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Smoke and Mirrors: Corporate Social

Responsibility and Tax Avoidance

Article in Accounting Forum · September 2010

DOI: 10.1016/j.accfor.2010.05.002

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 Essex Business School

SMOKE AND MIRRORS: CORPORATE SOCIAL RESPONSIBILITY

AND TAX AVOIDANCE

Prem Sikka
University of Essex, UK

Address for correspondence

Prem Sikka
Centre for Global Accountability
University of Essex
Colchester
Essex CO4 3SQ, UK

E-mail: prems@essex.ac.uk
Internet: www.aabaglobal.org

April, 2010

1
 SMOKE AND MIRRORS: CORPORATE SOCIAL RESPONSIBILITY AND
TAX AVOIDANCE

Abstract
The bourgeoning corporate social responsibility literature has paid little
attention to organised tax avoidance by companies even though it has real
consequences for the life chances of millions of people. Companies legitimise
their social credentials by making promises of responsible and ethical
conduct, but organisational culture and practices have not necessarily been
aligned with publicly espoused claims. This paper draws attention to the gaps
between corporate talk, decisions and action, or what may be characterised
as organised hypocrisy. Its persistence can become a liability and threaten
the welfare of the company, its employees and its executives. The paper
provides examples to show how companies, including major accountancy
firms, make promises of responsible conduct, but indulge in tax avoidance
and evasion. It also shows that the exposure of contradictions between talk
and action has yielded negative outcomes.

Keywords: Tax Avoidance, Corporate Social Responsibility, Hypocrisy

2
 SMOKE AND MIRRORS: CORPORATE SOCIAL RESPONSIBILITY AND
TAX AVOIDANCE

1. Introduction
Recent years have seen a considerable increase in the variety and volume of
literature on corporate social responsibility (CSR) (for example, see Cooper,
2004; Demirag, 2005; Frederick, 2006; Hawkins, 2006; Henderson, 2001;
Solomon, 2007; Vogel, 2005; Werther Jr. and Chandler, 2005). This literature
is informed by a variety of theoretical perspectives and seeks to address
issues about governance, economics, accountability, ethics, futures of
capitalism, sustainability and ultimately the survival of the planet and the
human race. As a result, we have a richer appreciation of the possibilities and
limitations of addressing ecological, employment, investment, power, politics,
gender and a variety of social problems.

The concept of CSR is broader than simple compliance with law. Social
history is littered with laws which permitted slavery, discrimination, abuse of
women, children and workers, but their shortcomings have been contested on
moral, ethical, accountability, human rights and other grounds. In the same
traditions CSR is frequently associated with promises of ethical and socially
responsible conduct by businesses and its scope is increasingly being
broadened. Sustainability, a non-governmental organisation (NGO) notes that

―Tax is the latest issue to emerge as part of a more thorough review of

the economic impacts that companies have. It has become the subject
of greater attention with a variety of stakeholder groups actively
reviewing the approach that companies take to their tax policies and
planning. … With the growing involvement of governments, the media,
non-governmental organisations (NGOs) and even religious groups,
the issue is being transformed from a narrow technical discussion for
specialists to one which is directly relevant to corporate responsibility‖
(Sustainability, 2006, p. 2).

Increasingly, pressure groups and non-governmental organisations are

highlighting the disparities between corporate claims of social responsibility

3
and their practice of avoiding taxes1 which disable the capacity of
governments to provide education, healthcare, security, pensions, clean
water, or redistribute wealth to eradicate poverty, and provide a peaceful and
equitable society (Oxfam, 2000; Christian-Aid, 2004, 2005, 2008a, 2008b.
2009; Action-Aid, 2008, 2009). However, comparatively little scholarly
attention is paid to the payment of democratically agreed taxes (Christensen
and Murphy, 2004); even though the payment of taxes is central to any notion
of responsible citizenship and claims of social responsibility are part of the
politics that enable the dominant class to advance its hegemony through
consent rather than brute force. The links between CSR and tax avoidance
may be neglected possibly because other than the standardised accounting
information2 ―companies rarely volunteer any detailed responses on tax
issues … [there is] paucity of information released by companies on their
taxation plans …‖ (Citigroup, 2006, p. 4 and 20), and ―it is rare for big
business to see the payment of taxes as an explicit social duty‖ (The
Guardian3, 14 February 2009).

Major corporations increasingly produce brochures and reports containing

promises of socially responsible conduct, but this has also been accompanied
by large scale tax avoidance and evasion. The revenues lost are large and
capable of making a difference to the quality of life for millions of people The
US Treasury estimates that it may be losing over $345 billion each year due to

1
There are perennial debates about the meaning and significance of ‗tax
avoidance‘ and ‗tax evasion‘. Generally, tax avoidance is considered to be
lawful and tax evasion is used to describe practices that contravene the law.
However, in practice the distinction is no so clear-cut. The promoters of some
strategies have described their schemes are ‗avoidance‘, but when
subsequently scrutinised and challenged in the courts they have been found
to be ‗evasion‘. On occasions, companies have structured transactions which
have little or no economic substance, but enable them to reduce their tax
liabilities. On moral and ethical grounds, such schemes have been considered
to be unacceptable (Christian-Aid, 2008a, 2008b, 2009), especially as the loss
of tax revenues has negative effect on the provision of public goods, security,
alleviation of poverty and social stability.
2
This is required by law (e.g. UK Companies Act 2006) and accounting
standards (e.g. IAS 12).
3
http://www.guardian.co.uk/business/2009/feb/14/tax-avoidance; accessed
17 Mar 2009.
4
a variety of tax avoidance/evasion schemes (US Treasury, 2009). A US
government report estimated that nearly 66% of the domestic and 68% of
foreign corporations did not pay any federal corporate taxes during the period
1998 to 2005 (US Government Accountability Office, 2008). In 2005, 28% of
large foreign companies, with sales in excess of $50 million and assets over
$250 million, generated gross revenues of $372 billion, but paid no federal
corporate taxes. The same study noted that 25% of the largest US companies
had gross sales of over $1.1 trillion but paid no corporate taxes.

The UK corporation tax rate has been reduced from 52% (prior to 1983) to
30% in 1999 and further down to 28% in 2008, but tax avoidance remains
rampant. A UK government report estimates that some £40 billion of tax
revenue is lost each year (HM Revenue and Customs, 2010) though other
models and leaked government papers estimate it to be over £100 billion
(Sunday Times, 4 June 2006; Lyssiotou et al., 2004). A UK government report
showed that for the year 2005-2006, 220 of the 700 biggest companies paid
no corporation tax and a further 210 companies paid less than £10 million
each (National Audit Office, 2007) and 12 of the UK's largest companies
extinguished all liabilities in 2005-2006 and scores more claimed tax losses
(The Guardian, 31 January 2009).

Developing countries, often some of the poorest, receive around $120 billion
in foreign-aid (The Guardian 30 March 2009) from G20 countries, but are
estimated to be losing between $858 billion and $1 trillion through illicit
financial outflows each year, mainly to western countries (Kar and Cartwright-
Smith, 2008). Around $500 billion is estimated to be lost through a variety of
tax avoidance schemes (Baker, 2005; Cobham, 2005), of which some $365
billion is attributed to transfer pricing practices that shift profits from
developing to developed countries (Christian-Aid, 2009). An OECD official4
has estimated that Africa alone may be losing amounts equivalent to between

4
A statement by Jeffrey Owens (director of the Centre for Tax Policy
Administration at the Organisation for Economic Cooperation and
Development) on 28 November 2008; available at
http://www.reuters.com/article/latestCrisis/idUSLS349361; accessed 20 March
2009.
5
7% and 8% of its GDP, around $250 billion each year, through tax avoidance
schemes. Such resources could be used to improve social infrastructure and
quality of life for millions of people.

Arguably, the payment of taxes provide a litmus test for corporate claims of
social responsibility as it involves transfers of wealth and contrived avoidance
cannot easily be reconciled with claims of ethical business conduct. It
highlights tensions between corporate objective of maximising profits for
shareholders and meeting their obligations to pay democratically agreed
taxes. The persistence of tax avoidance and evasion draws attention to
organised hypocrisy which may be understood as the gaps between the
corporate talk, decisions and action (Brunsson, 1989, 2003). In a conflict
environment, companies and their executives appease diverse audiences by
adopting double standards, or say one thing but do something entirely
different. Hypocrisy is not the unintentional outcome of corporate culture.
Rather it is actively produced within particular social and organisational
contexts and reflects tensions between publicly espoused goals to meet social
expectations and the failure to align organisational values, norms and
practices with the espoused aims and goals (Weaver, 2008). Consequently,
―two organizational structures evolve. One is the formal organization, which
obeys the institutional norms and which can easily be adapted to new
fashions or law, literally by a few strokes of a pen ... second type is generally
referred to as an ―informal‖ organization. … Organizations can also produce
double standards or double talk; i.e. keep different ideologies for external and
internal use. The way management presents the organization and its goals to
the outside world need not agree with the signals conveyed to the workforce‖
(Brunsson, 1989, p. 7). Thus companies may excel at talking about social
responsibility, but at the same time devise schemes to avoid/evade taxes.

