J Bus Ethics (2014) 124:173–184
DOI 10.1007/s10551-013-1862-4
The Curious Case of Corporate Tax Avoidance:
Is it Socially Irresponsible?
Grahame R. Dowling
Received: 6 February 2013 / Accepted: 2 August 2013 / Published online: 17 August 2013
Ó Springer Science+Business Media Dordrecht 2013
Abstract In contrast to many aspects of the social
responsibility of business, CSR scholarship has been lar-
gely silent on the issue of the payment of corporate tax.
This is curious because such tax payments are often con-
sidered a fundamental and easily measured example of a
company’s citizenship behavior. However, because the
payment of corporate tax can often be legally avoided, this
activity represents a boundary condition for CSR. If the law
and CSR suggest that a company should pay its fair share
of tax, yet many successful companies actively avoid this
social obligation, should they be considered socially irre-
sponsible. This paper explores the issue of tax avoidance
and the implications it has for any credible definition and
measure of CSR. It also highlights an aspect of corporate
practice that is deliberately hidden from public view.
Keywords Tax avoidance
Law
CSR
Business
ethics
Introduction
As the twenty-first century gathers pace the clamor for
business enterprises to be socially responsible shows no
sign of abating. In fact, a sophisticated corporate social
responsibility (CSR) industry has developed to research,
report about, offer advice, and sanction this endeavor. And
G. R. Dowling (&)
Marketing Discipline Group, University of Technology, Sydney,
Broadway, Ultimo, NSW 2007, Australia
e-mail: Grahame.Dowling@uts.edu.au
after the global financial crisis many commentators called
for more social responsibility to be delivered by Corporate
America. While movements like Occupy Wall Street had a
somewhat confused message about the reforms they wan-
ted, they made it clear that the current financial system did
not work for large sections of society. The overriding
sentiment was that many large corporations had let down
the government and major parts of the societies in which
they operate.
At the heart of this feeling is a debate about the nature of
the social responsibility of business. While most people
believe that companies should sell products and services
that people want, provide employment, make returns to
shareholders, and operate within the law, there is dis-
agreement about whether this range of activities should be
voluntarily expanded (Kemper and Martin 2010). Not-
withstanding these disagreements, most descriptions of
CSR and codes of good business conduct include the
requirement that corporations should abide by the laws of
the land in which they operate (e.g., Carroll 1979; Paine
et al. 2005). Some even suggest that companies exceed
their minimal legal requirements (Davis 1973; McWilliams
and Siegel 2001). But what does this boundary condition
really mean for the CSR activities of a corporation? Does it
mean that abiding by the letter of the law is not enough?
Must a company be seen to abide by some fuzzy notion of
the spirit of the law? For example, should it pay more tax
than it is required to? This paper explores this distinction
with respect to the payment of federal corporate income
tax.
Interest in the relationship between the tax paying
behavior of companies and CSR comes from two obser-
vations. The first was made by Christensen and Murphy
(2004) who note that most of the CSR industry has con-
sistently avoided the issue of the role of these payments in
123
174
the fulfillment of a company’s social responsibility. Also,
in other scholarly literatures such as accounting, econom-
ics, tax practice, and public policy (see for example, Bra-
ithwaite 2003; Erle et al. 2004; Schön 2008), corporate tax
paying behavior is seldom linked directly to CSR. It has
only been in recent years that this topic has come to public
prominence because of some parliamentary inquiries in the
UK and the US and investigative journalism in both
countries. Its global importance was signaled by being
included on the agendas of the G8 and G20 conferences in
2013.
The second observation is that the lack of discussion
about the nexus between the payment of corporate tax and
the socially responsible practices of companies exposes a
weakness in many definitions and measures of CSR. From
this perspective tax payments can be considered a clear
measure of the direct financial contribution a company
makes to an elected government. Because there are few
other such monetary measures of CSR available, it is
curious that so few scholars and advocates of CSR have
examined these transfer payments. While this is not an easy
task, scrutiny of corporate tax practices raises some
uncomfortable questions about the integrity of many defi-
nitions of CSR.
To frame the issues discussed here I pose the following
question. ‘‘If a company does not pay corporate tax on its
profits, should it be regarded as socially irresponsible?’’ As
noted below, the significance of this question emerges
because most of the money ‘‘lost’’ from tax avoidance is a
direct financial transfer from society to the company’s
shareholders. It is unclear how much of this money ulti-
mately enters the government’s revenue through the taxa-
tion of these individuals. And because tax avoidance is a
legal activity, it exposes the ambiguity of what is meant by
the simple statement that companies should ‘‘abide by the
law.’’ Here, we need to be clear about the distinction
between what is meant by abiding by the letter of the law
and the spirit of the law. This situation poses a challenge to
a crucial aspect of modern thinking about CSR and gov-
ernment fiscal and social policy (e.g., Carroll 1991, 1999;
Palazzo and Richter 2005).
The question of the social irresponsibility of business
stands regardless of the difficulty in estimating the tax
liability of corporations (Hanlon 2003). This difficulty
arises because the combined complexity of financial
reporting and tax law provides ample scope for tax plan-
ning arrangements that often result in multinational cor-
porations paying ‘‘only as much tax as the choose,’’ as one
European Union diplomat put it (Charlemagne 2013). Such
arrangements are often contested by the tax authorities and
have recently raised the ire of some social commentators.
The question also stands regardless of whether the non-
payment of tax is legal (termed tax avoidance and tax
123
G. R. Dowling
minimization1) or illegal (termed tax evasion). Hereafter I
use the single term tax avoidance because this is what the
authors of the cases reported below are focusing on.
Another motivation for this paper is that the widespread
practice of tax avoidance sits uncomfortably with much of
the moral rhetoric in many corporate codes of conduct and
pronouncements by advocates of social responsibility. What
is curious about this situation is that most of the web sites of
the companies noted below proudly proclaim their social
responsibility yet they have been found to actively avoid
paying corporate tax. While they presumably see no
hypocrisy in this behavior, even The Economist newspaper
has recently labeled the practice of massive tax avoidance as
‘‘inexcusable’’ (Charlemagne 2013). In contrast, the com-
panies and their professional tax advisers that actively avoid
tax see this activity as part of the financial responsibility of
the company (Erle et al. 2004). And as noted below, some
well-respected US companies are winning handsome
financial rewards from their expertise in avoiding tax.
