Editor's Note: Filing deadline

Illustration by Adam De Souza

This piece appeared as an editor’s note in the Spring 2016 issue of Corporate Knights

The last several years have seen a parade of increasingly cringe-worthy explanations from various multinational corporations seeking to justify their complicated tax avoidance schemes.

When pressed about Apple’s sophisticated offshore tax avoidance regime on CBS’s 60 Minutes last December, CEO Tim Cook dismissed the accusations as “total political crap. There is no truth behind it. Apple pays every tax dollar we owe.” At a hearing in front of a British parliamentary committee this past February, Google tax chief Tom Hutchinson asserted that the company wasn’t unfairly gaming the system. “We are paying the right amount,” he said.

Several members of parliament laughed in response.

It would be more refreshing if we heard what was actually going on: that many multinational firms are taking advantage of outdated corporate tax regimes to pay as little tax as possible across the board. A recent report found that at least 358 of Fortune 500 companies were maintaining offshore tax subsidiaries (see here for more).

Corporate tax avoidance brings with it a series of negative consequences. Declining corporate tax revenue leaves a revenue gap in government coffers and unfairly tilts the playing field in favour of larger firms with the resources to take full advantage of loopholes. And as economist Gabriel Zucman argues in his book The Hidden Wealth of Nations, it’s a contributor to growing inequality by reducing the effective taxation of capital – leading to higher rates of return for capital owners.

Corporate Knights believes that companies should contribute to the services and investments that directly benefit them in the countries in which they operate. It’s why we include a relative measurement of each company’s contribution to its fair share of taxes as one of the key indicators in all our corporate rankings.

Key sustainability benchmarking institutions like the Global Reporting Initiative recommend the disclosure of tax payment information because what is “frequently desired by users of sustainability reports is the organization’s contribution to the sustainability of a larger economic system.”

Now, there are a number of other vital ways in which corporations feed into the larger economic system, namely through income, employment and innovation. These shouldn’t be dismissed as inconsequential or inevitable.

There’s also a tradeoff between higher corporate tax rates and a firm’s ability to invest and remain competitive in the global marketplace. American firms have a point when they decry the 35 per cent corporate tax rate as out of sync with similar jurisdictions around the world.

But there’s a stark contrast between moving a company’s headquarters to take advantage of a lower corporate tax rate and looking to pay essentially no tax in any of the major countries you operate in.

Not surprisingly, we don’t see the latter argument being publicly articulated by the Apples and Googles of the world.

Momentum is building regarding national and international tax reform. It will take years and possibly decades to sufficiently reform tax systems around the world, but the impetus from a frustrated citizenry and cash-strapped governments will prove too great for those wishing to maintain the status quo.

In the meantime, shareholders have started to ask questions about how exposed they are to a changing tax landscape.

The UN Principles for Responsible Investment (PRI) recently released engagement guidance on corporate tax responsibility, while RobecoSAM added questions about tax policy for companies filling out the Dow Jones Sustainability Index questionnaire.

Explained PRI managing director Fiona Reynolds: “In the long term, well-run companies should pay an appropriate level of tax, adhere to the spirit as well as the letter of tax laws, and avoid the reputational, legal and financial risks posed by aggressive tax planning.”

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