The national bargain – the broad agreement between citizens and governments that taxation is a fair exchange for the provision of public services – is only maintained if the public trusts governments to deliver accordingly. Yet trust in public institutions is low. The 2023 Global accountancy trust survey, conducted by Edelman DXI found that trust in government in the UK is just 27% – its lowest level since 2016. 

So, who does the British public trust most to act ethically? It’s not NGOs (47%) or the media (37%), but business and business leaders. According to the survey, 50% of respondents rank business as their most trusted institution, with CEOs now expected to engage on a range of social and environmental issues. However, it is less clear whether this trust extends to the relationship between businesses and taxation. What can businesses do to demonstrate their commitment to upholding their part of the national bargain in the countries and communities in which they operate?

Towards transparency

“Looking at tax reporting through an ESG lens has the potential to tell a more holistic and relevant story about a business’s purpose, thereby building trust,” say PwC tax policy experts Edwin Visser and William Morris. “As a result, we are increasingly seeing investors looking at how businesses manage their tax affairs as an early indicator of how they might manage other aspects of the ESG agenda.”

Investors may be sceptical, however. For some businesses, a commitment to tax reporting may simply be yet another marketing tool to boost ESG credentials. And for those firms who do have good intentions, the complexity and political sensitivity of global tax architecture may mean any movement toward tax transparency gives investors and other stakeholders more questions than answers.

“Serious businesses are keen on doing the right thing, but because taxes are siloed between countries, doing the right thing and being ethical quite often relates to their home country first and foremost,” says Martin Wheatcroft, ICAEW fellow and advisor. “They are less uncomfortable taking tax revenues away from other countries through legitimate tax planning techniques. It is difficult with the haphazardly designed tax systems around the world. Quite often, it isn’t clear what the right thing to do is. Businesses will unsurprisingly take the route that pays less tax – and that opens them up to criticism.” 

“Corporations are liable to pay tax at source,” adds Peter Dietsch, professor in philosophy at the University of Victoria, Canada. “But they’re able to shift profits to other countries. Structurally, this is exactly like putting money in a foreign bank account, but it’s not illegal when businesses do it. This is problematic because it allows multi-national companies to subtract themselves from the national bargain and our idea of justice.” 

The ability of large global companies to move their profits around the world in search of lower taxes – while local businesses pay much higher effective tax rates – has been a big driver in the introduction of a global minimum corporate tax rate, which may go some way to solving these problems. The Organisation for Economic Cooperation and Development (OECD) issued final guidance for governments on how to bring the reform into law in February 2023, with aims to roll out the project in 2024. Legislation on implementing the minimum rate has already begun in the UK, EU member states, Japan and South Korea. 

Under current proposals, nearly 140 countries will introduce an effective minimum tax rate of 15% on multinational companies by committing to a top-up tax on profits falling below that effective tax rate. However, critics point to the limited scope of the project. The rules would apply to companies and groups making €750m in sales globally – currently around 1,000 organisations. 

Delivering on expectations

The delicate balancing act between attracting and maintaining global business, while also ensuring that the tax system is viewed as ‘fair’ by society, is a challenging path for governments across the globe to navigate.

“The tricky thing with corporate tax competition is that the interests of states are not aligned. After the financial crisis, nation states agreed that nobody wanted wealthy individuals evading tax, so they agreed on more tax transparency and we’re making progress on that,” says Dietsch.

“When it comes to corporations, interests are not aligned. Big countries don’t want to close down profit sharing if it leads to companies leaving and jobs ending. Smaller nations and tax havens want to keep the revenue they receive. It’s much harder to get any real agreement on this.” 

Such political paralysis means little progress has been made in tackling corporate tax avoidance in recent years. In fact, the inaction has meant corporate profit-shifting has continued to grow. It’s in stark contrast with the attitudes of society – the Institute of Business Ethics has found that corporate tax avoidance has been the number one issue that the public wants businesses to address for more than ten consecutive years. 

The hope is that the ongoing push towards tax transparency and forms of ESG reporting will continue to steer companies towards ethical decision-making that benefits all stakeholders, truly putting purpose at the heart of corporate activity. And it may be necessary if business is to maintain its position as society’s most trusted institution and fulfil its role in the national bargain.