In the next section I present evidence as to the state of
tax avoidance by major US companies. Following this I
focus on the relationship between tax payments and so-
called socially responsible corporate behavior.
The Corporate Tax Game2
Nearly all discussion of CSR suggests that companies
should abide by the law. Within the CSR context this
requirement can be interpreted in at least three ways. These
range across a spectrum of independence between the
notion of ‘‘abiding by the spirit of the law’’ and ‘‘abiding
by the letter of the law.’’ The chosen interpretation will
help to consider whether companies that avoid tax are
socially irresponsible. Consider the following options:
(A) There is a popular and political understanding of the
spirit of the law. Thus, if legislation stipulates that
companies are required to pay tax on their accounting
profits, then all profitable companies are expected to
pay such tax. The spirit of the law is that companies
owe a financial return to the State. The letter of the
law stipulates what are considered to be accounting
profits and the rate of tax payable on such profits.
(B) The letter of the law is contained in a statute and
various regulations. These are then interpreted by an
1
Tax minimization is defined as looking for ways to minimize the
tax bill in relation to transactions usually undertaken, whereas tax
avoidance is defined as transactions entered into solely for the
purpose of generating a tax benefit (Bowler 2009, Para. 2.5).
2
I use the word ‘‘game’’ for two reasons. First, tax specialists often
refer to their activities as ‘‘gaming the system.’’ Second, some
theories of tax evasion are couched in terms of game theory.
174
the fulfillment of a company’s social responsibility. Also,
in other scholarly literatures such as accounting, econom-
ics, tax practice, and public policy (see for example, Bra-
ithwaite 2003; Erle et al. 2004; Schön 2008), corporate tax
paying behavior is seldom linked directly to CSR. It has
only been in recent years that this topic has come to public
prominence because of some parliamentary inquiries in the
UK and the US and investigative journalism in both
countries. Its global importance was signaled by being
included on the agendas of the G8 and G20 conferences in
2013.
The second observation is that the lack of discussion
about the nexus between the payment of corporate tax and
the socially responsible practices of companies exposes a
weakness in many definitions and measures of CSR. From
this perspective tax payments can be considered a clear
measure of the direct financial contribution a company
makes to an elected government. Because there are few
other such monetary measures of CSR available, it is
curious that so few scholars and advocates of CSR have
examined these transfer payments. While this is not an easy
task, scrutiny of corporate tax practices raises some
uncomfortable questions about the integrity of many defi-
nitions of CSR.
To frame the issues discussed here I pose the following
question. ‘‘If a company does not pay corporate tax on its
profits, should it be regarded as socially irresponsible?’’ As
noted below, the significance of this question emerges
because most of the money ‘‘lost’’ from tax avoidance is a
direct financial transfer from society to the company’s
shareholders. It is unclear how much of this money ulti-
mately enters the government’s revenue through the taxa-
tion of these individuals. And because tax avoidance is a
legal activity, it exposes the ambiguity of what is meant by
the simple statement that companies should ‘‘abide by the
law.’’ Here, we need to be clear about the distinction
between what is meant by abiding by the letter of the law
and the spirit of the law. This situation poses a challenge to
a crucial aspect of modern thinking about CSR and gov-
ernment fiscal and social policy (e.g., Carroll 1991, 1999;
Palazzo and Richter 2005).
The question of the social irresponsibility of business
stands regardless of the difficulty in estimating the tax
liability of corporations (Hanlon 2003). This difficulty
arises because the combined complexity of financial
reporting and tax law provides ample scope for tax plan-
ning arrangements that often result in multinational cor-
porations paying ‘‘only as much tax as the choose,’’ as one
European Union diplomat put it (Charlemagne 2013). Such
arrangements are often contested by the tax authorities and
have recently raised the ire of some social commentators.
The question also stands regardless of whether the non-
payment of tax is legal (termed tax avoidance and tax
123
G. R. Dowling
minimization1) or illegal (termed tax evasion). Hereafter I
use the single term tax avoidance because this is what the
authors of the cases reported below are focusing on.
Another motivation for this paper is that the widespread
practice of tax avoidance sits uncomfortably with much of
the moral rhetoric in many corporate codes of conduct and
pronouncements by advocates of social responsibility. What
is curious about this situation is that most of the web sites of
the companies noted below proudly proclaim their social
responsibility yet they have been found to actively avoid
paying corporate tax. While they presumably see no
hypocrisy in this behavior, even The Economist newspaper
has recently labeled the practice of massive tax avoidance as
‘‘inexcusable’’ (Charlemagne 2013). In contrast, the com-
panies and their professional tax advisers that actively avoid
tax see this activity as part of the financial responsibility of
the company (Erle et al. 2004). And as noted below, some
well-respected US companies are winning handsome
financial rewards from their expertise in avoiding tax.
In the next section I present evidence as to the state of
tax avoidance by major US companies. Following this I
focus on the relationship between tax payments and so-
called socially responsible corporate behavior.
The Corporate Tax Game2
Nearly all discussion of CSR suggests that companies
should abide by the law. Within the CSR context this
requirement can be interpreted in at least three ways. These
range across a spectrum of independence between the
notion of ‘‘abiding by the spirit of the law’’ and ‘‘abiding
by the letter of the law.’’ The chosen interpretation will
help to consider whether companies that avoid tax are
socially irresponsible. Consider the following options:
(A) There is a popular and political understanding of the
spirit of the law. Thus, if legislation stipulates that
companies are required to pay tax on their accounting
profits, then all profitable companies are expected to
pay such tax. The spirit of the law is that companies
owe a financial return to the State. The letter of the
law stipulates what are considered to be accounting
profits and the rate of tax payable on such profits.
(B) The letter of the law is contained in a statute and
various regulations. These are then interpreted by an
1
Tax minimization is defined as looking for ways to minimize the
tax bill in relation to transactions usually undertaken, whereas tax
avoidance is defined as transactions entered into solely for the
purpose of generating a tax benefit (Bowler 2009, Para. 2.5).
2
I use the word ‘‘game’’ for two reasons. First, tax specialists often
refer to their activities as ‘‘gaming the system.’’ Second, some
theories of tax evasion are couched in terms of game theory.
