What do Apple and Virgin Australia have in common with Donald Trump? Spoiler: it’s not their charismatic leadership.

All three have – alongside a huge range of other companies and individuals – been accused of paying less in taxes than they should have. Whether or not this “makes them smart” or breaks the law, many people feel the practice shows businesses failing to meet their obligations to broader society.

Whether this is true or not depends on an important, subtle distinction between ‘tax planning’ and ‘tax avoidance’.

Responsible companies will seek to minimise their liability through good planning – making the most of the tools and mechanisms government provides: allowances, deductions, rebates and so on.

This is different from tax avoidance. Although legal, when financial instruments are exploited to provide tax advantages they weren’t designed to create, companies can obey the letter of the law while simultaneously undermining its spirit.

The behaviour can also be seen as aggressive – for instance, in the use of overseas tax havens.

Unlike tax evasion, avoiding tax and bending the rules of the tax system is not illegal. However, that doesn’t mean it’s entirely ethical.

Tax as a social responsibility

At a time when government spending cuts are having a real impact on the everyday lives of people, how can multinational corporations justify avoiding paying their fair share of taxes?

A 2015 survey by the Institute of Business Ethics and Ipsos MORI found the British public think tax avoidance is the most important ethics issue for business to address. Avoiding tax is avoiding a social obligation. In the UK, companies such as Apple, Starbucks and Amazon were vilified and boycotted for their tax policies. Tax avoidance can make a company vulnerable to accusations of greed and selfishness, damaging its reputation and destroying the public’s trust.

Paying a ‘fair’ amount of tax in the countries in which they operate is seen as the socially responsible thing for companies to do. Taxes provide the funds for public services such as healthcare, education and public investment in infrastructure – services that companies benefit from directly and indirectly.

Tax planning arrangements that go beyond the policy intent of the law and involve deliberate approaches to exploit the tax system are not ethical. It’s as simple as that.

For this reason, tax avoidance has been branded by some as an immoral and unethical practice that undermines the very integrity of the tax system.

However, company directors see their responsibility as being to maximise the value they deliver for their shareholders. This includes keeping tax costs to a legally permitted minimum. They might also point out the various other ways businesses contribute to the economy: employee and employer contributions, business rates, sales taxes and building sustainable businesses for employment.

Fairness

Remember, corporation tax is a tax on profits. If a company makes no profits, it can’t and shouldn’t be taxed on them. The issue is whether the profits are calculated correctly.  There’s a difference between sales and profits – a company might have high sales but still not be turning a profit. But in these cases we would be wise to question how those profits were calculated.

Tax policies should be underpinned by the guiding ethical principles of accountability, transparency and consistency. Tax planning arrangements that go beyond the policy intent of the law and involve deliberate approaches to exploit the tax system are not ethical. It’s as simple as that.

Rather than hiding behind the business case for tax avoidance, businesses need to be transparent about their tax planning.

The public expects businesses to pay their ‘fair share’ of tax but what is a ‘fair’ amount is subjective. What businesses most want out of a tax system is certainty – they want to know what their tax bills will be so they can plan their strategy and investments accordingly.

So if the tax planning industry were able to obtain official clearance for any new tax avoidance scheme, it would be able to operate with confidence that its activities were considered fair according to the standards of government. This would provide it with the confidence and foresight it requires, as well as helping give citizens a clear understanding of what measures are permitted and why.

Striking a balance

Arguments for and against tax avoidance are missing the point. Politically, it might be too difficult to argue that companies pay more tax, but government and business should ensure that corporate tax contributions make a fair return to society.

Rather than hiding behind ‘the business case for tax avoidance’, businesses need to be transparent about their tax planning. Both companies and government need to pay more attention to openly communicating their position on taxation and their interpretation of tax law. This would both restore public trust in business and provide more certainty for those trying to manage their tax requirements. 

Evidence from the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was not the first and won’t be the last revelations of unethical behaviour in business. In fact, it’s been a busy few years for anyone interested in business ethics.

We have seen the Panama Papers and Unaoil scandals play out, the muddied relationship between Clive Palmer and Queensland Nickel (who was in charge of the company, really?), managers falsely inflating earnings at Target and an admission of fraud by a senior manager at Seven Network.

Ethical issues involving accusations of dishonesty, bribery, corruption, fraud and theft are, sadly, never too far away from the news. Sometimes that ethical failure has an easily identifiable cause – someone who negligently steered a course into moral hazard or selfishly set out to do something they knew was wrong. It’s also easy to identify a solution: we deal with those people through education, punishment or both.

But what about those more commonplace ethical slip-ups – the ones that don’t fall into the #epicfail bucket or make headlines, at least not immediately? Where it’s not so easy to find a guilty person in need of punishment? It’s useful to think of these as instances of ethical drift – where an organisation unconsciously drifts away from its ethical True North.

How does ethical drift happen?

A big factor could simply be the way people communicate within an organisation. Ethical context, insight and commentary is easily lost in day-to-day business communications, and it can happen in a number of ways:

The ethical framework is nowhere to be seen

Most organisations have a mission statement about their purpose, values and principles, which is expected to provide the overall direction for the company. But this ethical framework is rarely localised or given the same status as other performance indicators. That makes it hard for people to stand back and assess if, for instance, a change management project is on track to reinforce the organisation’s values as well as meeting other objectives.

Emphasis on short time periods

Internal reporting is time-driven. The emphasis on monthly, quarterly or yearly figures makes it seem irrelevant to include commentary about longer term ethical symptoms or effects. As a result, the ethics of an activity are not assessed with the same regularity and urgency.

