Ethical Implications About Global Tax Avoidance †Free Samples

Question: Discuss about the Ethical Implications Global Tax Avoidance. Answer: Introduction The issue of ethics is topical in that it impacts on the operations of almost all businesses. Basically, ethics refers to the rules or principles that define right and wrong conduct (Robbins, 2010). In the same vein, it can be observed that enlightened firms encourage their managers to look beyond the expectations of the regulatory system and do the right thing (Kotler and Armstrong, 2010). These socially responsible firms seek to protect the long-run interests of their stakeholders and the environment. However, ethical issues usually involve conflicting interests and people can disagree about the right course of action to take in a given scenario (Kotler and Armstrong, 2010). As such, this paper seeks to discuss the ethical implications of global tax avoidance especially by multinational corporations (MNCs). There are mixed reactions to the aspect of tax avoidance since other people encourage it while others view it as morally wrong. Tax avoidance According to Investopedia (2017), tax avoidance involves the legal use of a tax regime in one territory. In other words, large corporations in particular register their businesses in a single territory where they are liable to pay taxes instead of paying to the respective countries in which they are operating. Tax havens are utilised in this case and these are recognised jurisdictions that are specifically meant to facilitate a reduction of taxes to the advantage of the party involved. The major notable aspect about tax avoidance is that the practice is legal but the only difference is that the tax regimes are administered in different jurisdictions apart from where the company is actually operating. In other words, the host country benefits in the form of employment creation through foreign direct investment but it loses a great deal in terms of revenue collection through tax avoidance. Though legal, tax avoidance has various implications on the government of the host country. Significance of corporate tax According to Cobham and Jansk (2017), international corporate tax is a very important source of government revenue particularly in developing countries such as Latin America, Sub Saharan Africa, Caribbean and South Asia. This notion has also been supported by Myers (2017) who state that developing countries mainly generate revenue from the taxes they charge corporations operating within their jurisdiction. However, it can be observed that these developing countries often lose revenue due to tax avoidance. When MNCs invest in developing countries, they should pay taxes but this is not usually the case. Corporate taxes are also very important since they play a significant role in the development of infrastructure. In most cases, the activities of MNCs in developing countries cause damage to the environment hence the need for them to pay taxes that can in turn be used to develop the infrastructure. Implications of tax avoidance Large multinational companies operating in developing countries are usually registered through offshore tax havens in particular not in the country in which they operate (Bearak, 2016). This action deprives the local governments large sums of tax revenue they are supposed to get from the operations of these MNCs in their countries. For example, it has been observed that Tullow, an organization that is viewed as Africas leading Independent Oil Company derives 84 % of its sales revenue from Africa yet only four of its 81 subsidiary companies are registered in Africa while 47 are registered in Tax havens (Bearak, 2016). This implies that only four registered subsidiary companies pay taxes in the countries in which they are registered in Africa. The rest of the subsidiaries pay their taxes through tax havens which illustrates a perfect example of tax avoidance. The majority of African governments in which the organization operates do not benefit a lot since they do not get corporate taxe s from these companies. The other example can be drawn from the case of Panama Papers where large sums of money were moved through tax havens and this money could have been taxed by the worlds poorest governments desperately in need of money (Bearak, 2016). The developing countries were compromised a great deal since they lost large sums of money through tax avoidance. In the same vein, it can be seen that the United Nations Economic Commission for Africa has estimated that between $30 billion and $60 billion is lost by African governments through tax avoidance annually (Bearak, 2016). Surprisingly, this money is siphoned legally from developing countries by the MNCs from the rich western countries in particular. The major notable aspect here is that tax avoidance is legal since it is not criminal in any way. The only difference is that tax regimes are administered in different jurisdictions apart from the host country where the MNCs operate as illustrated in the example explained above. Ethical implications of the practice of tax avoidance Whilst the aspect of tax avoidance is legal as noted above, the morality of the practice has been questioned and often criticised by people from different sectors of the society. Ethically, companies should strive to do the right thing in their operations. In some cases, actions that are legal can be immoral somehow since they impact negatively on the welfare of the majority of the people in the environment in which they operate. The companys action should benefit the majority of people in the environment in which it is operating. This view is supported by the utilitarian theory of ethics. According to Robbins (2000), the utilitarian theory of ethics mainly focuses on the outcomes of a certain action on the other people. In other words, it focuses on the interests of the other people since it clearly states that the majority of the people should benefit from a course of action especially by a company. This ethical theory equates pleasure with good while pain is equated with wrong doi ng (Cavalier, 2002). Therefore, the action that brings the greatest happiness to the greatest number of people should be given prominence over the action that is likely to cause suffering to the majority of people. In as far as the issue of tax avoidance is concerned, it can be seen that its morality is questionable though the action is viewed as legal. Legally, there is nothing wrong with this practice by quite a number of MNCs that operate in different countries but paying their taxes through tax havens. In the end, the host countries lose on corporate taxes which are much needed for various developmental purposes. The MNCs should consider the interests of the majority of people in the host countries who should benefit from the taxes they are supposed to pay instead of evading them through the use of tax havens. Many developing countries are often at the receiving end since they mainly rely on foreign aid. Ironically, these countries have vast natural resources that are expropriated by the developed countries that do not pay taxes that should benefit the local people. Ethically, this practice should be condemned since it undermines the interests of the other people who should benefit from the ir resources. MNCs should be cognisant of the fact that their actions are detrimental to the host country therefore they should compensate the local governments through paying taxes directly to them instead of relying on tax havens that are administered in offshore jurisdictions. This will help to address the anomaly where the local governments are at the receiving end instead of enjoying their own wealth. Conclusion It can be concluded that ethical issues impact on the operations of organisations in various ways since they are supposed to look beyond written laws and regulations. In other words, companies are expected to do the right thing in their work. As discussed above, the issue of ethics is controversial since it is comprised of conflicting interests and there is no universal agreement about what is right. As illustrated in the case of multinationals operating in poor countries, it can be seen that the issue of global tax avoidance is a cause for concern since these nations are losing billions of dollars annually through tax havens where the large corporations are registered. However, the aspect of tax havens is legal and it does not violate any law. The taxes are properly administered in offshore jurisdictions and the law recognises this practice as legal. However, the morality of the practice has often been criticised by many people since it undermines the interests of the local governme nts. They lose large sums of money which should benefit the local citizens. This comes against the background of many developing countries being at the receiving end of foreign aid instead of benefitting from their natural resources plundered by rich MNCs that do not pay corporate taxes. Ethically, this practice can be viewed as wrong since it does not benefit the majority of people. 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