The Curious Case of Corporate Tax Avoidance
agency such as the IRS in the US. This agency
divines the spirit of the law (i.e., its intention) from
its preamble, explanatory memoranda, and the set of
principles used to design the legislation. In the case
of corporate tax practice these are written for the
entities that are charged with administering and
complying with the law. It is a mistake to confound
this ‘‘spirit’’ with one based on contemporary popular
or political sentiment.
(C) There is no spirit of the law independent of the
language of the law. Both the spirit and intent are
bound together in the words used in the legislation.
When there are ambiguities in the language they will
be resolved by construing the plain meaning of the
words in the context of the law and by court
decisions.
Interpretation A can be grounded in social norm theory
which would suggest that tax avoidance is not considered
to be right and just from a general public point of view
because it imposes costs on society (e.g., Elster 1989). It
also captures the principle of ‘‘giving back.’’ Companies
have an obligation to structure their affairs in such a way as
not to avoid paying a ‘‘fair share’’ of tax on their profits to
the State. This behavior is guided by the ethics and moral
compass of the company and implemented through its
corporate governance principles. Here a fair share of tax is
defined by the statutory rate of tax at the time on a rea-
sonable estimate of the company’s profits, that is, its tax
base. What is considered to be ‘‘fair’’ may be conditioned
by the tax regime imposed on individuals and small busi-
nesses that have little room to legally avoid tax. What this
means in practice is that because most individuals can not
avoid tax many think that large companies should not be
allowed to do this. In essence, Interpretation A is social by
nature.
Interpretation B captures the principle of ‘‘negotiated
settlement.’’ Here, the company and the designated
administrative authority come to a series of agreements as
to what constitutes a fair tax burden. Settlements are on a
case-by-case basis and the settlement process is of a private
nature. Both these conditions have been the source of
disquiet with tax specialists, legal experts, and social
commentators. In essence, Interpretation B is political and
expedient by nature.
Interpretation C captures the principle of ‘‘taking from.’’
Here, the State is perceived to be extracting economic rents
from wealth producing corporate entities. Proponents of
this interpretation sometimes hark back to medieval times
when Monarchs and Churches extracted taxes from their
subjects to fund their nefarious activities. From this per-
spective tax avoidance is seen as a legitimate contest with
the authorities by any means available. In extreme cases
175
this leads to illegal tax evasion. In most cases it leads to
legal tax avoidance. What is a fair share of tax is defined by
the probability of being apprehended and the penalties for
avoidance or evasion. In essence, Interpretation C is legal
and game theoretic by nature.
Commentary in the popular press suggests that many
citizens and politicians consider that Interpretation A
should prevail. Here companies (and people) should pay
their fair share of tax so that these payments can help fund
the provision of public goods (schools, defense, health
care, etc.) and welfare. This position can be justified from
an ethical standpoint (McGee 2006; Preuss 2012). It is also
finding its way into various voluntary Codes of Corporate
Conduct. For example, after reviewing a variety of these
written by people who represent business and others who
represent different sectors of society, Paine et al. (2005)
found general agreement for the principle that companies
should pay tax. From all the codes surveyed the authors
then formed an overarching ‘‘codex’’—a set of governing
principles to guide business conduct. Included in their
citizenship principle is the statement that companies should
‘‘adhere to the letter and spirit of tax laws and make timely
payments of tax liabilities.’’
Interpretations B and C involve what is called ‘‘rules
lawyering’’ or ‘‘creative compliance’’ (Freedman 2010).
This involves exploiting the complexity, technicalities, and
loopholes in the law, which in the case of the UK and US
tax codes is considerable. Legal tax avoidance may also
involve what accountants politely call ‘‘creative tax
accounting’’ or ‘‘earnings management.’’ Here they exer-
cise their discretion over the accounting numbers without
violating generally accepted accounting principles. The
aim is to reduce to a minimum the company’s tax base.
A quote by a tax partner at one of the UK’s larger
accountancy firms sums up the essential nature of the game
of tax avoidance.
No matter what legislation is in place, the accountants
and lawyers will find a way around it. Rules are rules,
but rules are meant to be broken. (Finch 2004)
Tax avoidance is most prevalent among multinational
companies because their multiple locations allow them to
organize their affairs to realize profits in countries with the
most favorable tax regimes. Bowler (2009) notes that tax
avoidance occurs to the degree that it does because of the
complexity of the current tax legislation and administration
within a country and across the countries in which multi-
national companies operate. The key issue here is whether
the payment of tax should occur in the country where value
is created or the profit is actually earned or in the jurisdiction
that has the lowest tax rate. Social responsibility suggests the
former while financial responsibility suggests the latter.
123
176
Corporations that actively practice tax avoidance sub-
scribe to a view that different country tax rates are a form
of healthy competition among countries to attract multi-
national corporations. They also argue that tax is an
expense to be minimized. This is a fiduciary responsibility
to shareholders. Here, ‘‘fair share’’ means using all
allowable deductions to minimize the tax base by actively
organizing the company’s affairs to receive the maximum
deductions offered in various jurisdictions. This view of tax
liability runs counter to the view that tax should be paid
primarily where value is created or where transactions
occur. Under this interpretation a US multinational com-
pany should pay tax in the US as a return to the State for
the use and protection of its securities laws. The same
company should pay tax in the countries in which it
operates as recompense for the use of their public services.
However in practice, many US companies artificially
realize their profits overseas and then leave them there to
avoid paying tax in the US (Gongloff 2012).
The Cost of Tax Avoidance
By any estimate the corporate tax codes of many large
industrialized countries like the UK and US are extremely
complex. Adding to this is the complexity of cross-country
taxation agreements. Then there is the complexity of
modern accounting practice. Finally there is the private
nature of company negotiations with the tax authorities. In
combination, all these factors make it almost impossible
for a member of the general public to understand whether
or not a company pays its fair share of tax.
Within this regime there are five types of costs and
inefficiencies created when companies vigorously practice
tax avoidance. One is that as tax authorities try to counter
clever tax avoidance practices new regulations and opin-
ions get added to the tax code. While the aim of these is to
produce more certainty, the result is a more convoluted tax
system. This leads to the next issue, namely, that as cor-
porate compliance costs grow so do the administration
costs of the authorities. For example, the IRS has perma-
nent offices in two Hewlett-Packard facilities and has been
continually auditing H–P since 1962 (Gongloff 2012).
