Board, has noted: “Reputational damage [from a perception that a company is not paying its fair share of tax to a host country] may lead to liabilities for external costs associated with a company’s operations, greater difficulty in permitting that could lead to project delays or cancellation or the loss of favourable tax status or other forms of government financial assistance.”

*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.

Taxation policy is a key element in facilitating the achievement of the SDGs. As such, this red flag indicator is relevant for a range of SDGs, including:

• Do we have a policy on tax planning that includes a human rights perspective? Do we have a considered and disclosed position on use of “tax havens”?
• How transparent are we about our taxation strategy including as regards our operations in developing countries? Do we disclose how our approach to taxation planning aligns with our business purpose and sustainability strategy?
• To what extent do we review the structures and practices of tax planning through the lens of our responsibility respect human rights, (rather than merely the amount of tax paid, which is an outcome of these practices).
• Are we involved in projects for which tax rules are being created? Is our approach to these negotiations aligned with our sustainability commitments/ responsibilities?
• How meaningful is the interaction between our departments and external advisors responsible for taxation strategy and our corporate responsibility/ sustainability/ human rights teams, with a view to internal alignment?

*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.

In 2012 Starbucks announced that following “loud and clear” messages from customers, the company would make “changes which will result in Starbucks paying higher corporation tax in the UK – above what is currently required by law.”

• The B Team’s Responsible Tax Principles were developed through dialogue with a group of leading companies, convened by The B Team with contributions from civil society, institutional investors and international institution representatives.
• The International Bar Association’s Human Rights Institute released a 2013 report entitled Tax Abuses, Poverty and Human Rights. The Report addresses tax abuses from the novel perspective of human rights law and policy. It is based on extensive consultation from diverse perspectives and offers insight into the links between tax abuses, poverty and human rights.
• The Business and Human Rights Resource Centre portal on Tax Avoidance.
• Oxfam (2017) Making Tax Vanish: How the practices of consumer goods MNC RB show that the international tax system is broken. Contains an in-depth analysis and critique of the taxation planning practices of one company as well as the company’s response.
• M Lazala, Business & Human Rights Resource Centre (2015) Tax avoidance: the missing link in business & human rights?
• Tax Justice Network is a UK-based international research and advocacy network focusing on the link between taxation and, inter alia, human rights. It publishes the Corporate Tax Haven Index.
• OECD (2019) Tax and Digitalization discusses the tax challenges that arise from digitalization in furtherance of a work program to culminate in 2020 with an agreed global, long-term solution.
• The OECD’s Tax portal includes its Action Plan on Base Erosion and Profit Shifting and Inclusive Framework.