This paper encourages research into the taxation aspects of corporate social
responsibility because the revenues can make a difference to the quality of
life of millions of people. It shows that there are considerable disparities
between corporate claims of responsible and ethical conduct and their
practices of avoiding and evading taxes. It shows that corporate hypocrisy is
6
the outcome of systemic and organisational pressures to maximise profits and
financial rewards for company executives. This paper is organised into three
further sections. The next section offers a framework for exploring the
systemic, social and organisational pressures that result in the production of
soothing statements on social responsibility alongside internal practices,
rituals and routines that deviate from the claims presented to external
audiences. The second section provides extracts from a number of corporate
responsibility statements and contrasts them with their practice of avoiding
taxes. The final section reflects upon the evidence and its calls for research
which could help to align corporate practices with social expectations.

2. A Perspective on CSR and Taxation

In the contemporary world, taxes are generally levied on profits, wages and
investment income, which largely depend upon the activities of the private
sector. All creation of wealth requires co-operation of a variety of competing
capitals. Shareholders provide finance capital, employees provide human
capital and the state on behalf of society provides social capital in the shape
of education, healthcare, transport, security, legal system, subsidies and
support for corporations, and public goods. Each capital expects to receive
the requisite return on its investment. Shareholders receive return in the form
of dividends, employees in the form of wages and salaries, and the state 5
collects return on social capital in the form of taxes to enable it to finance a
particular kind of social order. However, in societies marked by class, age,
gender, income, wealth and other antagonisms, the allocation of returns is
highly contested. Markets exert pressure on companies to generate ever
increasing profits and returns as capitalism does not provide any guide to
upper limits of accumulation. Companies can generate returns for finance
capital, or add shareholder value, not only through competitive advantage on
products and services, but also by diluting the returns available to other forms

5
Since the state is the creator of corporations and grantor of all their
privileges, it has every right, on behalf of the wider society, to impose
obligations on companies, including the obligation to pay taxes.

7
of capital. In this context, finding ways of reducing tax payments has become
a fair game, even if that erodes the state‘s capacity to provide social stability
conducive to smoother accumulation of economic surpluses. Company
directors enjoy considerable autonomy to appropriate economic surpluses for
shareholders. They are expected to create ―systems designed to ensure that
the corporation obeys applicable laws, including tax …‖ (OECD, 2004, p. 58),
but their discretion to pay democratically agreed taxes and maximise social
welfare, is severely constrained by ideologies that preclude corporations from
voluntarily embracing policies which subordinate shareholder interests to the
advancement of collective social welfare (Friedman, 1962). Such priorities are
often legitimised by legislation. For example, Section 172 of the UK
Companies Act 2006 requires directors to promote the long-term success of
the company for the good of the shareholders as a whole, and in that process
have regard for the interests of other stakeholders (e.g. the environment,
customers, suppliers, employees, community).

Since some are inclined to endorse tax avoidance with the claims that
company directors‘ prime legal responsibility is to promote the success of the
company for the benefit of the shareholders and their interests must somehow
override the interests of other stakeholders (Henderson, 2001; KPMG, 2007),
it is appropriate to scrutinise such claims. There are no laws which require
directors to specifically increase profits by avoiding taxes, or by eroding return
on the investment of social capital. Indeed, directors‘ discretion is constrained
by many laws (e.g. health and safety, minimum wage, environment) and
social norms though they have considerable choices about the manner in
which profits might be increased. They are not bound by any shareholder
mandate and expected to exercise independent judgement, use reasonable
care, skill and diligence in pursuit of corporate objectives (Section 173 and
174 of the UK Companies Act 2006). Company directors are appointed and
removed by shareholders, but do not owe a ‗duty of care‘ to any individual
shareholder6. Their ‗duty of care‘ is to the company as a whole and applies to
shareholders, only to the extent of investment held in the company, i.e. it is a

6
This position was established by the UK House of Lords judgement in
Caparo Industries plc v Dickman [1990] 2 AC 605.
8
relationship with capital rather than with any individual per se. Shareholders
can pass resolutions at annual general meetings to constrain directors, but
such resolutions are advisory only and are not necessarily binding on
company directors (for further discussion see Wild and Weinstein, 2009).
Shareholder wealth maximisation is an idealised standard of conduct for
company directors rather than a legal mandate7. Thus directors have
considerable autonomy from interference by individual shareholders in the
day-to-day operations, unless specifically constrained by law or the
constitution of company. Directors can use their discretion to make investment
and other decisions, ranging from purchase of private executive jets,
corporate hospitality, locating production in low cost countries and using
complex tax avoidance schemes to increase corporate earnings. For the long-
term success of the company, directors ―are expected to take due regard of,
and deal fairly with, other stakeholder interests including those of employees,
creditors, customers, suppliers and local communities‖ (OECD, 2004, p. 58).
The pursuit of profits requires directors to balance the interests of a variety of
stakeholders, including obligation to pay taxes to the state and society. The
use of strategies for tax avoidance/evasion is primarily a matter of executive
discretion rather than any legal or moral compulsion. This discretion may also
be used to enrich directors since their remuneration is influenced by the level
of profits and returns to shareholders (Bender, 2004). Thus they have
economic incentives to increase profits even if that entails reducing the
payment of taxes. The successful executives are rewarded with status, social
accolades, higher salaries, bonuses and share options. In this context,
shareholder may even welcome a high degree of compliance with tax laws as
vigilance by the state guards against malfeasance by directors and the
possibility that some irregular activities may be discovered.

Corporate discretion on increasing profits through tax avoidance has been

enhanced by intensification of globalisation. In integrated markets,

7
The US case of Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W.
668. (Mich.1919) is ―often misread or mistaught as setting a legal rule of
shareholder wealth maximization. This was not and is not the law‖
(Henderson, 2007, p. 34).
9
corporations do not have to uproot and relocate their operations to take
advantage of taxation arbitrage as most countries have accepted the principle
that ―legal persons could reside concomitantly in a number of jurisdictions‖
(Palan, 2002, p. 172). The universal acceptance of this principle has enabled
businesses to shop for the best bundles of tax obligations that they can find8.
Such a search is not constrained by public claims of social responsibility
because ultimately corporations have ―no intrinsic commitment to product, to
place, to country, or to type of economic activity. The commitment is to the
accumulation of capital. Therefore, the capitalist will shift locus of economic
engagement (product, place, country, type of activity) as shifts occur in the
opportunities to maximize revenues from undertaking‖ (Wallerstein, 1996, p.
89). Many companies have extended their options by establishing residences
in microstates9 (often known as tax havens) and so as to take advantage of
the diverse menu of taxation choices. One survey estimated that 99% of the
European quoted companies have operations in tax havens, which levy low
taxes and offer secrecy to enable corporations to avoid taxes in other
jurisdictions (Tax Justice Network, 2009).

8
A number of low/no tax jurisdictions (often known as tax havens) offering
secrecy and low regulation have sprung up. These often lack natural, human,
military and technical resources and are at the periphery of global economy.
Some have used their sovereignty to offer favourable laws and entice capital
to create employment and economic activity (Sikka, 2003).
9
An International Business Company/Corporation (IBC) is often the preferred
vehicle for this. It is established in accordance with the laws of offshore
jurisdictions, such as Bahamas, Belize, British Virgin Islands, Gibraltar, Jersey
and Seychelles. Typically, by paying annual registration fees, an IBC enables
the company (which could a global multinational company) to secure
exemption from local corporate taxes on the profits booked there as long as
the company does not engage in any local business. Belize sells its facilities
by stating that a ―Belize IBC is a tax-free and exchange control-free Limited
Liability Company, incorporated under the laws of Belize. However all its
profit-earning activities must be conducted outside Belize … Because there
are no minimum capital requirements, no need for audited accounts, no
annual returns, no requirement for a local director or secretary and no
requirement for an annual general meeting, the costs of maintaining a Belize
IBC are kept to a minimum‖ (http://www.offshorepedia.com/some-basic-
characteristics-of-an-international-business-company-ibc-in-belize; accessed
16 May 2010). In recent years, the concept of IBC has received considerable
scrutiny from the European Union and the Organisation for Economic Co-
operation and Development.

10
Tax avoidance is generally pursued away from the glare of public scrutiny and
company financial reports are mostly silent on the issues. An open declaration
to avoid taxes amounts to a direct challenge to the authority of the state and
the social bargain struck by parliament to levy taxes. Under the weight of
public expectations the state could respond by punitive actions and rigorous
enforcement. A declared intention to avoid taxes also risks alienating citizens
who dutifully pay their taxes. Such alienation and the surrounding media
publicity and scrutiny by non-governmental organisations (NGOs) could lead
to loss of public legitimacy and damage a company‘s ability to accumulate
profits. Companies manage environmental turbulence and threats to their
reputation by publishing CSR statements and codes of conduct that promise
ethical behaviour, improvement of economic and social infrastructure and
quality of life of all stakeholders10 (Phillips, 2003). With increasing
commodification of life, ethics too have become a big business activity and
battalions of consultants and public relations experts are available to advise
businesses on ways of putting gloss on their policies and image (Neimark,
1995). The CSR statements may symbolically satisfy the diverse demands
from a critical external environment, but rarely empower stakeholders to
shape corporate decisions or provide means of monitoring compliance with
the promised policies. More crucially, the talk of ethical conduct does not
stymie the systemic pressures to produce ever rising profits and the executive
quest for higher financial rewards. Even if one organisation restrains itself, the
superior profits of a competitor exert pressure to explore ways of matching or
exceeding that. Thus the tendency to increase profits through avoidance of
taxes remains embedded within the social system.