The legalized nature of tax avoidance encourages the
formation of two industries that are designed to exploit the
system. One is composed of lobbyists. The other is com-
posed of tax specialists who are often located inside large
corporations and accounting firms. For example, Sikka
(2004) reports that in 1 year Enron paid $88 million in fees
to its tax advisers to avoid paying $2 billion in US taxes.
The fifth cost is lost government revenue. Kocieniewski
(2011b) and Sikka (2003) estimate that tax avoidance costs
the US federal government between $50 and $170 billion
annually. Clausing (2011) reports estimates of $57–$90
123
G. R. Dowling
billion. Also, the US Congressional Research Service
(Keightley 2013) published a report showing evidence of
massive tax avoidance by US companies through the use of
tax havens. Because even the tax authorities have trouble
calculating the revenue lost to tax avoidance these numbers
must be regarded as speculative. Notwithstanding this
uncertainty there is widespread agreement in the business
and financial press that this amount is substantial. For
example, the Guardian and the Financial Times newspapers
in the UK have run a series of articles and blogs on this
issue, the overwhelming tone of which is negative. Thus
the public policy issue is that tax avoidance undermines the
tax base of the US and other countries where it is widely
practiced. To further characterize the nature of this prob-
lem the following information is informative.
Who Does not Pay Tax?
Most contemporary tax avoidance schemes are derived
from Stigliz’s (1985) basic principles of tax avoidance,
namely, the postponement of taxes, and tax arbitrage across
different types of income and tax entities. For many
modern multinational companies, these principles motivate
them to create what Kleinbard (2011) calls ‘‘stateless
income.’’ This is the movement of taxable income within a
multinational group from high-tax to low-tax countries
without shifting the location of externally supplied capital
or productive activities. In effect, profit is subject to tax in
a jurisdiction that is not directly related to where transac-
tions occur, value is created or where the company is
domiciled.
Some common practices for tax avoidance are offshore
tax sheltering, accounting manipulation, and legal obfus-
cation. Offshore tax sheltering (aka profit laundering, tax
arbitrage, and the use of tax havens) is the practice of using
artificial transactions to shift revenue to low-tax countries
while recognizing expenses in high-tax countries. For
example, eBay uses Luxembourg as a tax haven for its UK
operations (Moulds 2012). Accounting manipulation
involves practices like transfer pricing, charging royalties,
making administrative payments, and using revolving
short-term loans between head office and subsidiaries to
minimize profits. For example, on similar sales revenues in
the UK for 2010–2011, Costa paid an effective tax rate of
30.5 % while Starbucks rate was 0 % (Ebrahimi 2012).
Legal obfuscation is the practice of overwhelming the
authorities with complicated paperwork. For example, the
2009–2010 tax return of General Electric (GE) was 57,000
(electronic) pages in length (McCormack 2011).
One question is whether the companies cited above are
the exception or the rule? A report produced by McIntyre
et al. (2011) suggests that gross tax avoidance by US
companies is widespread. For example, they identified 78
The Curious Case of Corporate Tax Avoidance
profitable companies that paid zero federal income tax or
less in at least 1 year during the period 2008–2010. This
report stimulated the interest of a number of investigative
journalists. In 2011–2012 high-profile companies like
Amazon, Apple, Bank of America, Boeing, Cadbury,
Chevron, eBay, Exxon Mobil, Google, IKEA, Microsoft,
News Corporation, Hewlett-Packard, and Starbucks have
all received bad publicity about their tax practices. How-
ever, GE has been signaled out as the Poster Child of US
tax avoidance practice.
In a pivotal article published in The New York Times,
David Kocieniewski (2011a) highlights the skill with
which GE plays the tax avoidance game.3 Based on a
review of GE’s statutory company filings he reports that
during 2009–2010 GE made world-wide profits of $14.2
billion of which $5.1 billion was made in the US. After
submitting its 57,000 page tax return the company paid no
tax in the US. It also made a claim for a potential reduction
of its future tax liability of $3.2 billion. While Kocie-
niewski’s interpretation of these figures was not indepen-
dently verified, GE did not provide any other estimates to
counter them.
As subsequent news commentary about this episode
revealed (e.g., Helman 2011), GE achieved this position
through a wide variety of legal tax avoidance schemes. In
the business community GE’s tax department, which
employed 975 people at that time, gained a reputation for
being ‘‘the world’s best tax law firm’’ (Kocieniewski
2011a). Inside GE the tax department is the company’s best
performing profit center. During this period GE also paid
$41.8 million for lobbying and political campaign contri-
butions (Anderson et al. 2011).
Because large, well-respected companies are role mod-
els in the economy and society, and because the amounts of
money involved in tax avoidance are not trivial, this issue
speaks to the heart of modern notions of CSR. And the
sanctity of CSR is not helped by academic studies like the
one done by Prior et al. (2008) which found that companies
that engage in accounting practices to lower their tax base
were also more likely to use CSR activities to deflect the
attention and potential criticism of non-shareholders from
these accounting activities. Together, the results of these
and other similar investigations have surprised many pol-
iticians and members of the general public.
Who Does Pay Tax?
As one would expect most US companies do pay tax on
their profits. For example, McIntyre et al.’s (2011) study
found that of the 280 major US companies they studied
3
In April, 2012 he was awarded a Pulitzer Prize for this explanatory
journalism.
177
during 2008–2010 14 had a 3-year average effective tax
rate just above the statutory corporate rate of 35 %. In total
25 % had an effective tax rate of more than 30 %; 35 %
had a rate of between 17.5 and 30 %; and 40 % had a rate
of \17.5 %. In the top group were companies like Best
Buy, Harley-Davidson, Hershey, Home Depot, Humana,
Radio Shack, Sealed Air, St Jude Medical, and Walmart.
It is interesting to contrast GE’s record of tax payments
with those of the so-called ‘‘vice company’’ Altria Group,
previously known as Philip Morris. The company’s 2010
Responsibility Report notes that Altria paid excise tax
payments on the production for sale of cigarettes of $32.7
billion; a further $10.2 billion in other charges, and $1.4
billion of federal income tax (McIntyre et al. 2011).
Depending on how the calculations are made this amount
of corporate tax represents an effective tax rate of 26.2 %
(McIntyre et al. 2011) or 31.7 % (Altria corporate website)
in 2010. Few US companies make such a huge financial
contribution to government revenue. These figures, and
similar ones in the past, suggest that the government relies
heavily on direct corporate and ‘‘social’’ taxes from Altria
Group and the other vice companies.
