What ‘tax responsibility’ might look like in the real world

In my conversations with tax executives from multinational businesses, I’m used to hearing them talk about the decision any business makes about how aggressive its tax positioning is going to be. The position advanced by many campaigners is that a socially responsible business will make a conscious decision to be at the less aggressive end of this spectrum. The savvier campaigners try to make a business case for this, as well as an ethical one.

The tricky part comes is in clarifying what ‘responsible’ looks like. I’ve never met a tax executive who will admit that her company chooses to take a more aggressive position than others, and yet I’m sure some do. All companies are able to put out vague statements about compliance with this and cooperation with that, but I’ve never read one where I could conclude from it that particular examples of tax planning schemes would be ruled out. So if campaigners want to paint a picture of a responsible business that would require behaviour change from some companies, they need to find some concrete statements at policy level that act as a litmus test.

(Yes, I understand that many in the tax profession think this discussion is a poor substitute for fixing the law to eliminate companies’ discretion and tax enforcement by the mob…I’m not getting into that today!)

On this subject, a great paper has popped up in the journal ‘Management Accounting Research’, by a Danish researcher called Christian Plesner Rossing. It’s a study of an unnamed European multinational, referred to as ‘Global’, which appears to have formulated a tax policy that consciously changes it towards a more risk-averse position. The paper also discusses the role the policy plays in helping the tax department do its job, defined largely as risk management. Transfer pricing is a tricky area, in part because it quickly becomes so complex that senior executives struggle to supervise the transfer pricing manager effectively, and in part because the process of adjusting internal transactions can have a negative impact on the performance metrics of different parts of the group.

I hoped that the clear statement of intent to be ‘conservative’, rather than to be ‘somewhere in the middle of the spectrum’ as most companies tend to say, might lead to some clear indicators of what conservative looks like. Let’s see.

Reputation risk

According to the new policy document, the company’s aim in formulating the policy was as follows:

‘[Global] does not want its tax affairs to appear in the public domain. [Global] will manage its compliance affairs to minimize the risk of any public comment’.

Now I’m sure any company would want to minimise this risk, but this company seems to have prioritised this, as explained by the transfer pricing manager:

We will avoid [transfer pricing] penalties and we will not be on the front page – that is one hundred per cent sure.

Wanting to be one hundred percent sure would surely mean adopting a very conservative approach. More conservative than, say, Vodafone, whose tax code of conduct states:

It is not appropriate for the details of the Group’s tax affairs to appear in the public domain. Vodafone will however only enter into transactions which would be fully justifiable should they become public.

Adjustment risk

The ‘Global’ tax strategy document goes on to say:

All positions taken in the tax returns must be supportable and, on the balance of probability, be more likely than not to be agreed by the appropriate tax authority…The tax department will aim to have no adjustments to the tax returns…Group Tax will take a conservative position in respect of the tax charge in the accounts’.

Now, an aim of having no adjustments, if the tax department is assessed in this way, would surely preclude taking more aggressive transfer pricing positions that come with a risk – all be it a manageable one – of adjustment.

In contrast, Vodafone’s policy, which also invokes ‘more likely than not’, goes on to add the caveat that

there are instances in which a filing position will not meet the more likely than not standard but would still be tenable…[such as] Where there are current uncertainties or opportunities created by recognised errors in law not yet corrected.

I wonder how these two apparently different positions would apply in a developing country where the law and enforcement are weak. It’s clear that firms take liberties in countries without effective transfer pricing enforcement that would not pass the ‘more likely than not’ test, and would lead to adjustments, if they were properly investigated. That explains why, just a couple of years after Kenya began transfer pricing audits in earnest, it chalked up ten major adjustments of multinational firms.


Finally, the policy adds:

All transactions must have a business purpose. All decisions in [Global] must be based on the underlying business and not on internal tax sub optimization. The Group will not undertake nor accept purely tax driven transactions.

This sounds welcome, but hardly radical. Most companies seem to feel comfortable saying this, and my guess is that, while there are plenty of examples of purely tax-driven artificial transactions, most tax planning in a multinational firm also has some kind of underlying substance. Vodafone’s policy says the same thing, and gives quite some detail on how it defines artificiality.


We might possibly conclude two ways to start to define a more ‘responsible’ policy on the basis of this rather quick analysis:

  1. Less risk (vis a vis both the media and tax authorities) is entertained, which means that more conservative positions are taken. (It’s interesting that ActionAid’s tax responsibility guide doesn’t say this, it just states that the level of appetite for risk should be articulated).
  2. Risk is assessed in the same way in countries with weaker legislation and enforcement as it is in countries where it is stronger, so that deficiencies in these areas do not lead to a more aggressive position being taken because it is less likely to be challenged.