The development of performance related pay has been accompanied by the

intensification of an industry that advises businesses on strategies for
avoiding taxes. Accountants, lawyers and financial services experts not only
provide novel interpretations of law and technical skills to enable some to

10
There is some evidence to suggest that companies in the eye of a public
storm are more likely to make grander promises of responsible conduct
(Salterbaxter, 2008).
11
avoid taxes, they also legitimise vocabularies and discourses that seek to
normalise avoidance of taxes. For example, in traditional accounting literature
returns to providers of financial capital (e.g. dividends) are portrayed as
rewards, and something that must be maximised. In contrast, returns to social
capital (e.g. taxation) are assigned to negative spaces and defined as ‗costs‘,
or burdens, and the contemporary economic logic dictates that they should be
reduced or even eliminated. As an Ernst & Young partner put it, ―Companies
are constantly looking to save costs, and tax is a major cost‖ (New York
Times11, 7 April 2009). This ideology portrays tax as a transfer from
shareholders to the state rather than a return to society on the investment of
social capital and thus regards avoidance of taxes as a normal and
commonsensical business practice.

Accounting firms are also capitalist enterprises in their own right and cannot
buck the systemic pressures to increase their own profits and must, therefore,
constantly develop new tax avoidance schemes and find new clients (Sikka
and Hampton, 2005; Sikka, 2008). Within accounting firms the organisational
culture socialises employees ―on being commercial and on performing a
service for the customer rather than on being public spirited on behalf of either
the public or the state‖ (Hanlon, 1994, p. 150). Through appeals to
professional codes of ethics accountants may disarm critics, but the talk is not
easily translated into action. For example, following its investigation into the
marketing of tax avoidance schemes the US Senate Committee on
Permanent Investigations concluded that

―respected professional firms are spending substantial resources,

forming alliances, and developing the internal and external
infrastructure necessary to design, market, and implement hundreds of
complex tax shelters, some of which are illegal … They are now big
business, assigned to talented professionals at the top of their fields
and able to draw upon the vast resources and reputations of the
country‘s largest accounting firms, law firms, investment advisory firms,
and banks‖ (US Senate Permanent Subcommittee on Investigations,
2003, pp. 1-2 and 5).

11
http://www.nytimes.com/2009/04/08/business/global/08tax.html?pagewante
d=1&_r=1&sq=tax&st=nyt&scp=2; accessed 7 April 2009.
12
The above highlights the inconsistencies or decoupling of organisational talk,
decisions and action which manifests itself in hypocrisy. It emphasises the
gaps between the promises to act responsibly, the promises which implicitly
also apply to pay democratically agreed taxes, and deliberate corporate
practices to avoid taxes. Since talk and action may not easily be reconciled
corporations develop dual strategies to manage conflict. Codes of conduct
and statements of responsible and ethical behaviour are used as strategic
resources to mould public opinion and shield the business from a hostile
external environment. Such codes symbolise conformity with public
expectations and create a buffer and enable the internal organisation to
function with comparatively few obstacles. The responses to external
pressures may, however, be inappropriate for accomplishing daily routines
and technical tasks (Meyer and Rowan, 1977). To accomplish tasks,
organisations may be decentralised and staff may not share the ideals of the
executives and thus high sounding statements may not be acted upon.
Companies may also be divided into departments, divisions and sub units and
each may be assigned production or revenue generating targets, which
conflict with the publicly espoused goals. Similarly companies may draw upon
the dominant organisational ideas of the time and create tax departments and
the efficiency of employees within these units may be measured by reductions
in corporate tax liability. Specialist tax departments not only facilitate
compliance with the law, but also develop or purchase strategies for reducing
tax payments. Employees are trained to pursue organisational targets and
their performance is regularly assessed through internal reports. The
successful ones are rewarded with career advancement. In time, certain
habits and practices become normalised and tax avoidance becomes just
another part of daily organisational life. Since internal routines cannot easily
be reconciled with external pressures, organisations adopt decoupled
responses. As the responses are decoupled they do not interfere with each
other. Companies can continue to publish high sounding statements of social
responsibility whilst at the same time internal routines are geared to tax
avoidance. The hypocrisy is not an accidental or unintentional outcome, but
rather it is the intentional outcome of policies deliberately chosen and
implemented by corporate executives.
13
The persistence of organised hypocrisy is a double-edged sword and can
become a liability. Its maintenance requires constant resources to bolster the
appearance of responsiveness through revised codes of conduct, media
interventions and nods to increasingly vigilant NGOs (Weaver, 2008). This
reinforces expectations that corporations will deliver the promised conduct,
but management may be constrained by systemic pressures, or may make
little effort to align organisational routines and culture with external
expectations. The tensions may remain hidden, but there is always the
possibility that disgruntled employees, NGOs, investigative journalists,
whistleblowers and powers of the state may expose the contradictions and
provide negative publicity leading to loss of legitimacy and revenue earning
opportunities. At this point, rather than a resource for social legitimacy,
hypocrisy becomes a liability and can threaten the survival and welfare of the
company and its executives. Management may respond by aligning corporate
culture, goals, practices and mindsets of staff and executives with social
expectations through investment of financial, human, political, psychological
and ideological resources. Such initiatives may be thwarted by organisational
politics and entrenched interests, as well as systemic pressures to report
higher profits, and management may once again devote resources to
constructing hypocrisy, albeit in a revised form.

3. Corporate Social Responsibility and Taxation Practices

This section draws attention to a number of cases where the organisations

concerned had pledged to behave ethically and in a socially responsible way,
but simultaneously indulged in tax avoidance, and in some cases tax evasion.
The cases relate to major organisations from the field of energy,
telecommunications, finance, mining and retail trade. Major accountancy firms
are also included because as significant capitalist enterprises they too are
subject to pressures to increase profits and have chosen to do so by
facilitating tax avoidance. All of the entities discussed in this section claim to
be observing the highest standards of ethics and responsibility, and there is
no reason to doubt the applicability of these claims to the payment of taxes.
14
This section does not rely on a statistical sample in any positivistic sense
because companies rarely provide information about their tax avoidance and
evasion strategies and therefore the size of the appropriate populations
cannot be determined in any meaningful way. Rather it uses cases to illustrate
the gaps and contradictions between corporate talk, decisions and action to
problematise the claims of social responsibility. It relies on episodes that have
been brought to public attention by parliamentary committees, courts,
regulators, and investigative journalists, all of which are ascribed a certain
kind of hardness by contemporary standards of evidence.

The demise of Enron drew attention to the gap between corporate talk,
decisions and action. Enron, the largest US energy company and ranked
seventh on the Fortune 500 list of the country‘s largest companies for 2001,
boasted a 64 page Code of Ethics which stated that

―We are dedicated to conducting business according to all applicable

local and international laws and regulations, including, but not limited
to, the US Foreign Corrupt Practices Act, and with the highest
professional and ethical standards. …officers and employees of the
company are responsible for conducting the business affairs of the
Company in accordance with all applicable laws and in a moral and
honest manner. … Employees of Enron Corp, its subsidiaries and its
affiliated companies [collectively the Company] are charged with
conducting their business affairs in accordance with the highest ethical
standards … ‖ (Werther Jr. and Chandler, 2005, p. 70, 92).

The company‘s talk enabled it to win a number of awards, including Financial

Times‘ ―Boldest Successful Investment Decision‖ award in 2000 and Fortune
magazine‘s ―America‘s Most Innovative Company‖ award for six consecutive
years from1996 to 2001.

In late 2001, under the weight of frauds by senior management, Enron

collapsed and the gaps between its talk and action came to public attention
(Powers Jr., Troubh and Winokur Jr., 2002). An investigation by the US
Senate Joint Committee on Taxation tried to pick through Enron‘s tax affairs
and stated that for the period 1996 to 1999 the company reported net income
of $2.3 billion, but it claimed tax losses of $3 billion. For year 2000, Enron

15
reported financial statement net income of $1.0 billion and taxable income of
$3.1 billion, subject to utilisation of tax losses brought forward (US Senate
Joint Committee on Taxation, 2003). Between 1996 and 2000, despite profits
Enron received US federal tax rebates (Financial Times, 19 March 2002). In
2000 alone, Enron‘s top five executives received remuneration of $282.7
million (Forbes, 22 March 2002). Despite a code of ethics, Enron‘s financial
statements made no mention of any of its tax avoidance schemes.