Tax Payments and Social Reputation
The recent publicity about the tax practices of many large
corporations raises the interesting question of whether
these practices might affect the social reputations of the
companies exposed. Many CSR advocates would suggest
that it does or should. However, public relations people
might suggest that it will depend on what people know and
what they value. For example, for smokers Altria’s social
reputation might be considered to be good. For people who
are indifferent to smoking the tax payments of Altria might
offset some of the negative health effects of its products.
For non-smokers, no amount of financial restitution might
offset the health effects caused by tobacco. Similar com-
ments would apply to other vice companies. In the case of
GE many business people seem to agree with its behavior.
Also, many business academics would not consider that it
is socially unacceptable to legally minimize corporate tax.
The perspective here is that this is an issue of financial not
social responsibility. In effect, these two responsibilities
are deemed to be separate and should be neither con-
founded nor confused.
Reputation scholars believe that reputations are groun-
ded in what people know about an organization (Dowling
and Gardberg 2012). The tax issue here is informative. I
would venture to say that the tax payments of most big
companies are not widely known. The reasoning here is
that because companies tend to report their tax obligations
in obscure ways in their annual reports, as Hanlon (2003)
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178
illustrates it takes a tax expert to figure out what tax has
been, and is likely to be paid in any tax year. Also, while
many companies claim that they are transparent in their
values, Paine et al. (2005) found that most corporate codes
of conduct rarely discuss tax obligations.
Many companies like GE have done a good job of
deflecting attention away from some potentially negative
aspects of their social reputations by promoting other
aspects of it. For example, GE has launched a major pro-
gram called ‘‘ecomagination’’—described as ‘‘a commit-
ment to imagine and build innovative solutions to today’s
environmental challenges while driving economic growth’’
(GE website. Accessed 2 July 2013). This program has
been well publicized. It might now help to deflect attention
from the recent negative publicity about its tax affairs.
Definitions and Measures of CSR
An important research question linked to how people form
their social reputation of a company is how should CSR be
defined and measured? Devinney (2009) notes the confusion
in the scholarly literature about exactly what is meant by
CSR and its offspring corporate social performance (CSP).
Notwithstanding this confusion a key issue is whether
scholars, companies, and members of the general public
consider the payment of corporate tax as a fundamental
aspect of CSR. And if so, how would each group assess the
importance of this activity in relation to other aspects of
CSR? One way to assess these questions is to examine how
CSR is actually measured. Two commonly used measures
are illustrative. One assumes that people will not make trade-
offs across elements of CSR while the other assumes they do.
Given that both are used to assess the CSR profile of com-
panies and predict the responses of the same types of people
to these companies both are unlikely to be valid.
Consider the case of social investment funds. To be
included in such a fund the company must be perceived as
socially responsible. Thus, in order to avoid including a
company that is not socially responsible many fund man-
agers employ a non-compensatory approach that screens
out companies with clear socially undesirable attributes
from their social investment funds. For example, if a
company makes products or is involved in activities that
harm people it is excluded. A variation on this approach is
to include or exclude companies from a fund based on a
single surrogate indicator of corporate responsibility. For
example, a company might be automatically included if it
engages in philanthropy or automatically excluded if it is
involved in an environmental disaster.
Now consider the measure of CSP developed by KLD
Research & Analytics. This measure has become ‘‘the de
facto research standard’’ in scholarly research (Waddock
123
G. R. Dowling
2003, p. 369). It scores a company across seven different
social screens, each of which is composed of multiple
items where the company’s ‘‘strengths’’ and ‘‘concerns’’
in the area offset each other to form an overall score.
Researchers often combine these sub-scores (sum or
average) to provide an overall score of social perfor-
mance. In effect, CSP is measured here in a compensatory
manner.
What is noteworthy about these and most other measures
of CSR is that they are silent about the issues raised in this
paper. Neither the measures nor their underlying definitions
articulate which interpretation (A, B, or C) of abiding by the
law is operable, and whether or not the company is expected
to pay a fair share of tax on its profits. They are also silent
about the decision calculus used by people to form an overall
evaluation of social responsibility (Yani-de-Soriano et al.
2012). For these reasons I suggest that much of the scholarly
and public rhetoric about CSR conceptualizes it in terms of a
number of broad ranging citizenship behaviors but measures
these with some notable omissions.
To extend the examination of whether tax avoidance is
socially irresponsible I pursue four lines of inquiry, some
of which are outside the traditional domain of CSR
scholarship. The first focuses on the ethics and morals of
tax avoidance. The two terms are considered as synony-
mous in the corporate context. This line of inquiry turns out
to be unhelpful. The next is socio-economic in nature. Here
I outline many of the common arguments for and against
tax avoidance. This exposes some of the fundamental
contradictions about the social and financial roles of paying
corporate tax. The third is political in nature. It focuses on
tax avoidance as a political issue and a technical issue of
corporate law. The last line of inquiry is principles based.
Here the set of principles of a modern tax system is used to
highlight how the social responsibility or not of tax
avoidance hinges on which principles one adheres to.
The Morality of Tax Avoidance
The problem with assessing the tax paying behaviors of
companies through the lens of ethics and morality is that it
relies on a definition of CSR and the establishment of a set
of moral principles against which to judge this definition.
As noted earlier, the definitional landscape of CSR is a
morass. I would suggest that the landscape of moral rea-
soning is even more complex. Thus, it should not be a
surprise to discover that an analysis of the ethics of tax
avoidance illustrates how a persuasive case can be made
for or against this behavior, either from religious scriptures
or from the ethical theories of political philosophers
(McGee 2006). However, what is somewhat surprising is
the strength of the arguments that can be mounted for the
The Curious Case of Corporate Tax Avoidance
case that tax is legalized theft by a government and the case
that it is the rightful appropriation of funds to run an
elected government. This state of affairs suggests that there
is likely to be little agreement between the moral advocates
and opponents of tax avoidance.
