How do corporations justify their (tax) conduct?

Many businesses faced bankruptcy due to the impact of the global pandemic. Thankfully, government support kept many companies and entire industries afloat. Whilst government support is often expected, especially in times of crisis, reciprocal expectations to contribute to the income underpinning such support is often heavily resisted. Such tensions have put corporate tax conduct in the spotlight. Unsurprisingly, justifications for why some large multinationals pay nil tax, does not go down well with most taxpayers[1]. But how have perceptions of what is considered a legitimate tax strategy shifted over time?

Our study, published in the Journal of Management Studies, demonstrated a shift in how corporates justify their tax conduct as legitimate. Up until the global financial crisis (GFC), the bar for legitimacy was set at the legal minimum standard. With the wave of scandals emerging from the leaking of tax-related information, such as Panama Papers and Luxleaks, public discontent mounted. For almost a decade, civil society groups[2] as well as professional service firms have warned the business sector that legality was no longer an acceptable bar in tax debates: a ‘tax morality controversy [had been] in the making’[3]. This controversy took centre stage in Australia between 2014 and 2018 when civil society groups published an expose on the tax affairs of the top 200 Australian Stock Exchange listed corporations. The accusations sparked immediate media attention and a public inquiry on corporate tax avoidance. We interviewed tax executives of Australian corporations as well as their external advisors during the inquiry.

Our contribution: ‘forecasted consensus’ shapes legitimacy debates

What is deemed legitimate has attracted much attention by scholars interested in corporate reputation, market entry and corporate conduct. Legitimacy refers to a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions (Suchman 1995). Scholars have identified multiple cues provided by a range of stakeholders (Bitektine and Haack, 2015), highlighting the conflicting expectations of appropriate business conduct between corporates, non-government organizations (NGOs) and government, for instance in environmental stewardship, minimum wage, etc.

The novelty of our study stems from employing the Economies of Worth framework (Boltanski and Thevenot, 2006) to analyse how debates on the legitimacy of tax strategies were evolving among tax strategists. Specifically, the framework provided the basis to unravel how competing expectations, and the relative stakeholders putting forward such expectations, were addressed in justifications of corporate tax conduct. Insights were generated from analysing 46 interviews, primarily with professionals in corporate tax as well as 82 voluntary submissions that corporations made to an official inquiry into corporate tax avoidance.

Our research found that, most practitioners and corporate submissions explicitly denied accusations of irresponsibility from marginal stakeholders and described these accusations as ‘uninformed’. However, corporate justifications also revealed the emerging need to transparently report tax affairs to legitimize organizations’ conduct vis-à-vis ‘all’ stakeholders, including the so called ‘uninformed’. These justifications signalled a forecasted consensus emerging among powerful stakeholders about what a legitimate tax conduct will look like in the future – a transparent disclosure of corporate tax affairs that could withstand public scrutiny. Even though tax transparency was resisted by almost all our interviewees and the corporate entities behind the submissions we analysed, through the spread of justifications among peers, regulators and media alike, these forecasts of the expected future consensus fed back into practitioners’ perceptions and ultimately modified their conduct. The Australian corporate sector moved from a few players embracing tax transparency to over 200 corporates publicly reporting their tax affairs as part of a newly implemented Tax Transparency Code[4], despite the voluntary nature of this code.

Implications for managers and responsibility debates

Our findings have two important implications for managers. First, managers should proactively seek to understand critique from the margin and its merits – rather than ignoring or dismissing such critique as irrelevant or uninformed. Such dismissal is often a costly mistake, with corporates finding themselves unprepared and out of touch with the shifting expectations of responsible conduct held by regulators, peers, consumers and the broader community. It puts corporates on the back-foot in responding and living up to such expectations.

Second, managers should be aware that corporate justifications and rhetoric has an impact in shaping the judgments of peers and eventually their own perceptions of legitimacy. Justifications are not just ‘cheap talk’. Rather, justifications impact the very companies that create and use them by shaping stakeholder expectations and perceptions of debates and pressures and ultimately, the moral values and practices that companies are held accountable for. Justifications are not only outward-facing impression management tools, but rather powerful inward-focused sensemaking devices that shape how managers and corporations perceive themselves, and ultimately act.

What does our case say about corporate taxation and other CSR issues

The Corporate Social Responsibility agenda now emphasizes a firms’ tax conduct, with taxation included in ESG reporting. Our study revealed the variation of justifications at play as corporates legitimize their social contributions by transparently reporting on tax paid. Australia has been a protagonist in the shift towards tax transparency. As our research shows[5] however, tax experts are clear about what this shift means: even if “information is publicly available […] at the end of the day it’s the legislation” that matters. Transparency has become the new test for legitimacy within the tax debate, yet legality still drives corporate tax decisions in practice. In fact, tax reports only show us discrete numbers of tax paid, as prescribed by legal requirements. They do not help us understand to what extent, when aggregated across the business sector, tax revenue enables governments to steward us through pandemics or recessions or natural disasters.

Tax transparency is certainly a step forward: it helps appease critics and the public, and has forced some companies to shift away from utilizing tax arrangements at the cusp of legality. However, tax transparency alone is not a reliable indicator of an equitable tax system[6]. We are witnessing a similar transparency wave across the business sector with reporting output, through discrete numbers (e.g., reduction in pollution), being conflated with responsible business conduct (e.g., contributing to the fight against climate change). We are also seeing an increase in whitewashing and ‘greenwashing’ in ESG reporting. We see a need to shift regulatory debates on responsibility from transparency as an end to transparency as a means. This opens a completely different exchange of critiques and justifications, and one that we believe is urgently needed in debates between practitioners and policy-makers.

[1] https://www.abc.net.au/news/2022-11-03/companies-that-paid-no-tax-ato-corporate-tax-transparency-covid/101607632

[2] https://catalogue.nla.gov.au/Record/6578361

[3] Why the tax controversy outlook looks set to become even more challenging. (2022). International Tax Review, Retrieved from http://ezproxy.library.usyd.edu.au/login?url=https://www.proquest.com/scholarly-journals/why-tax-controversy-outlook-looks-set-become-even/docview/2727508629/se-2

[4] https://www.ato.gov.au/Business/Large-business/Corporate-Tax-Transparency/Voluntary-Tax-Transparency-Code/

[5] https://onlinelibrary.wiley.com/doi/abs/10.1111/joms.12889

[6] https://www.commondreams.org/news/2021/07/07/top-economist-warns-15-global-minimum-tax-corporations-way-too-low