The US Senate report found that with advice from Arthur Andersen, Citigroup,
Deloitte & Touche, Chase Manhattan, Deutsche Bank, JP Morgan Chase,
Merrill Lynch, Bankers Trust and several major law firms Enron operated
through a labyrinth of domestic and foreign subsidiaries and affiliates to
structure transactions and avoid taxes at home and abroad (US Senate Joint
Committee on Taxation, 2003). This included entities in Cayman Islands12, a
tax haven that did not levy corporate taxes. Many of Enron‘s transactions had
no economic substance and were designed to solely improve reported profits.
Enron‘s tax department not only managed tax liabilities, but also ―became a
source for financial statement earnings, thereby making it a profit center for
the company‖ abroad (US Senate Joint Committee on Taxation, 2003, p. 8).
In common with other profit centres it was assigned revenue targets and its
operations were monitored. Within the tax department an independent unit,
the ―structured transactions group‖ was formed and its focus was to
synthesize tax, finance, legal, and accounting principles to enhance Enron
profits. The group was responsible for managing a structured transaction from
its inception to its final execution. It handled all aspects of the entities involved
in a structured transaction, including the bookkeeping, financial reporting, tax
reporting, investor reporting, dividend payments, and corporate governance
responsibilities (US Senate Joint Committee on Taxation, 2003). Some of the
transactions were designed to duplicate losses to enable the company to
deduct the same tax loss twice. Many projects were designed to avoid/evade
taxes in the future and challenged the resources that the tax authorities could
devote to unravel them. Indeed, the Senate Committee‘s report and

12
Many of these were believed to be inactive shells and were not associated
with any ongoing business.
16
accompanying schedules and appendices run to nearly 10,000 pages and
then only provide an ‗introduction‘ to Enron‘s tax avoidance schemes.
Amongst other places Enron had operations in India13, Indonesia, Poland,
Turkey, China, the Philippines, Burma, Brazil, Argentina and Hungary and
these were often routed through tax havens and the company paid no
domestic or foreign taxes. The Senate Committee concluded that Enron
deliberately and aggressively engaged in transactions that had little or no
business purpose in order to obtain favourable tax and accounting treatment
(US Senate Joint Committee on Taxation, 2003, p.9).

Another US Senate report investigated Enron‘s fledgling electronic trading

business in the pulp and paper industry, which it developed with the support
of major banks. It examined four major transactions from this trade and
concluded that each ―involved deceptive financial structures utilizing multiple
SPEs [Special Purpose Entities] or joint ventures, asset or stock transfers,
and exotic forms of financing. All relied on a major financial institution to
provide funding, complex funds transfers, and intricate structured finance
deals. In the end, all four transactions appear to have had no business
purpose other than to enable Enron to engage in deceptive accounting and
tax strategies to inflate its financial results or deceptively reduce its tax
obligations‖ (US Senate Permanent Subcommittee on Investigations, 2002, p.
4). Amongst the various prosecutions, four ex Merrill Lynch officials have
been convicted of fraud and sent to prison (Washington Post, 4 November
2004); JP Morgan Chase has paid $2.2 billion to settle a class-action lawsuit
(Washington Post, 15 June 2005); Citigroup paid $1.66 billion to settle claims
of helping Enron to deceive investors (New York Times, 27 March, 2008); and
a host of lawsuits are still outstanding.

Organised hypocrisy also became a liability at WorldCom, a US

telecommunications company, which collapsed amidst allegations of fraud in
2002. The company had made extensive use of tax avoidance schemes to
increase its accounting earnings. WorldCom‘s senior management had a

13
Enron Oil & Gas India Ltd had oil and gas operations in India, but was
registered in Grand Cayman.
17
disdain for a formal Code of Ethics (Beresford, Katzenbach and Rogers Jr.,
2003), but nevertheless claimed to be encouraging ethical business conduct
(Werther Jr. and Chandler, 2005). Its policies stated that ―fraud and
dishonesty would not be tolerated‖ (Beresford, Katzenbach and Rogers Jr.,
2003, p. 289). The insolvency examiner‘s report drew attention to internal
decisions for boosting profits through tax avoidance (US Bankruptcy Court
Southern District of New York, 2004). In the normal course, such decision and
practices remain hidden from public view.

WorldCom was approached by KPMG about the possibility of providing tax

consulting services and reducing WorldCom taxes. It secured a contract after
performing an initial feasibility study at no obligation to the company.
Management concerns were soothed by the engagement letter in which
KPMG agreed to indemnify WorldCom for claims or assessments arising out
of the firm‘s negligence or from incorrect conclusions. KPMG were hired in
1997 for an initial fee of $3 million and also recouped a $500,000 fee for its
feasibility study. The firm went on to earn performance bonuses totalling an
additional $2.5 million. KPMG‘s services became part of the company‘s ―tax
minimization programs‖ and mostly related to the use of transfer pricing to
shift profits to low tax jurisdictions and reduce taxes and boost accounting
profits (US Bankruptcy Court Southern District of New York, 2004). A major
component of the programs, designed by KPMG, was the classification of the
―foresight of top management14‖ as an intangible asset, which the parent
company licensed to the subsidiaries in return for royalty charges. Under the
programs, for the years 1998-2001, royalties came to over $20 billion, which
far exceeded WorldCom‘s consolidated net income during that period. The
royalty charges often represented a huge percentage, in some cases as much
as 80 to 90 percent, of some subsidiaries‘ net income. The WorldCom tax
department treated the royalty programs like ―paper‖ transactions and even

14
―Management foresight‖ appears to encompass the plan or strategy of the
Company‘s former senior Management to provide end-to-end bundled
services (voice, data, Internet, international) to customers over a global
network (US Bankruptcy Court Southern District of New York, 2004, p. 28)
18
increased the royalty charges in 2001 without seeking any corporate
approvals (p. 13).

The royalty programs substantially reduced the company‘s tax obligations

because the subsidiaries deducted the royalty charges as necessary business
expenses and the royalty income was shifted into jurisdictions where a
substantial portion of the royalty income was not subject to tax. The royalty
programmes alone may have enabled WorldCom to avoid taxes ranging from
$100 million to $350 million (US Bankruptcy Court Southern District of New
York, 2004, p. 34). The Insolvency Examiner concluded that the royalty
programs ―were not well conceived or implemented, and are vulnerable to
challenge by various states. …The Examiner does not believe that
―management foresight‖ is an intangible asset. … KPMG provided this advice
despite a lack of persuasive legal authority to support it. … KPMG rendered
flawed advice. …KPMG apparently failed to explain the true nature of the
Royalty Programs to the taxing authorities‖ (US Bankruptcy Court Southern
District of New York, 2004, p. 28, 38, 41). Company profits helped to swell
executive remuneration. Its regulatory filing in May 2000 showed that for the
year 1999 its chief executive received a performance related remuneration
package of $142 million ($935,000 salary+$7.5 million bonus+$133.6 million
in stock options). A number of US states are considering taking legal action
against WorldCom and its advisers for the loss of tax revenues (Los Angeles
Times, 20 August 2005).

The above two examples draw attention to the role of accountancy firms in
facilitating tax avoidance. The firms generally shelter under claims of
professionalism and codes of ethics. In the case of KPMG, the firm‘s 2005
annual reported stated that

―the quality and integrity of our people and our work is paramount to
everything we do at KPMG. Above all, we recognize that we operate in
the public interest and we must be open and transparent in our
operations and policies … We believe quality and integrity start with
culture. That‘s why we place so much emphasis on bringing our shared
values alive within member firms … Independence, integrity, ethics,
and objectivity—these are all vital to the way we work … It is the
19
 responsibility of each person working within a member firm to maintain
their integrity and objectivity … Their actions are guided and monitored
through a set of consistent standards, processes and procedures …‖
(KPMG 2005, pp. 50-51).

The firm adds that ―Our network of member firms in over 140 countries
worldwide share the same values15‖. Such statements may help to mould
public opinion, but they were also economical about organisational culture
and practices.

With global revenues of US$22.69 billion16, KPMG is one of the world‘s Big
Four accounting firms. A considerable amount of its revenues ($4.73 billion in
2008) are devised from the sale of taxation services. In the US alone it
employed 10,300 tax professionals in 122 offices. The inconsistencies
between its talk of ethical and responsible conduct and organisational
practices geared to increase profits were highlighted in an investigation by a
US Senate Committee (US Senate Permanent Subcommittee on
Investigations, 2003, 2005). The internal documents available to the Senate
Committee showed that KPMG had developed an elaborate organisational
structure for selling taxation services. The firm aspired to be a global leader
and maintained an inventory of 500 off-the-shelf tax avoidance schemes,
which were internally described as ―tax products‖, for sale to multiple clients.
The expansion of taxation services was partly a response to the success of
competitors in increasing their revenues and market share. The organisational
structure included a ―Tax Innovation Center‖ which functioned as a profit
centre and was solely dedicated to developing new products. This was
accompanied by a Sales Opportunity Center that developed marketing
strategies for the tax products, and a telemarketing centre staffed with people
trained to make cold calls to find buyers for specific tax products. Accountants
and lawyers working for the firm were pressurised to sell the firm‘s generic tax
products. The Senate report noted that KPMG excavated confidential client

15
http://www.kpmg.com/Global/WhoWeAre/Pages/default.aspx; accessed 13
April 2009.
16
KPMG‘s 2008 annual review available at
http://www.kpmg.com/SiteCollectionDocuments/IAR2008a.pdf; accessed 10
April 2009.
20
data from its internal databases to identify potential targets for its tax
products. Staff were assigned revenue targets and directed to approach
existing tax and audit client clients. KPMG advised its employees, in some
cases, to make misleading statements to potential buyers, such as claiming
that a product was no longer available for sale, even though it was, apparently
hoping that reverse psychology would then cause the client to want to buy the
product.

KPMG were also concerned about disclosures to authorities and loss of

competitive advantage. Consequently, several client presentations were made
on chalkboards or erasable whiteboards and written material was retrieved
from clients before leaving a meeting. Potential purchasers were asked to
sign a ―nondisclosure‖ agreement. Staff engaged in the sale of tax products
were advised not to keep revealing information in their files. KPMG developed
and marketed its schemes through a network of law firms, banks, investment
advisory firms and charitable organisations and also made use of offshore tax
havens to structure transactions. The Senate Committee noted that Major
banks, such as Deutsche Bank, HVB, UBS, and NatWest, provided ―purported
loans for tens of millions of dollars essential to the orchestrated transactions
… and facilitated potentially abusive or illegal tax shelters …‖ (US Senate
Permanent Subcommittee on Investigations, 2005, p. 7). The firm used
opinion letters (for a fee) from friendly lawyers17 to convince sceptical clients
that the product would withstand any challenge from the tax authorities and
was virtually risk free. The Senate Committee found that in many cases
―KPMG had drafted its own prototype tax opinion letter supporting the product
and used this prototype as a template for the letters it actually sent to its
clients‖ (US Senate Permanent Subcommittee on Investigations, 2003, p. 11).

