Tax avoidance: the missing link in business & human rights?
Mauricio Lazala, Deputy Director, Business & Human Rights Resource Centre
A version of this article will appear in FEE's publication "Tax Policy: A Matter for Society as a Whole", available on www.fee.be in Spring 2015.
Recently, I participated in the annual sustainability forum of a global food & beverage company that is highly regarded for its social responsibility policies. The Chairman confidently spoke about their progress on land-grabbings, freedom of association, and access to water. But when somebody mentioned tax avoidance as a human rights issue, he retorted that it was the first time he had heard “tax” and “human rights” mentioned in the same phrase. While the last 15 years have seen a fast-paced increase in businesses’ awareness towards their human rights responsibilities, the same cannot be said about recognising tax avoidance as a key corporate responsibility issue, and much less as a fundamental human rights issue.
Despite that, in recent times much has been written about allegations of large-scale tax evasion by corporations, using loopholes, tax havens and lack of government regulation to deprive societies, North & South, of billions of dollars in taxes and royalties. But what is still not widely recognised is that these practices deprive developing countries from the resources necessary to deliver human rights to their populations.
NGOs have been trying to draw attention to the link. Action Aid, Tax Justice Network, Christian Aid, and Oxfam, among others, have researched and campaigned on the link between avoiding paying a fair share of taxes and the deprivation of essential revenues needed in order to deliver on basic services such as health, education, housing, access to water and other human rights. It has also been repeatedly reported that global South countries lose much more money to tax evasion and illicit financial flows than what they receive in international aid; by some estimates, countries lose three times more to tax havens than they receive in aid; others say shifting profits to jurisdictions where taxes are lower or non-existent “robbed developing countries of $4.7 trillion, which is nearly six times the amount of official development assistance they received during the same period.”
While there have been important advances, a large number of companies still fail to disclose the tax and royalties they pay in each country.
How do companies do this? There are a host of different methods. It is important to note that although a lot is lost to illegal tax evasion, more is lost to “legal” tax avoidance and aggressive tax minimization tactics. Methods include non-payment of taxes through agreements with governments, subsidies, loopholes, tax havens, creative accounting practices, “transfer-pricing”, and others. And though these methods are usually legal under national laws, concerns are raised about whether aggressive tax planning complies with international standards; in particular, with the obligation of companies to respect human rights under the UN Guiding Principles on Business & Human Rights (“UN GPs”), endorsed by the UN Human Rights Council in 2011 and supported by businesses around the world.
The UN GPs set out a global standard of expected conduct for all business enterprises wherever they operate:
“…business enterprises have responsibility to respect human rights, also in their business relations, which requires them to:
(a) Avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; and
(b) Seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”
Nobody questions that businesses are important partners in the fight against poverty, but they also have the responsibility to respect human rights throughout their operations. Business enterprises - including tax advisors, accountancy firms, law firms 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. Due diligence is required by the UN GPs.
A recent report from the International Bar Association entitled “Tax Abuses, Poverty and Human Rights” makes the case for framing corporate tax abuse as a human rights issue. The report says that transfer (mis-)pricing; negotiation of tax holidays; (non-)taxation of natural resources; 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 fulfil internationally recognized human rights.
As the body of literature and campaigns making the link between tax avoidance and human rights grows, so does the heat that some companies are feeling. To give just two recent examples:
- A September 2014 University of Manchester study found that South Africa’s diamond industry is benefitting from royalty and export tax structures “riddled with loopholes, shortchanging citizens of one of the world’s premier sources of diamonds of tens of millions of dollars a year in revenue.” The report states that the main beneficiary of a system tilted in industry’s favour is De Beers. De Beers responded saying the report fails to recognise their economic contribution to South Africa, which “goes well beyond our tax obligations including R6.1bn in taxes between 2008-2012”.
- This is a global phenomenon that also affects rich countries: a July 2014 Guardian report alleges that restaurant group Nando's uses a battery of offshore techniques to legally reduce its UK corporation tax bill by up to a third. Nando's refuted the claims. Similar allegations have been raised in the UK against Starbucks, Google, Amazon, and others. The UK Government published in March 2014 a proposal for new international rules to address cross-border business structures or finance transactions and a disclosure scheme for international tax schemes, in the context of its ongoing work with G20 and OECD countries.
The issue of tax avoidance has been high on the agenda at recent G8 and G20 summits, but little concrete action has come out of these events. Multi-stakeholder initiatives have been set up to deal with aspects of the problem, such as the Extractive Industries Transparency Initiative (EITI), a coalition of governments, companies and civil society working “to improve openness and accountable management of revenues from natural resources.”
Some companies have taken an actively progressive approach in this area, which proves that much more can be done in this area even before civil society manages to force government to close loopholes and eliminate tax havens. For example, the Co-operative Bank said: “One of the most effective ways that businesses can contribute to poverty reduction is to pay income tax in developing countries.” Publish What You Pay, an NGO, praised Rio Tinto in 2009 for voluntarily disclosing, for the first time, the total tax and royalty payments that it makes to 13 of the countries where it operates.
While there have been important advances, a large number of companies still fail to disclose the tax and royalties they pay in each country. Much more action is needed by governments, individually and collectively, to address tax avoidance through improved laws and enforcement. But companies are responsible for their own tax practices, and they can take corrective actions now, if they are serious about their human rights commitments.
 Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, UN Doc. A/HRC/17/31, par. 11.
 See report, related materials and De Beers response here: https://business-humanrights.org/en/so-africa-rough-and-polished-report-alleges-tax-avoidance-by-diamond-mining-companies-de-beers-denies-claim