Another perspective on tax morality is to consider
whether or not the two issues should be related. This line of
argument suggests that some people will consider the
payment of corporate tax as a moral issue (it is the right
thing to do) while others will see it as amoral (they are
unaware of, or indifferent to, or they separate it from right
or wrong), and still others will see it as immoral (they are
actively opposed to paying tax). This perspective suggests
that people who disapprove of tax avoidance think that this
is a moral issue because paying tax is the right thing to do
and because to do otherwise shifts the burden of tax from
companies to others. In contrast, many tax specialists and
multinational companies that practice tax avoidance sug-
gest that it is amoral. There is no morality in tax and no
immorality in tax avoidance. However, for those compa-
nies that practice illegal tax evasion this might be consid-
ered as immoral if one accepts the premise that the laws of
the land reflect the social norms of society.
Scanning the literature suggests that CSR advocates are
trying to use the basic moral principles of justice (and thus
fairness) and beneficence (helping yourself and others) to
frame many business issues. Tax avoidance fits neatly into
this genre. Recently this group has been aided and abetted
by the media who have reported corporate tax practice and
provided a platform to publicize the moral stance of some
groups about tax avoidance. If tax avoidance can be effec-
tively framed as immoral it may motivate governments to
restrict the various avenues available to its practitioners.
Within the business community there is resistance to
framing corporate tax and its avoidance as a moral issue.
For example, Will Morris the director of global tax policy
at GE and head of the Business and Industry Advisory
Committee lobby group recently framed the issue as one of
‘‘cross-border trade and investment.’’ Chas Roy-Chowdh-
ury, head of taxation at the Association of Chartered Cer-
tified Accountants framed tax as ‘‘another cost to the
business’’ and tax management as a part of competition
(Bergin 2013). These are amoral perspectives. The tug of
war between framing tax avoidance as a moral or amoral
issue may ultimately be determined by the revenue
requirements of various governments.
The Case Against Tax Avoidance: Social
Irresponsibility
Christensen (Christensen and Murphy 2004; Christensen
2011) argues that the payment of corporate tax is the area
179
where corporate citizenship is most tangible and most
important. He aggressively supports the view that paying
tax is a prime social responsibility of the modern corpo-
ration. His view is supported by others (e.g., Avi-Yonah
2008; Devinney 2009; Klinger et al. 2011; Lanis and
Richardson 2012; Paine et al. 2005; Preuss 2012; Sikka
2011). The tax legislation in some countries like Australia
also supports this view. It provides for the authorities to
determine if schemes or arrangements that are used are
substantive (i.e., they create business value) or whether
they are merely of a form to artificially lower the tax base
(Gilders et al. 2004). This type of provision is known as a
general anti-avoidance rule. It authorizes the tax authorities
and the courts to vault substance over form.
While the case against tax avoidance is based on various
combinations of the following ideas Devinney (2009) notes
that although they sound noble, they are often difficult to
operationalize.
1. If a company is viewed as an entity of the State with
certain privileges granted by the State (the ‘‘artificial
entity view’’ of the firm) then paying corporate tax is
one way of fulfilling its obligations to the State (Avi-
Yonah 2008).
2. If companies avoid paying tax then the State may not
have enough money to fulfill even its exclusive social
obligations (such as defense and the judiciary).
3. A company can not be deemed to practice an ethical
approach to doing business if it does not pay tax, and is
not transparent about its tax practices.
4. The non-payment of corporate tax shifts the tax burden
to other less mobile and often less well off tax payers.
Thus, it promotes social inequality and undermines
public confidence in the tax law.
5. Tax avoidance demands complexity and obfuscation to
avoid detection. Such non-transparent behavior can
easily hide managerial opportunism.
6. The tax havens and accounting schemes used by
companies to avoid tax are also used for corrupt
practices such as money laundering, hiding corruptly
obtained assets, and evading sanction.
Opponents of tax avoidance suggest that these argu-
ments provide a compelling case for government policy to
stop these practices. Yet so far this has not eventuated. It is
difficult to overturn an entrenched business practice and as
outlined next there are some persuasive arguments in favor
of tax avoidance.
The Case for Tax Avoidance: Financial Responsibility
Explanations and arguments that have been advanced for
tax avoidance are:
123
180
1. As the various cases noted above testify, it is hugely
profitable. And for big companies it is easy to do. For
example, there is a vigorous industry of tax advisers
who promote numerous schemes to avoid tax. Also,
because many other companies engage in this practice
any company that does not trades at a financial
discount to its peers. Finally, when executive managers
are paid in share options or are encouraged to own
shares in the corporation they have a personal incen-
tive to maximize after-tax profits. For example, Lanis
and Richardson (2011) have found a positive relation-
ship between the share ownership of board members
and the tax aggressiveness of their companies.
2. The payment of tax reduces the company’s wealth
generating activities and thus its ability to deliver some
of its basic corporate social responsibilities. For
example, it may employ fewer people and have less
money to invest in research and development.
3. There is a widespread social aversion to paying any
form of tax. This is evidenced by the fact that few
people pay more tax than they are required to even
though this is an option on the personal income tax
returns of some countries. These attitudes are consis-
tent with the hypothesis that the emotion of paying a
tax is negative while the emotion of giving a similar
amount is positive (e.g., Kahneman and Tversky
1979). Thus, the payment of tax is not viewed as
socially responsible in the way that other CSR
activities are. There is mixed empirical evidence about
this view (e.g., Davis et al. 2012; Lanis and Richardson
2011; Watson 2011).
4. If a company is viewed as an aggregate of its
individual members (the ‘‘aggregate’’ or ‘‘nexus of
contracts’’ view of the firm) then unless paying tax and
other forms of CSR contributes directly to the
economic viability of the company they are an
illegitimate attempt by managers to defraud share-
holders (Avi-Yonah 2008). This view of the firm was
made famous by Friedman (1970). It has since
received favor amongst many economic and corporate
governance academics.
5. The level of tax avoidance is a signal to government
not to abuse its monopoly tax raising power. Also, the
various statutory rates of tax are signals by countries of
their desire to host multinational companies.
In the scholarly literature, it is the nexus of contracts
view of the firm that provides most corporate governance
support for tax avoidance. Here tax is assumed to be an
expense, albeit one that is governed by a complex set of
laws and regulations that provide ample opportunity to
exploit. Thus, tax avoidance becomes a simple cost–benefit
calculation. The benefits are financial. The costs are
123
G. R. Dowling
potential damage to the company’s social reputation,
financial payments to advisers, internal administrative
costs, and penalties for violations (Erle et al. 2004).