The US federal law requires sellers of tax avoidance schemes to register their
products with the tax authorities, but KPMG chose not to register any of its
500 tax products. In defence KPMG claimed that it is not a tax promoter and
does not sell any tax products that have to be registered under the law.

17
Sidley Austin Brown, a law firm, issued more than 600 legal opinion letters
supporting 13 KPMG tax products.
21
However, the Senate Committee found that a senior KPMG tax professional
advocated that, for business reasons, the firm should not register some of its
products even if required by the law. In an email to colleagues s/he claimed
that the tax authorities were not vigorously enforcing the registration
requirements and that the penalties for non-compliance were much less than
the potential profits from selling the tax product (US Senate Permanent
Subcommittee on Investigations, 2003, p. 13). The same senior tax
professional also warned that compliance with the tax shelter registration
requirement would place the firm at a competitive disadvantage. There was
some internal disquiet about the failure to register tax products, but concerned
employees were overruled by senior officials.

Following the US Senate report, the tax authorities further investigated KPMG
practices. In August 2005, the US Department of Justice (press release18, 29
August 2005) stated that KPMG has admitted to ―criminal wrongdoing‖ and
agreed to pay $456 million in fines, restitution, and penalties as part of an
agreement to defer prosecution of the firm19. In addition, nine individuals,
including six former KPMG partners and the former deputy chairman of the
firm, were charged20 with criminal tax fraud conspiracy relating to design,
marketing, and implementation of fraudulent tax shelters. A further ten KPMG
personnel were charged on 17 October 2005 (US Justice Department press
release21, 17 October 2005).

In 2006, one of the firm‘s [former] tax partners told a court that he ――willfully
aided and abetted the evasion of taxes‖ and added that the illegal schemes
were ―designed and approved by senior partners and leaders at KPMG and

18
http://www.usdoj.gov/opa/pr/2005/August/05_ag_433.html; accessed 11
April 2009.
19
In January 2007, US authorities dropped criminal charges against KPMG
as the firm had accepted the imposition of an external monitor until
September 2008 (Los Angeles Times, 4 January 2007).
20
In July 2007, a judge dismissed charges against 13 KPMG defendants
because the US authorities had violated the constitutional rights of the
defendants when they pressured their former employer KPMG to cut off their
legal fees (New York Times, 17 July 2007).
21
http://www.justice.gov/usao/nys/pressreleases/October05/kpmgsupersedingi
ndictmentpr.pdf; 12 April 2009
22
other entities to allow wealthy taxpayers to claim phony losses on their tax
returns through a series of complicated transactions … so that KPMG and
other entities could earn significant fees‖ (The San Diego Union Tribune, 9
April 200622). In January 2007, a former KPMG tax consultant, pleaded
guilty to participating in a conspiracy to defraud the United States Treasury,
evade taxes and file false tax returns23. In December 2008, two former KPMG
executives were convicted of selling illegal tax shelters that helped wealthy
clients evade taxes (New York Times, 17 December 2008). They were
subsequently fined and given prison sentences (New York Times, 1 April
2009). In March 2010, a former KPMG partner already serving an eight year
prison sentence was given a 57 month sentence and fined $1.05 million for
participating in a conspiracy to defraud the tax authorities (US Department of
Justice press release24, 3 March 2010). Despite claims of serving the public
interest, ethics and integrity, none of the above activities were explained in
any KPMG report. Rather they were brought to public attention by a US
Senate Committee investigation.

UBS, implicated in the tax shelters marketed by KPMG, is Switzerland‘s

largest bank, second largest bank in Europe and the world‘s largest private
wealth manager. It has extensive operations in many European countries and
the US. Its corporate talk promised that

―UBS upholds the law, respects regulations and behaves in a principled

way. UBS is self-aware and has the courage to face the truth. UBS
maintains the highest ethical standards‖ (p 57) … UBS takes its
responsibility to preserve the integrity of the financial system … The
firm has developed extensive policies intended to prevent, detect and
report money laundering, corruption (UBS, 2008, p. 57, 62)

A US Senate report noted that UBS played a key role in the schemes
marketed by KPMG by ―providing credit lines which, in the aggregate, were in

22
http://www.signonsandiego.com/uniontrib/20060409/news_1b9kpmg.html;
accessed 11 April 2009.
23
http://www.usdoj.gov/usao/nys/pressreleases/January07/acostapleapr.pdf;
accessed 15 April 2009.
24
http://www.justice.gov/usao/nys/pressreleases/March10/pfaffrobertsentencin
gpr.pdf; accessed 5 March 2010.
23
the range of several billion Swiss franc‖ (US Senate Permanent
Subcommittee on Investigations, 2003, p. 78). In February 1998, one
concerned employee wrote a letter to UBS senior management to complain
that one of the units ―is currently offering an illegal capital gains tax evasion
scheme to US tax payers‖. The letter continued:

―This scheme is costing the US Internal Revenue Service several

hundred million dollars a year. I am concerned that once IRS comes to
know about this scheme they will levy huge financial/criminal penalties
on UBS for offering tax evasion schemes. … In 1997 several billion
dollars of this scheme was sold to high net worth US tax payers, I am
told that in 1998 the plan is continu[ing] to market this scheme and to
offer several new US tax avoidance schemes involving swaps. My sole
objective is to let you know about this scheme, so that you can take
some concrete steps to minimise the financial and reputational damage
to UBS. … P.S. I am sorry I cannot disclose my identity at this time
because I don‘t know whether this action of mine will be rewarded or
punished‖ (p.87-88; also see US Senate Permanent Subcommittee on
Investigations, 2005).

The tax services continued unabated. UBS involvement in tax avoidance was
also scrutinised in another report which noted the bank‘s role in enabling US
citizens to avoid taxes (US Senate Permanent Subcommittee on
Investigations, 2006).

In February 2009, the US Justice Department announced that

―UBS … has agreed to immediately provide the United States

government with the identities of, and account information for, certain
United States customers of UBS‘s cross-border business. Under the
deferred prosecution agreement, UBS has also agreed to expeditiously
exit the business of providing banking services to United States clients
with undeclared accounts. As part of the deferred prosecution
agreement, UBS has further agreed to pay $780 million in fines,
penalties, interest and restitution … [US Justice Department] alleges
that UBS managers and employees used encrypted laptops and other
counter-surveillance techniques to help prevent the detection of their
marketing efforts and the identities and offshore assets of their U.S.
clients. According to the information, clients of the cross-border
business in turn filed false tax returns which omitted the income earned
on their Swiss bank accounts and failed to disclose the existence of

24
 those accounts to the IRS‖ (US Department of Justice press release25,
18 February 2009).

The US authorities are demanding details of 52,000 accounts facilitated by

UBS (New York Times, 19 February 2009). In August 2009, the bank handed
over details of 4,450 accounts containing $18 billion to US tax investigators
(The Guardian, 19 August 2009).

A number of UBS executives have also been indicted. In June 2008, a former
UBS executive pleaded guilty to assisting ―the U.S. clients in concealing their
ownership of the assets held offshore by helping these wealthy customers
create nominee and sham entities. This was done to prevent the risk of losing
the approximately $20 billion of assets under management in the United
States undeclared business, which earned the bank approximately $200
million per year in revenues. … managers and bankers at the Swiss bank,
and U.S. clients prepared false and misleading IRS forms that claimed that
the owners of the accounts were sham off-shore entities‘ and failed to prepare
and file IRS forms that should have identified the true U.S. owner of the
accounts‖ (US Department of Justice press release26, 19 June 2008).

In November 2008, another UBS executive was charged with aiding 20,000
US citizens to conceal ―approximately $20 billion in assets from the IRS. [the
executive] allegedly referred to this business as ―toxic waste,‖ mandated that
Swiss bankers grow the cross-border business, despite knowing that this
would cause bankers to violate U.S. law. [Swiss bankers] ravelled to the
United States approximately 3,800 times to discuss their clients‘ Swiss bank
accounts. Clients of the cross-border business filed false tax returns which
omitted the income earned on their Swiss bank accounts and failed to
disclose the existence of those bank accounts to the IRS‖ (US Department of
Justice press release27, 12 November 2008). In January 2009, the executive

25
http://www.usdoj.gov/opa/pr/2009/February/09-tax-136.html; accessed 17
March 2009
26
http://www.usdoj.gov/tax/txdv08550.htm; accessed 17 March 2009.
27
http://www.usdoj.gov/tax/txdv081001.htm; accessed 17 March 2009.
25
left the country and was declared a fugitive by a US court (Bloomberg28, 14
January 2009). By April 2010, eight former UBS clients in the US admitted to
tax evasion and faced fines and prison sentences (US Department of Justice
press release29, 13 April 2010). The US action has persuaded not only UBS
clients, but also clients of Credit Suisse, Julius Baer Holdings, HSBC and
Bank Leumi Le-Israel to volunteer information to the tax authorities, which in
turn may aid scrutiny of these and other organisations (Bloomberg30, .18
September 2009). The US revelations have also encouraged governments in
the UK, Canada, France, Germany, Hong Kong and India to probe UBS‘s role
in organised tax avoidance and prolonged litigation may follow.