Managing up

Managers do manage up. As reports go up the line they narrow the focus of the reader and set the agenda for what might need to be understood. Such reports tend to leave out any information that might go against the usual approach or beliefs, be unclear or prompt questions. On one hand – fair enough. Who wants to get a management report and be confused? But the downside is that the reader might be being well managed toward a certain conclusion rather than being well informed.

The glut of communication

We are drowning in information, so wherever possible reporting is abbreviated and metricated. Qualitative assessments are expected to be backed by hard figures and compared against something – a benchmark, a previous period or a competitor’s results. Assessing whether an organisation is still heading in the right ethical direction isn’t something that lends itself to metrification. And if a report’s format doesn’t include a space for ethical insights, it sends a signal that it’s not important or welcome.

Misplaced emphasis on annual staff surveys

Whether an organisation is on course for its True North is often determined by an annual staff survey. Frequently, such surveys ask people to put a numerical score (say, one to 10) on how well their team lives the ethics of the organisation. This can act as a quick point-in-time morale check, but it hardly lets people question an organisation’s accepted norms. It takes an extra level of sophistication for an organisation to change its routine reporting to capture ethical insights and measures, and to put them on an equal footing with routine performance measures.

For organisations to function at their ethical best, they need to have proactive, fearless but humble debate. But it’s hard to foster debate in an environment where reporting tools are very narrowly defined and don’t link back to the organisation’s ethical framework.

Instead, organisations need a culture where questioning is not treated as a ‘gotcha’ opportunity. Where leaders welcome information that indicates all might not be simple and rosy. Where ambiguity creates interest rather than fear. And where numerically insignificant data or exceptions are not confused with ethical insignificance.

Does the dominant economic system of the Western world withstand moral scrutiny? Trevor Treharne asks leading moral philosophers and experts.

While economics are seldom discussed in directly ethical terms, it is through the spirit of moral inquiry that today’s capitalist societies were originally imagined.

Adam Smith, the 18th century thinker known as the father of modern economics and capitalism, was first and foremost a moral philosopher.

Smith’s famous metaphor of ‘the invisible hand’ attempted to describe the wider social benefits that result from individual actions. Capitalism was designed to be ethical, but is it?

The achievement of capitalism

Assuming society has certain obligations – the reduction of poverty, the improvement of health and the extension of human happiness – capitalism plays an important role.

“The best things about capitalism are its mind-boggling productivity and its exquisite sensitivity to what people want and need”, says John Bishop, a moral philosopher at Trent University in the UK and editor of the book Ethics and Capitalism.

Bishop argues that historically and globally, capitalism has caused the life expectancy of people to rise from about 28 years to over 70 years.

“Much of this has been through reducing infant and child mortality – a most ethical goal – and lifting hundreds of millions of people out of abject poverty.”

“Capitalism creates net new wealth on a scale the world has never before seen”, he says.

Harvard cognitive scientist Steven Pinker says that it’s hard to have an intelligent discussion about capitalism because too many people confuse “capitalism” with “unregulated capitalism with no social welfare”. Their criticisms have nothing to do with capitalism itself but about whether it’s a good idea for governments to regulate economic activity to provide social benefits. This is completely compatible with capitalism, as the capitalist economies of Scandinavia, Canada, and New Zealand prove.

“Putting aside that red herring, there are several advantages to capitalist economies, apart from generating wealth that makes rich and poor alike better off”, Pinker says.

“Countries that trade with each other are less likely to start wars with each other, because with effective markets it’s cheaper to buy things than to steal them.”

“Also, in a market economy, other people are more valuable to you alive than dead. All of this reduces some of the exploitative incentives of war and conquest”, Pinker adds.

The issues with capitalism

Bishop warns that capitalism has a tendency to distribute its benefits in an extremely unequal fashion.

“It also has the inability to value important things that do not have market value such as human dignity, caregiving, the climate, the environment, and people who have nothing to offer the market, such as children, the severely disabled, and the elderly”, he says.

Bishop says capitalism also fails to account for the needs of future generations.

“Given this, our ethical duty is to mitigate the harms and omissions of capitalism without serious disruption of its immense productivity and wealth creation.”

Simon Tormey, a political theorist at The University of Sydney, says the problems of capitalism depend on the governing system it operates within.

“What has tended historically to dictate which end of the [ethical] spectrum capitalism appears on is the ability of ordinary people to rein back capitalism’s excesses through the actions of the state on the one hand, and of social movements such as trade unions on the other”, he says.

“Countries with strong states and strong social movements are able to develop forms of capitalism that are quite ethical in this respect and Scandinavia would perhaps offer the most complete examples.”

“However, countries where there is authoritarian governance, where trade unions and other social movements are weak, are often characterised by a highly unethical and obnoxious form of capitalism that prays on individual weakness to generate profits for a small minority.”

Tormey adds that unfortunately much of the evidence of the past 40 years suggests a progressively slippery slope to domination by “the 1%” and thus to “unethical capitalism”.

Not perfect, but superior

Society is ordered by picking a preference from a series of competing systems, all of which flourish and flounder in varying degrees.

It is not sensible to overthrow a system such as capitalism on the mere basis of a few potential pitfalls.

But noting the issues can start a conversation about its reform or adaption.

“Is capitalism ethical? As compared to what?” asks moral philosopher Peter Singer.

“So far, none of the alternatives tried have done nearly as good a job as capitalism of keeping most of the population out of poverty and even providing them with a reasonable level of comfort.”

“Until we have evidence that there is another system that can do better, the sensible course seems to be to stick with capitalism and attempt to deal with its flaws rather than to abandon it”, Singer adds.