Case Study

In the United Kingdom in recent years, the tax affairs of large multinational corporations have been in the headlines and under public scrutiny.  Although the companies involved have argued that their offshore tax management is legal, often using complex structures registering companies in markets where tax rates are much lower, there has been a strong negative public and political reaction.

For some of these companies there has been a high reputational cost, with questioning of their style of management and lack of transparency. This, together with rising attention to the tax affairs of companies operating in developing economies, has led to corporation tax being a feature on the G8 agenda, with a particular focus on transparency.

In this situation, the business issue may be to maximise profit by utilising any potential tax loopholes – that could be deemed legal tax avoidance. However, such decisions need to be viewed in a wider context in relation to stakeholder trust and perceived fairness and impact on wider society – the ethical consideration.

This too can have longer term impact on the business. In October 2015 G20 finance ministers endorsed reforms to the international tax system for curbing avoidance by multinational companies.

Issues of tax avoidance and tax evasion are addressed in F1 Financial Reporting and Taxation. The case study shows that decisions on tax should be considered in light of the long term impact of the decision as well as how a decision could be viewed. Always consider the consequences of an action or non-action.

As you progress through your exams, you will need to be able to show that you are able to view scenarios using an “ethical lens”, in effect being aware of any potential threats or "red flags" to the longer term business.

Return to ethical issues in exams

What is striking is that change is happening, and fast, as the demand for greater transparency and fairness extends globally and accelerates. For example, for citizens everywhere - in Africa, in G8 countries and across the globe – current tax practices are raising questions about fairness, social justice, and citizenship. And many governments are becoming increasingly concerned that the erosion of their tax bases will undermine the social contract between citizens and states.

Kofi Annan Past Secretary General of the United Nations, in making the case to the G8 in June 2013 on Tax Avoidance