UBS is not the only bank to exhibit gaps between its talk, decisions and
action. Deutsche Bank is the largest bank in Germany and has extensive
operations in Europe and the US. It sponsors a prestigious annual academic
prize in financial economics and a number of arts and education programs. Its
2006 corporate responsibility report proclaimed:

―We are dedicated to transparency in corporate governance and

communication. … For us, Corporate Social Responsibility (CSR)
means acting responsibly towards shareholders and customers as well
as towards our employees and society as a whole …‖ (Deutsche Bank,
2007, p. 1 and 5).

In 2003, Deutsche Bank was fined €59.3 million by a court in Germany for
helping to facilitate tax evasion by thousands of its customers. The bank
systematically helped thousands of its customers to avoid composite tax on
interest earnings. This was done by opening branches in neighbouring tax
havens such as Luxembourg, Switzerland and Liechtenstein, then advising
customers to move untaxed earnings into accounts in these offshore braches,
thus avoiding German taxes (Tax News31, 7 April 2003). The Bank also
28
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSEvhPR7Ok6A
&refer=home; accessed 15 April 2009.
29
http://www.justice.gov/opa/pr/2010/April/10-tax-401.html; accessed 14 April
2010.
30
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKv3sNBZA6Pc;
accessed 19 September 2009.
31
http://www.tax-
news.com/archive/story/Deutsche_Bank_To_Pay_Massive_Fine_For_Facilitat
ing_Tax_Evasion_xxxx11439.html; accessed 16 April 2009.
26
advised Enron (see above) on its tax avoidance schemes and has been under
investigation over its tax shelter work in the US from the late 1990s through
2001 (New York Times, 16 November 2008). Following revelations of the
marketing of tax avoidance schemes by KPMG (see above); the bank came
under further scrutiny. The US Senate Committee on Permanent
Investigations found that ―Deutsche Bank … provided billions of dollars in
lending critical to transactions which the banks knew were tax motivated,
involved little or no credit risk, and facilitated potentially abusive or illegal tax
shelters …‖ (US Senate Permanent Subcommittee on Investigations, 2003, p.
7). The documents examined by the Senate Committee showed that
Deutsche knew the nature of the transactions but still chose to participate in it.
In an internal memo one official wrote that in ―this transaction, reputation risk
is tax related and we have been asked by the Tax Department not to create
an audit trail in respect of the Bank‘s tax affairs …‖ (p. 113). The Senate
Committee found that Deutsche actively participated in many KPMG
schemes. It provided $11 billion of credit lines to KPMG clients to enable them
to structure the transactions and received $79 million in fees (p. 112). In 2005
the company explained that it reduced its earnings by nearly $300 million to
cover legal costs related to its role in creating and selling questionable tax
shelters (New York Times, 10 March 2006). In February 2006, US federal
prosecutors were said to be investigating the role of the bank in helping
wealthy investors to evade taxes (New York Times, 15 February 2006).
Inevitably, many clients were concerned about the possible fallout and sought
to take action against Deutsche. In February 2007, the bank reached an out-
of-court settlement with wealth investors ―likely to be at least tens of millions
of dollars‖ (New York Times, 8 February 2007). In June 2009, one of the
lawyers associated with tax avoidance schemes promoted by Deutsche was
charged with conspiracy and fraud (New York Times, 9 June 2009). Some
experts believe that the tax authorities will eventually levy a fine on Deutsche
of around $1 billion (Accounting Today32, 9 February 2007).

The gap between corporate talk, decisions and action is not just confined to
the financial sector. It is also to be found in other sectors. Walmart33 is
America‘s largest corporation and the largest private sector employer. Its

32
http://www.webcpa.com/article.cfm?articleid=23345; accessed 21 March
2009.
33
It has international operations and owns the ASDA supermarket chain in the
UK.
27
2010 annual reports buttresses the company‘s social responsibility credentials
by stating that as

―Walmart grows, we bring more than jobs to a community … Walmart

has unparalleled opportunities to reduce environmental impact … Our
passion for serving our local communities is woven into the fabric of
Walmart‘s culture through associate volunteerism and donations …
Our company continues to instill in our associates the highest
standards of integrity, and we remain committed to accountability if
those standards are not met … Our company was founded on the
belief that open communications and the highest standards of ethics
are necessary to be successful … Walmart has adopted a Statement of
Ethics to guide our associates in the continued observance of high
ethical standards such as honesty, integrity and compliance with the
law in the conduct of Walmart‘s business. Familiarity and compliance
with the Statement of Ethics is required of all associates who are part
of management. The company also maintains a separate Code of
Ethics for our senior financial officers …‖ (Walmart, 2010, p. 11, 12,
54).

It is not too unreasonable to argue that the promised standards of serving

communities, accountability and transparency would also apply to payment of
taxes.

Tax revenues help neighbourhoods and communities too by providing

education, healthcare, security, pensions and transport, but Walmart has
operated a variety of strategies to avoid taxes. For example, in May 2006, the
State of New Mexico Taxation and Revenue Department announced that a
tax court has upheld its case against Walmart for ―$11,630,226 in corporate
income tax against Wal-Mart Stores, Inc. The assessment arose out of Wal-
Mart‘s creation of a holding company in Delaware in 1991 called WMR, Inc. …
WMR was created for the primary purpose of reducing state income taxes for
Wal-Mart Stores, Inc. Because WMR confined its operations to Delaware, a
state which does not tax such income, Wal-Mart Stores, Inc. believed that
WMR could shelter Wal-Mart Stores‘ income from taxation by most states‖
(State of New Mexico Taxation and Revenue Department press release34, 3
May 2006).

The above case is part of a long line of revelations relating to schemes under
which Walmart avoided taxes in about twenty-five US states (Wall Street

34
http://www.tax.state.nm.us/News/walmart_Mar06.pdf; accessed 17 April
2009.
28
Journal35, 1 February 2007). Ernst & young devised a number of schemes36
for Walmart and one of these related to the use of Reinvestment Trusts
(REITs), which were introduced to encourage small investors to invest in a
diversified portfolio of commercial property and spread their risks. The
legislation exempted REITs from corporate taxes as long as they paid out
90% of the profits to shareholders. REITs need at least 100 shareholders. To
meet the 100-shareholder threshold Walmart distributed a minimal amount of
nonvoting stock, to approximately 114 of its employees. Walmart transferred a
number of its properties to a specially created subsidiary and turned it into a
REIT. These properties were then leased back and the stores continued their
trade in the normal way. Under the arrangements, the subsidiary occupying
the property paid rent, which was a tax deductible expense and hence
reduced its tax liability in the relevant tax jurisdiction. In fact, Walmart was
paying rent to itself and the benefit was that the subsidiary receiving the
income would be exempt from tax because of the special concessions
available to REITs. Over a four-year period, the REIT strategy reduced
Walmart‘s tax bill by around $230 million (Wall Street Journal, 23 October
2007).

Amongst other US states Walmart‘s tax avoidance scheme was challenged by

the North Carolina tax authority and it blocked the $33.5 million tax relief
claimed by the company (Bloomberg37, 6 January 2008). In 2005, a court
ruled against Walmart. The company unsuccessfully appealed against the
judgement. The judge rejected Wal-mart‘s claim that it had incurred rental
costs and said that the

―rental arrangement allowed plaintiffs [Walmart] to funnel substantial

amount of their gross income through respective REITs and property
companies only to have the ―rent‖ return to them in a non-taxable form,
prior to the eventual transfer of the funds to the parent Wal-Mart
Stores, Inc. There is no evidence in this record of any economic impact
(apart from the obvious state tax savings) of the transaction to

35
http://online.wsj.com/public/article/SB117027500505994065-
WAv3Z4GcXNsXgv1Bi_Xlvadhgpk_20070322.html?mod=msn_free; accessed
14 April 2009.
36
Available at http://online.wsj.com/public/resources/documents/wsj071023-
walmart-tax_reduction.pdf; accessed 21 March 2009.
37
http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aJE
b2qzbDR9k; accessed 13 April 2009.
29
 plaintiffs, particularly as plaintiffs were rendered no poorer in a material
sense by their ―payment of ―rent‖ … there is no evidence that the rent
transaction, taken as a whole, has any real economic substance …‖
(North Carolina Wake County Superior Court Division, 2007, p.18, 23;
also see Wall Street Journal38, 5 January 2008).

Walmart fought unsuccessfully to prevent public disclosure of court

documents. One of these contained a letter39, dated 30 April 1996, from Ernst
& Young to Walmart and stated that the

―successful operation of this project will result in substantial state

income tax savings to Wal-Mart. While the strategies being
implemented are totally within the law, we see no useful purpose being
served in broadcasting these changes. Rather we see only potential
downside from any external publicity from these changes. We don‘t
think there is much the state taxing authorities can do to mitigate these
savings to Wal-Mart, however, some states might attempt something if
they had advance notification. We think the best course of action is to
keep the project relatively quiet. All our team members of course need
to know what we are doing and why. It does not need to be treated as
a secret. On the other hand, if a broader group of people are
knowledgeable about these strategies, there just seem to be too many
opportunities for it to get out to the press or financial community and
we all know they are difficult to control, particularly when we are
dealing with a client as well-known as Wal-Mart. As a result, we have
concluded that the project‘s long-term success will be enhanced by
being discreet in how and where we discuss the project‖.