However, there is a subtle problem with the logic of this
view. It is revealed by accounting convention in the Profit
& Loss statement reported in the annual report (Christen-
sen 2011). Here a company’s tax liability is shown after net
profit as a distribution to government just like the main
distributions to shareholders (dividends) and the company
(retained earnings). Thus, the financial accounts treat tax as
a social distribution, not a cost.
The next section explores further the issue of tax
avoidance as a political (public law) issue. I then develop
some principles against which tax avoidance can be judged.
Tax Avoidance as a Political Issue
Governments have the right to levy taxes. And for a host of
political and economic reasons most countries tax compa-
nies as well as labor and expenditure. Once this decision
has been made there is a political imperative for companies
to pay a ‘‘fair share’’ of tax, both in appearance and sub-
stance. The evidence of tax avoidance presented earlier
directly challenges the US and UK governments’ compe-
tence in claiming such a quantum of revenue and regulating
this mandated aspect of corporate behavior. This in turn
has prompted some politicians and social commentators to
proclaim immoral behavior on the part of the offending
companies. As noted earlier, the irony here is that this is a
problem largely of a government’s own making. It is hard
to find any politician, tax expert, or business person that
disagrees with the proposition that the current tax systems
of the US and the UK are far too complex for their own
good.
The complex jurisprudence (legislation, administration,
and compliance) of taxation reflects a mosaic of the poli-
cies and ideologies of successive governments designed to
build up the State and promote the public good. In this
context the anti-tax avoidance provisions embedded in this
system support revenue capture and reinforce these various
governments’ visions of society. Thus, tax law fits firmly
within the realm of politics. And tax avoidance is a direct
challenge to the host government of companies that prac-
tice this art form. Governments however have to be careful
how they respond to this challenge because in international
markets where companies can move freely, two responses
are evident. One is that companies organize their activities
so that realized losses occur in high-tax countries and
profits in low-tax countries. The other is that foreign gov-
ernments poach the tax paying companies of another
country. This is the political economy context that fosters
The Curious Case of Corporate Tax Avoidance
the use of many forms of tax avoidance and the estab-
lishment of tax havens.
The issue highlighted by the existence of international
tax avoidance schemes is that of ‘‘tax sovereignty,’’
namely, the ability of a government to use its tax law to
regulate companies and get them to help fund its social
objectives. Snape (2007) suggests that tax sovereignty
ultimately rests on the credibility of the government to set
appropriate rules for corporate taxation, administer the tax
system fairly and efficiently, and to spend revenues wisely.
Often there is disagreement between the State and Corpo-
rate America (Australia, Britain, Canada, etc.) about all the
elements of this trinity. It might well be that the level of tax
avoidance is a measure of the level of trust and confidence
in the tax system and the government. In a low-trust
environment it encourages the governors of corporations to
frame tax avoidance as a legal activity that is controlled in
contestable fashion, that is, Interpretations B and C earlier.
This framing discounts the social and political conse-
quences of tax avoidance.
The current tax environment presents politicians, tax
authorities, and companies with a political dilemma. While
companies and the authorities would be better off using a
low-cost, relationship style of engagement, neither side can
really trust the other not to shirk on their responsibilities.
However, it is unclear whether either the fear of financial
penalty from the tax authorities and reputation damage
from this exposure or the internal motivation to be seen as a
respectful member of society is sufficient to produce an
outcome where companies are seen to pay their fair share
of tax (Schön 2008). And when politicians enter the tax
debate, ideology tends to focus attention on the relative
burden of taxes among all tax paying entities (called ver-
tical equity) and the distribution from these taxes across
sectors of society. What joins these two party-political
issues is the question of ‘‘What is a company’s ‘fair share’
of tax?’’
One part of the answer to this question focuses on how
the tax base of a company is calculated. The calculation of
profit is governed by generally accepted accounting prin-
ciples and other specific abatements, incentives, and
deductions noted in the tax regulations of the time. This is
an opaque world that few people other than accountants
and tax experts understand. As such, it is largely ignored in
debates about fairness and compliance. Rather these
debates tend to focus on what is more visible, namely, the
government’s statutory rate of tax.
In any socio-political debate about the social responsi-
bility of tax avoidance the statutory rate of tax plays a
special role. It becomes a mental reference point against
which actual tax payments are evaluated. This reference
point can be considered as fair and equitable or the mini-
mum or maximum that should be paid. Which reference
181
point is chosen frames much of the discussion of tax
avoidance. For example, if the statutory rate is thought to
be fair and/or the minimum payable then any effective tax
rate less than this may be considered by some people as a
loss to society. Kahneman (2011, Chap. 28) suggests that
most members of society think that the exploitation of
market power (say by a large company) that imposes a loss
on others (by shifting the tax burden to other groups) will
be judged to be morally unacceptable.
As noted earlier, in practice few large US companies
pay at or above the current statutory rate of tax. This state
of affairs has arisen because of the active role of the tax
authorities. Through their negotiations with large compa-
nies, the use of litigation or the threat thereof, and the use
of no-fault penalties, they effectively determine whether a
company’s tax payments are fair. In a very complicated
environment this might be an efficient system. However, it
leaves the tax authorities open to being accused of setting
an inappropriate standard and/or abusing their power.
While companies can seek a direct remedy through the
courts for any such lapse, society can not.
As the proceeding discussion illustrates the question of
the social irresponsibility or otherwise of significant tax
avoidance is difficult to answer. This occurs because there
are conflicting points of view and it is problematic that all
the necessary information is readily available to politicians,
social commentators and many lay people. To try to bring
more structure to this debate I will outline a set of tax
principles that speak to the broad notion of tax avoidance.
Such principles can be used to help antagonists recognize
common ground and the fundamental aspects of their
disagreement.
A Principles-Based View of Tax Avoidance
The fact is that tax avoidance is a well-established practice
among most large corporations. To explore whether it
might be considered as socially irresponsible I examine
some tax design principles that underpin many modern tax
systems. These are also related to contemporary ideas
about CSR. From a legal standpoint these principles are the
intuitive parliamentary intention of a State’s tax legislation
as understood by someone familiar with the context of
business taxation. They are statements about the intended
outcomes of the legislation. Their aim is to guide taxpay-
ers, governments, tax authorities and CSR scholars and
practitioners.
