Taxation plays a key role in every society. It provides to the state the financial resources to fund public expenditures and government activities. In most countries, corporations are taxed on their income to a certain extent. For example, in 2024, the Corporate Tax Rate was 22 per cent in Norway and 25 per cent in France and Belgium. Enterprises, particularly multinational corporations, have been actively engaging in aggressive tax planning behaviors over the last few decades. Aggressive tax planning, according to the European Commission, is ‘taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability’. Another way of characterizing the aggressive nature of the tax planning is when it is done at the costs of other members of society. The ultimate goal is to maximize shareholder profits and minimize tax liabilities.
However, these practices have significant consequences for governments, mainly a loss of tax revenues that are essential for public investments, notably in infrastructure, education, health, social protection systems, the environment and other sustainable development goals.
Bridging Taxation and UN Sustainable Development Goals
Achieving the UN Sustainable Development Goals (SDGs) is very much dependent on taxes. The SDGs are 17 goals adopted in 2015 by UN member states to fight against poverty, inequality and climate change. Governments have the responsibility to achieve these goals while maintaining an economic growth. To achieve most SDGs, governments have to rely on various financial public resources, with taxation on corporate profits being among the most important. Mominur Rahman highlighted that it can ‘significantly increase tax collections if appropriately implemented, for example, ensuring corporations pay their fair share of taxes’.
A Fragile Balance for Governments
The laws of the market also apply to corporate taxation. Businesses are profit focused, and following the mainstream agency theory of the firm, boards and managers in general are encouraged to take decisions in the interest of shareholders. Therefore, if a government imposes what are perceived by business as being excessive tax rates, corporations may shift their profits to lower-tax jurisdictions or will stop investing within the fiscal jurisdiction. This may lead to a reduction of tax revenues. On the other hand, a significantly low tax rate could further result in increasing the government’s deficit which stifles economic growth overall.
Governments therefore often perceive themselves as balancing on a thin line in order to remain competitive and to maintain corporations within their jurisdiction.
A Social Responsibility for Corporations?
Within the sphere of the European Commission’s ‘Corporate Sustainability and Responsibility’, the concept of ‘Corporate Social Responsibility’ (CSR) has been defined by the European Commission as the ‘responsibility of enterprises for their impact on society’. In other words, it consists of a duty for companies to ‘integrate social, environmental, ethical, consumer and human rights concerns into their business strategy and operations’ as well as to follow the law. What is the role of CSR in the companies’ tax decision-making?
For the past decade, following the several tax scandals that drew corporate tax behavior in the media spotlight, Gribnau and Jallai see a tendency for global corporations to accept their moral responsibilities towards society. The two scholars pointed out that nowadays, enterprises are expected not engage in any kind of aggressive tax planning. According to Gribnau and Jallai’s findings, the concept of ‘sustainable tax governance’ is subsequently entering into the private sector, as a future-oriented tax governance. Part of CSR also goes through paying a fair share of taxes in every place a company conducts some economic activities, especially in developing countries.
Transparency as CSR main enforcing tool
Transparency plays a key role within the EU action plan to combat aggressive tax planning. Transparency is perceived as a means to accountability. As well formulated by Hirst and Thompson, transnational corporations can ‘no longer be controlled or even constrained by the policies of particular national states’. Within the EU, CSR is promoted through voluntary and mandatory actions with transparency as one of the key enforcing tools. On the one hand, it would allow citizens and more generally the public opinion to assess the tax strategies and the contribution to welfare by multinationals (Directive (EU) 2021/2101 on corporate tax transparency). On the other hand, other mechanisms like country-by-country reporting would give the ability to the tax authorities to assess the tax practices of corporations more efficiently and enforce their policies. Ultimately, social norms like the expectation society has for appropriate business behavior and outcomes carry a lot of weight on businesses’ strategies.
Corporate Taxation: The Key to Attaining Sustainability Objectives?
Corporate tax represents an important financial resource for governments. It plays its part in sustainable development policies and actions, at the national, regional, and international level. When discussing the relationship between taxes and sustainability, it is logical to refer to environmental taxes. On top of generating revenues, one objective of this tax is to change corporate behaviors and reduce environmental damages. In the broadest sense, an environmental tax doesn’t exclusively apply to corporations, but also to citizens. Unfortunately, nowadays this tool is underexploited. Rotillon points out that ‘the public opinion appears to be largely opposed to high environmental taxation, even under constat fiscal pressure’. A solution could be to strengthen the environmental tax burden on enterprises, pushing, once again, on the ‘polluter-payer’ principle.
Moreover, this reflection is closely linked with the fight against aggressive tax planning and tax avoidance. Governments and policymakers like the EU should actively promote more sustainable tax behaviors. It can be through the adoption of sector-specific taxes or sustainability-oriented taxes, but also through other mechanisms that would encourage a more sustainable behavior of corporations, like transparency or (other) CSR actions. Nevertheless, these ambitions won’t work without clear policies at the various legislative levels (national and European). It is for instance the responsibility of the public authority to provide more guidance as to what is considered illegitimate tax planning practices.
We can ask ourselves the following questions: is the gap too large between the sustainable tax governance of corporations that policymakers advocate and the actual fiscal strategic choices undertaken by boards? Can these ambitions only rest upon relative constraint, transparency and a voluntary basis from enterprises? And ultimately, is it really the government’s intention to close those ‘tax’ loopholes or are the governments more inclined to a ‘shareholder primacy’ approach in order to stay competitive on an international level?