In another document, Ernst & Young considered hypothetical questions and

then provided answers – ―Q: What if the press gets wind of this and portrays
us as a ‗tax cheat‘? A: That‘s a possibility … If you are concerned about
possible negative publicity, you can counter it by reinvesting the savings in the
community‖ (cited in Wall Street Journal40, 1 February 2007).

The above revelations pose questions about Ernst & Young, another global
accounting firm. With operations in 140 countries and 2008 global fee income

38
http://online.wsj.com/article/SB119947912201068371.html; accessed 14
Apr 2009.
39
Available at http://online.wsj.com/public/resources/documents/wsj071023-
walmart-tax_project.pdf; accessed 21 March 2009.
40
http://online.wsj.com/public/article/SB117027500505994065-
WAv3Z4GcXNsXgv1Bi_Xlvadhgpk_20070322.html?mod=msn_free; accessed
15 April 2009.
30
of $24.5 billion41, Ernst & Young is one of the Big Four accounting firms. Its
‗Global Code of Conduct42‘ states that its personnel have a

―professional commitment to do the right thing. …We are committed to

communicating openly and honestly. … We nurture integrity, respect
and teaming … No client or external relationship is more important than
the ethics, integrity and reputation of Ernst & Young … We commit
ourselves, as professionals, to uphold the trust placed in us by others.
… We reject unethical or illegal business practices in all
circumstances‖.

Once again the talk of responsible conduct is decoupled from organisational

practices and action. Ernst & Young have crafted a number of tax avoidance
schemes in the UK and some have been rejected by the courts (Sikka and
Hampton, 2005). Rather famously, the firm devised a tax avoidance scheme
under which directors of Phones4U, a mobile company in the UK, paid
themselves in gold bars, fine wine, and platinum sponge in order to avoid
income tax and national insurance contributions. In 1997, the government
outlawed such schemes, but soon after the firm devised another scheme that
made complex use of trusts to enable company directors to avoid UK income
tax (UK Inland Revenue Special Commissioners, 2002). In July 2003, Ernst &
Young (E&Y) paid $15 million to US tax authorities to resolve issues for failure
to properly register tax shelters and properly maintain lists of people who
bought them (US Internal Revenue Service press release43, 2 July 2003). A
subsequent investigation by a US Senate Committee found that the firm sold
tax avoidance schemes ―to multiple clients despite evidence that some …
were potentially abusive or illegal tax shelters‖ (US Senate Committee
Permanent Subcommittee on Investigations, 2005, p. 6). In May 2007, the US
Justice Department charged four current and former partners of the firm ―with
tax fraud conspiracy and related crimes arising out of tax shelters promoted
by E&Y … the defendants and their co-conspirators concocted and marketed

41
http://www.ey.com/Global_Review_2008/Index.html; accessed 17 April
2009.
42
http://www.ey.com/global/assets.nsf/International/Ernst_&_Young_Global_C
ode_of_Conduct/$file/EY_Code_of_Conduct.pdf; accessed 31 March 2009.
43
http://www.irs.gov/newsroom/article/0,,id=111188,00.html; accessed 7 April
2009.
31
tax shelter transactions based on false and fraudulent factual scenarios to be
used by wealthy individuals with taxable income generally in excess of $10 or
$20 million to eliminate or reduce the taxes they would have to pay the IRS‖
(US Justice Department press release44, 30 May 2007). The Justice
Department explained that Ernst & Young had an elaborate organisational
structure, and groups of highly educated individuals specifically devoted to
designing, marketing, and implementing high-fee tax strategies for individual
clients. These strategies were specifically targeted at high-net-worth clients to
enable them to eliminate, reduce or defer taxes on significant amounts of
income or gains. The firm developed a network and its staff worked with
banks, other financial institutions and law firms to design, market and
implement tax strategies. Some staff were designated to be members of the
―Quickstrike Team‖, a nationwide area-based network created to provide
greater efficiency in the marketing of schemes.

The US Justice Department45 argued that to persuade clients to buy tax

schemes the firm secured opinion letters from law firms which claimed that
―the tax shelter losses or deductions would ―more likely than not‖ survive IRS
challenge, or ―should‖ survive IRS challenge. However, the defendants knew
those opinions were based upon false and fraudulent statements, and omitted
material facts‖ (paras 15 and 62). The Justice Department argued that firm‘s
personnel feared that the tax authorities would aggressively challenge the
schemes and therefore they falsified a number of documents and ―directed
the destruction of documents which would reveal the true facts surrounding
the design, marketing and implementation‖ of the schemes (para 29). Staff
were instructed to ensure that the PowerPoint presentations which laid out the
steps necessary for the operations of the schemes transaction were not left
with the clients (para 30). An internal email told staff that there ―should be no
materials in the clients‘ hands – or even in their memory … a fax of the

44
http://www.usdoj.gov/usao/nys/pressreleases/May07/eyindictmentpr.pdf;
accessed 13 April 2009.
45
http://visar.csustan.edu/aaba/Ernst&Young2007taxindictment.pdf; accessed
10 April 2009.
32
materials to certain people in the … government would have calamitous
results‖ (paragraph 39 and 46).

In June 2007, a former Ernst & Young employee pleaded guilty to

―conspiracy to commit tax fraud‖ [and] acknowledged that she and

others deliberately concealed information from the IRS, and submitted
false and fraudulent documentation to the IRS. … that over a period of
several years, she and others participated in marketing and
implementing shelters called CDS (for ―Contingent Deferred Swap‖)
and CDS Add-On. She knew that in order for these tax shelters to
succeed in generating the intended tax benefits, it was necessary for
the clients to have non-tax business motivations for entering into them,
and for carrying out the various steps that generated the tax benefits …
that she and her co-conspirators also took steps to disguise the fact
that all the steps of the transactions were all pre-planned from the
beginning, and that they did so because they knew that fact would
harm the clients‘ tax positions‖ (US Justice Department press
release46, 14 June 2007).

In September 2008, partner of a law firm associated with Ernst & Young
schemes pleaded guilty to criminal tax fraud. He acknowledged that over a
period of several years, ―he and others, including individuals at E&Y,
participated in developing the PICO [acronym for the tax avoidance scheme]
shelter and creating a legal opinion that would be used to support it. …
admitted he and his co-conspirators knew that the IRS would not allow PICO‘s
tax benefit if the IRS was told that PICO was designed primarily to allow the
client to avoid paying taxes and otherwise did not have economic substance‖
(US Department of Justice press release47, 11 September 2008).

In January 2009, a promoter of Ernst & Young tax avoidance schemes

pleaded guilty and ―acknowledged that he agreed with others to deliberately
mislead the [US] IRS‖ (US Department of Justice press release48, 22 January

46
http://www.usdoj.gov/usao/nys/pressreleases/June07/sixpleapr.pdf;
accessed 10 April 2009.
47

http://www.usdoj.gov/usao/nys/pressreleases/September08/cinquegranipleapr
.pdf; accessed 20 Mar 2009.
48
http://www.usdoj.gov/usao/nys/pressreleases/January09/boltoncharlespleap
r.pdf; accessed 20 Mar 2009.
33
2009). In May 2009, after a ten week jury trial, four current and former
partners of Ernst & Young were found guilty of conspiracy and tax evasion
(US Department of Justice press release49, 7 May 2009). In January 2010,
two further partners given 28 and 20 months prison sentence (US
Department of Justice press release50, 22 January 2010), followed by a
variety of sentences for advisors and employees connected with the
marketing of tax shelter schemes (Wall street Journal, 13 April 2010; Wall
street Journal, 19 April 2010).

Whilst the contradictions between corporate talk, decisions and action may be
exposed by media or well resourced government departments in developed
countries, the same is very difficult in developing countries as they often lack
the required administrative and enforcement resources. Frequently
multinational corporations promising responsible behaviour extract tax
holidays, subsidies, performance incentives, and low rates of royalties and
taxes from investment starved countries even though their demands may
deprive millions of people of education, healthcare, clean water, food, etc
(Riesco, Lagos and Lima, 2005). Some companies transfer profits through
transfer pricing, inter-company loans and a variety of tax avoidance schemes
designed by accountants, lawyers, banks and corporations in the western
world (Action-Aid, 2009; Christian-Aid, 2008a, p. 8).

