Taxing Human Rights?
Commentary, 01 May 2013
By Rachel Noble
"The governments of developing countries urgently need to increase their tax bases so that public services - key to fulfilling basic rights and tackling poverty - are available for all. The taxes levied on multinational corporations operating in poor countries already make a vital contribution to national coffers in this regard."
Yet despite their importance, issues relating to taxation and other fiscal policies rarely feature in UN human rights declarations or policy discussions. The International Bar Association’s Human Rights Initiative (IBAHRI) will soon produce a comprehensive list of the few references that do exist as part of its project analysing the links between tax abuse, poverty and human rights.
The governments of developing countries urgently need to increase their tax bases so that public services - key to fulfilling basic rights and tackling poverty - are available for all. The taxes levied on multinational corporations operating in poor countries already make a vital contribution to national coffers in this regard. Yet the reality is that pervasive corporate tax avoidance, incentivised and facilitated by a dazzling array of offshore tax havens eagerly vying for business in a relentless race to the bottom, denies developing countries’ over US$160bn in tax revenue every year.
Tax evasion and avoidance also undermine wider development finance strategies. The OECD estimates that poor countries lose almost three times more to tax havens than what they receive from developed countries in aid.
Due to its secretive nature, the full scale of corporate tax avoidance is difficult to ascertain. Indeed, the shifting of profits, debt, and corporate assets to low or no-tax jurisdictions in order to minimise tax bills has become a core business strategy for too many multinationals. And tax havens are now central to the operations of most multinational businesses. ActionAid’s research into the FTSE 100 in 2011 found that 98 companies use tax havens, where almost 40% of their overseas subsidiaries are based (we publish an update of this research later this month).
The corporate responsibility to respect human rights (the baseline norm for all businesses set out in the UN Guiding Principles on Business and Human Rights), under which companies should ensure their activities and relationships do not infringe the rights of others) states that businesses should not undermine the ability of governments to meet their own human rights obligations. Additionally, corporates should be transparent about how they identify and address their human rights impacts. Clearly, the widespread use of secretive tax havens and tax avoidance strategies fly in the face of these principles. The Guiding Principles also require states to protect against abuses by businesses, which, as pointed out by IBAHRI, should include ensuring coherence between corporate law, tax policies and the fulfilment of human rights.
So, why does this matter for investors? The responsibility to respect extends to investors, who should be doing their own due diligence and investor engagement to ensure that the companies in which they invest are not engaged in practices that are – whether directly or indirectly - adversely affecting human rights. This goes for tax avoidance as much as any other area of business activity that may be impeding human rights.
The business case for responsible tax planning is becoming increasingly compelling. Firstly, on a purely practical level, businesses depend upon the infrastructure paid for by taxes. They benefit from healthy, educated work forces, as well as from operating within stable political environments, where governments are democratically accountable, transparent and responsive to their citizens, based around a fair tax regime and public service provision.
Secondly, irresponsible tax practices can increasingly generate serious reputational damage. The recent tax U-turn by Starbucks in the face of direct consumer pressure in the UK is the most recent example. The growing roll-call of tax exposes - including media interest in ActionAid’s own investigations into how beverages giant SABMiller and, more recently, Associated British Foods (which owns brands such as Kingsmill, Silver Spoon and Twinings) are denying millions of pounds to the African countries in which they operate - demonstrates the reputational risks involved.
Additionally, tax policy and planning pose significant regulatory risks. The growing public and political outcry over tax evasion, avoidance and associated corruption, is beginning to trigger waves of regulatory reforms both nationally and internationally. This can be seen in the spread of anti-tax-avoidance legislation (such as general anti-avoidance rules in the UK, India and elsewhere). Tax authorities’ powers to engage in greater international cooperation on audits and similar measures have been growing as well since 2009 – for example, through the expanding membership of the OECD/Council of Europe’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The same trend is afoot in developing countries. For instance, following media coverage of ActionAid’s allegations against SABMiller, tax authorities from 21 African countries initiated a new African multilateral tax cooperation treaty, which was finalised in August 2012. It is likely to increase African tax authorities’ powers to scrutinise the cross-border tax affairs of multinationals in the future.
Finally, there are risks to the bottom line. Both reputational and regulatory risks carry heavy financial implications for companies who are caught out or caught short. Aggressive tax planning can also increase the likelihood of audit scrutiny by tax authorities, creating considerable compliance costs. Investors and shareholders can be negatively impacted when their investments fail to manage these risks. This has resulted in demands for more information about how companies approach tax-related risk. But how can investors gauge these risks effectively, particularly when surrounded by a cacophony of contradictory claims by businesses, media, tax authorities and campaigners?
Tax Responsibility – An Investor Guide is designed as a practical contribution towards meeting this challenge. It looks at tax policy, planning and reporting, and offers seven benchmarks and associated indicators of a responsible approach to tax. These provide guidance to investors and other corporate stakeholders for enquiring about a company’s tax management and practices. The Guide should also help companies to effectively communicate their approach to tax and associated levels of risk, particularly those operating in developing countries.
The parallels between ActionAid’s Investor Guide and the operational framework for implementing the corporate responsibility to respect human rights outlined in the Guiding Principles are immediately obvious. These parallels include the importance of developing a policy that is approved at the highest levels and informed by relevant expertise; of integrating this policy throughout the company to ensure its effective implementation; and of regular, sufficiently detailed reporting. These similarities also indicate how a responsible approach to tax and human rights might be integrated further, with on-going due diligence to assess tax-related risks (including how practices may be undermining the tax base in poor countries) becoming part of a wider process of due diligence aimed at identifying and mitigating human rights-related risks.