Toward a Responsible Corporate Tax Strategy
Author: Clara Knapp | UC Berkeley School of Law | J.D. Candidate 2021 | Posted: November 23, 2020
The myopic focus of corporate entities on tax bill reduction is a global phenomenon. However, U.S. big business, in particular, has long enjoyed wildly successful schemes of tax avoidance. Applying traditional tax strategies that are preoccupied with financial considerations, these corporations offer meager tax contributions to society despite their profitability.
But as public and regulatory scrutiny of corporate tax avoidance continue to grow—exacerbated by the compounding impacts of COVID-19, widespread natural disasters, and global economic recession (to name a few)—corporate tax strategy may be the target of an ESG makeover.
The recent surge in collective outrage over prolific corporate tax avoidance is not unfounded. The Tax Cuts and Jobs Act of 2017 (TCJA) illustrates how corporations can legally circumvent tax liability on a massive scale.
The TCJA has proven to be “a windfall for big business,” enabling large corporations to skip out on sizable portions of their tax bills. [1] In 2018, for example, four big pharma tycoons—Johnson & Johnson, Merck, Pfizer, and Abbott Laboratories—collectively scored $7 billion in tax savings under two TCJA provisions. [2] However, instead of investing in R&D or offering price cuts, “they plowed that money into stock buybacks and dividends” for shareholders, giving rise to substantial public criticism. [3] Moving forward, “[w]e can expect there to be zero tolerance of businesses seen to be avoiding paying their ‘fair share’.” [4]
Now considered a long-term ESG concern, corporate tax strategy has become a priority for the C-suite and corporate boards. [5] Tax considerations have expanded beyond financial metrics to include disclosure and reputational risks, including managing increased public scrutiny of tax strategies and outcomes. [6]
For example, one unpopular and highly publicized tax strategy that poses a substantial reputational risk to companies is corporate profit-shifting to lower tax jurisdictions. [7] Tax policy leaders such as the Organisation of Economic Cooperation and Development (OECD) are seeking to limit such forms of legal tax avoidance using new solutions, such as OECD’s proposal to establish a global minimum corporate tax rate. [8]
Tax is now an accepted metric for ESG. Notably, the tax metric extends far beyond purely financial targets, seeking disclosure on concerns such as managing reputational risk, withstanding increased media, activist, and stakeholder scrutiny, and risks associated with “the impact of tax on everything from business models to investor communications.” [9] Corporate boards as part of their risk oversight responsibilities “must understand these tax-related risks and confirm that management has recognized and addressed them.” [10] PRI’s guidance encourages investors to engage with companies on tax issues as well, emphasizing “corporate tax responsibility: a more responsible corporate approach to tax practices, including better disclosure and transparency, good governance and appropriate management of tax-related risks.” [11] A related focus is the tax treatment of executive compensation, and investors are proposing reforms there too, including accelerating the taxation of certain types of executive compensation. [12]
In light of the series of unfortunate events that is Year 2020, much remains uncertain—however, “what is certain is that more big corporations should start paying their fair share. Any business wanting to speed the recovery and create resilient, lasting prosperity should contribute to the fiscal revenues needed to deliver it.” [13]
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[1] Kyle Blankenship, J&J, Merck and Pfizer spent tax savings on investor payouts, not R&D: Oxfam, QUESTEX (Apr. 15, 2019), https://www.fiercepharma.com/pharma/billions-pharma-tax-savings-goes-to-investors-rather-than-r-d-oxfam.
[2] Id.
[3] Id.
[4] Diversity and tax become key components of ESG, KPMG (May 2020), https://home.kpmg/xx/en/home/insights/2020/05/diversity-and-tax-become-key-components-of-esg.html.
[5] Taking the long-term view: 2019 Directors’ Alert, DELOITTE (2019), https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-directors-alert-2019-report.pdf.
[6] Id.
[7] Pedro Gonçalves, OECD calls for global minimum corporate tax rate, INTERNATIONAL INVESTMENT (Nov. 12, 2019), https://www.internationalinvestment.net/news/4006765/oecd-calls-global-minimum-corporate-tax-rate.
[8] Id.
[9] See supra note [5].
[10] Id.
[11] PRI Engagement Guidance on Corporate Tax Responsibility, PRI (2015), https://www.unpri.org/download?ac=5601.
[12] John R. Ellerman & Ira T. Kay, Proposed Sweeping Changes to the Taxation of Executive Compensation, HLS FORUM ON CORPORATE GOVERNANCE (July 9, 2020), https://corpgov.law.harvard.edu/2020/07/09/proposed-sweeping-changes-to-the-taxation-of-executive-compensation/#more-131005.
[13] Paul Polman, A clampdown on corporate tax avoidance is coming. Companies should embrace it, FORTUNE (May 6, 2020), https://fortune.com/2020/05/26/corporate-tax-avoidance-business-leadership/.