Within a legal context these principles are not meant to
introduce any moral element into tax law (Freedman 2010),
however, in the context of CSR avoiding any moral eval-
uation is almost impossible to achieve. Their interpretation
also provides an interesting window into the tension
123
182 G. R. Dowling

between Interpretations A, B, and C of the letter and the
spirit of the tax law. They are described in Table 1.
The origin of the principles-based approach to examin-
ing and designing tax systems is credited to Smith (1776).
His ‘‘cannons of taxation’’ for an ideal tax system were
fourfold, namely, proportionality (i.e., people should con-
tribute in proportion to their respective abilities), certainty
(tax payments should not be arbitrary), convenience of
payment, and efficiency (economy in collection). Alley and
Bentley (2005) note that the number of times these prin-
ciples are referred to by tax scholars suggests that they are
still relevant today. They have also been expanded to
accommodate the contemporary political environment. For
example, the tax system should not diminish economic
efficiency; it should be transparent and easy to understand;
it should be fair in its procedures, and it should promote
economic welfare by dealing with externalities which arise
when people or organizations do not take account of the
effects of their actions on others (Mirrlees 2011).
Principles 1–6 and 10 have a positive social responsi-
bility theme; number 9 is counter to these, while principles
7 and 8 focus on efficiency. The tension between principle
9 and the pro-social principles hinges on whether a mul-
tinational company should exercise its current option to
effectively pay the amount of tax it chooses. This choice
focuses attention on the issue of whether corporate tax is
largely at the discretion of the company or whether it is a
State responsibility to collect what it deems to be its ‘‘fair
share.’’ In the latter case it puts responsibly back on the
State to redesign its corporate tax system to make it more
efficient and effective. In the former case it requires many
large companies to state if corporate tax is a prime deliv-
erable of their CSR.
The ten principles also highlight the issue of how they
might be combined to provide a framework to guide the tax
paying behavior of companies. Also, should they be used
by the tax authorities? Should some be given more
importance than others? If so, does this depend on the
current circumstances of the company, the economy, or the
country? In the field of scholarship the issue is if and how
they might be used to redefine CSR and develop better
measures of the construct. More research is needed to
explore these issues.
What seems evident at this stage is that the value laden
nature of the principles will trigger some interesting dis-
cussion about tax avoidance. What is also interesting is
whether the recent public scrutiny by the fourth estate will
have any meaningful affect on the tax avoidance practices

Table 1 Common tax principles

Principle Explanation/policy outcome Relationship to CSR

1. Revenue adequacy It is a fundamental prerogative of the State to raise Because companies rely on these services, they
revenue through taxation to fund public services should pay tax to support their provision
2. Jurisdiction Parliament has decreed that companies pay tax on Thus, paying corporate tax is not contestable
their profits
3. Ability-to-pay Companies are taxed on their profit This social contribution will not put the survival of
the company at risk
4. Sovereignty A company earns taxable income where it creates Company tax should be shared among the countries
and captures value and where it is domiciled in which it relies on public services and
institutions to support its operations
5. Vertical equity While most of the overall tax burden falls on labor Every profitable company should pay its ‘fair share’
and consumers, some should fall on companies of tax
earning resource rents
6. Horizontal equity Companies earning the same amount of profit should When some companies choose to practice tax
pay the same amount of tax avoidance they pose an unfair burden on other tax
payers
7. Certainty The tax system should provide a degree of revenue Uncertainty undermines the revenue contribution
certainty for government and cost certainty for from business to government
business planning
8. Simplicity and The tax system should be as simple and transparent Complexity increases administrative and
transparency as possible compliance costs, and fosters avoidance
9. Tax avoidance Every company is entitled to order its affairs so that There is no obligation to forsake legal opportunities
it minimizes the amount of tax paid under the laws to minimize tax irrespective of the social return
of the land such tax might provide to the State
10. Tax evasion No company is entitled to deliberately violate the Breaking the law is prima facie evidence of poor
tax laws and regulations corporate citizenship
Primary Sources European Commission, Directorate—General Taxation and Customs Union, General Tax Principles (2004), Australian
Government Treasury—Principles for Business Tax Reform (2012), Alley and Bentley (2005), Mirrlees (2011), Duhigg and Kocieniewski (2012)

123
The Curious Case of Corporate Tax Avoidance
of companies or the behavior of the tax authorities. To date
there is some tentative evidence that negative publicity
surrounding corporate social behavior such as tax avoid-
ance may result in reputation damage and a change in the
behavior of the companies involved (e.g., Bednar et al.
2013).
Conclusions
Devinney (2009) suggests that companies will never be
truly socially responsible by even the narrowest definitions
of CSR. The reason is that they have many tradeoffs to
make and these will never be Pareto optimal in the social
domain. Tax avoidance is one such trade off. The thesis of
this paper is that by examining tradeoffs like this it is
possible to test some of the foundational assumptions and
boundary conditions of CSR. Here, the assumption is that
all companies should abide by the law, and the boundary
condition is where CSR theorists and practitioners would
draw the line between the ‘‘spirit’’ and the ‘‘letter’’ of the
tax law.
One reason why tax avoidance has not been on the main
agenda of CSR scholars is that it is a background issue in
stakeholder theory which is one of the primary theories
underpinning this field of scholarship. For example, most
advocates of stakeholder theory suggest that the three most
important groups are employees, customers, and investors.
Across these three groups tax avoidance has a positive
outcome because there is more money available to support
low prices, pay employees more, and make the company
more profitable.
However, when the number of important stakeholders is
expanded to six groups, competitors, suppliers, and the
public are generally added to the list (Paine et al. 2005).
Now the general public’s interest must be considered
against that of the other groups. However, even this per-
spective seems too narrow. What the various bailouts that
occurred as a result of the global financial crisis demon-
strated is that government is also a primary stakeholder of
Corporate-America, etc. Hence, if scholars are prepared to
shift the State from the background to the foreground in the
stakeholder—CSR debate then issues like tax avoidance
will attract more scrutiny.
The aim of this paper is not to resolve the issue of the
social responsibility of tax avoidance but to start a debate
in the mainstream business ethics literature about the fun-
damental assumptions and boundary conditions of CSR.
For example, do advocates of CSR really want companies
to blindly adhere to government policy? Or is there a
legitimate role for companies to challenge the social
agenda of elected governments? From this perspective
personal and corporate tax avoidance can be framed as a
183
form of civil disobedience. An alternative perspective is
that tax avoidance is a form of anti-democratic behavior.
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