Between 2002 and 2006, mining companies exported around US$2.9 billion of
gold from Tanzania. During the same period, the government received around
US$17.4 million a year in royalties (Action-aid, 2009, p. 29). The Geita gold
mine is AngloGold Ashanti‘s (AGA) only one in Tanzania and is one of Africa‘s
biggest open pit mines. The New York stock exchange listed company‘s
website contains a detailed ―Report to Society51‖ with sections on ethics,

49
http://www.usdoj.gov/tax/usaopress/2009/txdv09_Four_Found_Guiilty_on_C
riminal_Tax_Charges.html; accessed 16 September 2009.
50

http://www.justice.gov/usao/nys/pressreleases/January10/shapirovaughnsent
encingpr.pdf; accessed 23 January 2010.
51
http://www.anglogold.com/subwebs/InformationForInvestors/Reports08/Rep
ortToSociety08/default.htm; accessed 16 Apr 2009.
34
human rights, health and safety, environment and community welfare. The
report is silent on commitment to pay taxes, but states that ―We will comply
with all laws, regulations, standards and international conventions which apply
to our businesses and to our relationships with our stakeholders. Specifically,
AngloGold Ashanti supports the Universal Declaration of Human Rights, the
Fundamental Rights Conventions of the International Labour Organization
(ILO) and those principles and values referred to in the United Nations Global
Compact. Should laws and regulations be non-existent or inadequate, we will
maintain the highest reasonable regional standard for that location. We will
fully, accurately and in a timely and verifiable manner, consistently disclose
material information about the company and its performance. This will be
done in readily understandable language to appropriate regulators, our
stakeholders and the public52 …‖ The company‘s annual reports show that in
2006 it produced 308,000 ounces of gold and made gross profits of US$93m
between 2002 and mid-2007. AGA has paid only US$1 million in corporate
income tax, and has announced that it will pay further corporate income tax
only in 2011, a whole 11 years after starting operations (Action-Aid, 2009, p.
31).

Barrick Gold, the Canadian registered company, is the world‘s largest pure
gold mining company with extensive operations in Tanzania. Its corporate
responsibility statement is silent on its tax practices, but states that ―We
conduct our business around the world in an ethical, honest and accountable
manner and in accordance with all applicable laws, rules and regulations. We
value and are committed to transparency in our business practices, consistent
with good governance and commercial confidentiality53‖.The company
reported a net income of US $97 million for the period between 2004 and the
first half of 2007 but has not yet started paying corporate income tax (Action-
Aid, 2009).

52
http://www.anglogold.com/Values/Ethics.htm; accessed 18 April 2009.
53
http://www.barrick.com/CorporateResponsibility/Ethics/default.aspx;
accessed 17 Apr 2009.
35
In 2003 the Tanzanian government appointed special auditors to examine the
production and financial position of major mining companies. The report was
not officially published, but in 2006 its leaked contents appeared in a
newspaper and said ―that four gold mining companies, including Barrick and
AGA, over-declared losses by US$502m (AGA US$158m and Barrick
US$236m) between 1999 and 2003. This means the government potentially
lost tax revenues of US$132m. The audit noted that thousands of documents
were missing that would have shown whether royalties of US$25m had been
paid‖ (Christian-Aid, 2008a, p. 12). A 2007 investigation by a Tanzanian
Parliamentary Committee estimated that the mining companies had declared
losses estimated at US$1.045 billion for the period 1998 and 2005, even
though they were making heavy capital investment at the time. The
parliamentary report estimated that Tanzania has lost out on ―at least
US$400m over the past seven years from low royalties and lost taxes from
mining companies‖ (Christian-Aid, 2008a, p.13). Unsurprisingly, NGOs are
taking considerable interest in the tax avoidance by multinational corporations
in developing countries (Christian-Aid, 2004, 2007, 2008a, 2008b, 2009;
Oxfam, 2000; Action-Aid, 2008, 2009).

4. Summary and Discussion

This paper has sought to encourage research into corporate claims of socially
responsible conduct by examining their tax practices. Arguably, few
companies make any direct reference to payment of taxes in their social
responsibility reports, but their claims of ethics, integrity, honesty,
transparency and responsibility are meant to apply to all aspect of their
operations. Since the payment of democratically agreed taxes in an important
part of corporate citizenship this assumed that the declared standards also
applied to taxes. The limited number of cases examined in this paper show
that there is a considerable gap between corporate talk, decisions and action
culminating in organised hypocrisy. Corporations have developed two
cultures: one promises ethical conduct to external audiences and this is
decoupled from the organisational practices which are geared to improving
profits by avoiding and even evading taxes. In essence, companies have

36
developed elaborate practices to appropriate returns due to society on its
investment of social capital. Transfer pricing, royalty programmes, offshore
tax havens and carefully structured transactions are just some of the
techniques used to avoid taxes. Despite the allusions of transparency and
integrity, none of the organisations examined in this paper communicated
their tax avoidance practices to stakeholders, or explained the possible social
consequences of avoiding taxes. Examples were provided to show how
companies developed elaborate daily routines and administrative structures to
indulge in tax avoidance. There is no legal or moral compulsion for company
directors to indulge in tax evasion or avoidance. Rather it is a choice that they
themselves have made in pursuit of higher profits, remuneration, status and
media accolades. The contradictions between talk and action have been
exposed by whistleblowers, investigators and law enforcement agencies. The
implosion of hypocrisy has resulted in fines, imprisonment for some company
executives and hostile press coverage. The negative outcomes may have
persuaded some to take steps to align corporate culture with publicly
espoused claims, but the systemic pressures to maximise profits, share prices
and executive financial rewards present considerable barriers to securing
long-term cultural change. In common with a number of other writers this
paper cautions against too easily accepting corporate claims of social
responsibility (Milne and Patten, 2002; Deegan, 2002; Corporate Watch,
2006; Adler, Forbes and Willmott, 2007), especially as they are rarely
accompanied by any snippets of organisational practices and culture.

The public exposure of organised hypocrisy challenges corporate claims of

social responsibility. By rendering the familiar unfamiliar it opens up the
possibilities of wider debates for reforms. There is a need to go beyond the
carefully cultivated corporate image and engage with actual corporate
practices and consider their impact on the lives of people. Organised tax
avoidance has real human consequences even though corporate CSR reports
remain silent. Consider the case of developing countries which frequently rely
upon foreign-aid and loans for economic development. These often come with
strings attached, such as ―structural adjustment programs‖, and dilute the
autonomy of local governments (Pilger, 1998). In contrast tax revenues are
37
free from external pressures and are non-returnable. They provide the most
durable resource to finance social infrastructure and provide much needed
economic and social development to improve the quality of life of millions of
people.

For example, in mineral rich Tanzania (mentioned above) more than half of its
40 million population lives on less than US$1 a day. The life expectancy is just
51 years. Around 44% of the population is classified as undernourished
(Christian-Aid, 2008a, p. 11). Across the world some 969 million people are
estimated to survive on less than U$1 a day (Ahmed et al., 2007). Nearly 3
billion people, including over 500 million youths (ages 15 to 24), struggle to
survive on less that US$2 a day, considered to be the internationally defined
poverty line (United Nations Population Fund, 2005). Whilst the average life
expectancy in many western countries is around 80 years, in Swaziland,
Botswana and Lesotho it is 33, 34 and 36 years respectively (Population
Reference Bureau, 2007). In developing countries, more than 1 billion people
do not have access to safe drinking water. About 1.9 million people die every
year from diarrheal diseases and around 1.5 million (or 5,000 a day) of the
fatalities are children under the age of five (Water Aid, 2007). An estimated
774 million adults lack basic literacy skills (UNESCO, 2007). Due to lack of tax
revenues, 34 out of 84 countries decreased the share of gross national
product (GNP) devoted to education since 1999. 24 out of 105 countries
allocated less than 3% of GNP to education. Such problems could be
addressed by holding corporations to account and requiring them to pay taxes
so that millions of people can receive healthcare, housing, education and
other essentials.

The consequences of organised tax avoidance affect developed countries too

and limit the support that the state can provide to the less well-off, the elderly
and the vulnerable. For example, the UK state manages poverty through the
provision of a variety of tax credits and social security (Sikka, 2008). Despite
huge increases in support in recent years, around 13.2 million people, or 22%

38
of the population, live below the poverty line 54 (Oxfam, 2009). Some 2.9
million children live in poverty households (The Times, 18 February 2009). In
a league of 21 industrialised nations, measuring child well-being, the UK
came last, marginally behind the USA (UNICEF, 2007). The UK state pension
is a major source of income for retired citizens, but it is almost the lowest in
Europe. An average earner would receive a pension worth just 17% of their
salary, compared with an EU average of 57% (The Guardian, 13 November
2007; Mitchell and Sikka, 2006). The state can only provide support if it
collects sufficient tax revenues and corporations live up to their promises of
responsible and ethical conduct.

This paper has argued that the payment of democratically agreed taxes
represents a litmus test for claims of social responsibility. The possibilities of
social responsibility rest on the alignment of corporate culture with the social
expectations that companies will honour their publicly espoused goals. In
principle, the state could be mobilised to exert pressure on companies by
requiring greater disclosures about corporate strategies for avoiding taxes and
changing the nature of corporations so that diverse social groups are
represented on company boards. This could stimulate public debates and
even check some excesses, but is unlikely to shed light on the systemic
origins of the tendency to avoid taxes, nor make the tax avoidance industry go
away. In any case, within the contemporary neoliberal order, the states
compete to attract capital and in that process offer tax holidays, inducements
and concession to encourage mobility of capital, which in turn fuels schemes
for avoiding taxes. The key issue is the social conflict inherent in the very
nature of corporations (Bakan, 2004; Monbiot, 2000) and requires reflections
on the social steering mechanisms that prioritise preoccupation with private
accumulation of wealth and render human concerns relatively invisible. Money
and power seem to have developed their own logic and have become
indifferent to human concerns about producing a just, equitable and open
society. By scrutinising organised hypocrisy and persuading companies to
honour the commitment to pay taxes opens up a research agenda that

54
This is defined as less than 60% of the median income.
39
requires detailed considerations of the role of the state, neoliberal ideologies,
the law, the nature of democracy, the media, institutional structures and
nodes of power that give meaning to everyday practices and (re)production of
reflective individuals.

40
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