Özer Gül


2015 04 10 Ordan Burdan

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Ethical problems of tax avoidance

Essentially, ethics is considered as one of the basic principles of corporate social responsibility.  Therefore, ethical CSR includes both is what is right to do and the philanthropic responsibilities of a company to the society (Carroll 2006). The relationship between tax and ethics are widely becoming an international standard. The various research linking tax avoidance and ethics have combined three different themes which may include self-interest of managers, the role accounting experts in drafting tax avoidance measures, and theoretical standards used to judge the ethics of tax avoidance.

The various theories that commonly uses in evaluating the ethics of tax avoidance include utilitarianism, virtue ethics, deontology, beneficence, and justice. Preuss (2013) conducted a research on tax avoidance in Cayman Islands and Bermuda using three perspectives namely deontology, utilitarianism and virtue ethics.  Based on the three theories the researcher concluded that tax avoidance is illegal and should be judged as illegal. According to the utilitarian theory perspective, tax avoidance through a cost benefit analysis, the advantages are only felt by small proportion of professions who include advisors, shareholders, and managers. On the other hand, a large number of people are affected due to the inability of the government to collect and uses the taxes for infrastructure and social welfare.   From a utilitarian stakeholders point of view, the tax avoidance is considered ethical depending on the situation (Godar, O’Connor and  Taylor  2005).  The groups of stakeholders that are impacted by the tax inversion include customers, investors, employees, prospective home government, and present home government.  While some stakeholders are positively affected, other are impacted negatively both psychologically and economically.  The net effect of determining the effect of the decision-making raise the question of what it implies to be a citizen and the duties and rights that come with citizenship. Corporations such as Starbucks, who carry out activities of tax avoidance, undermine the real mean of citizenship.  

According to deontological theory, human beings must be regarded as ends and to as means.  When taxes are reduced through these predatory activities, this golden rule is violated (Sikka 2008). Consequently, the government and companies are denied an opportunity to work effectively with the aim of addressing the social welfare interests of the citizens.  Moreover, the virtue ethics principle advocates that companies should avoid intense actions and recommends that they always build their moral character (Velasquez, 2012).  Touting a company’s corporate social responsibility while belligerently avoid taxes develops an atmosphere which normalizes certain practices and habits and tax avoidance become the order of the day (Sikka 2010). According to the virtue ethics principle, tax avoidance is undesirable corporate culture and thus unaccepted.

Notably, managers have a fiduciary duty to shareholders and a result their moral duty must be spread over a wider range of stakeholders including the society and the government.  Most of the ethical principles indicate that it is hard to justify the act of tax avoidance on ethical grounds. To explain this, reducing of taxes to maximize shareholders wealth and the same action being detrimental to other stakeholders is not morally justified.  The theories of beneficence (Dowlinn 2014) and justice (Slemrod 2004), also explains that tax avoidance is unjustified on ethical grounds.  The theory of justice argues that the act is merely a transfer of finance from the society to the shareholders. The beneficence theory is similar to that utilitarianism, but with an added provision of “do no harm.” Many people have different opinions on taxes. Some consider payment of taxes as immoral; some as the right thing to do while other consider it amoral. Critics of tax avoidance consider the practice as a moral issue since companies, and in this case, Starbucks, have a social responsibility (Christensen and Murphy 2004). Additionally, tax profession argues that it is unethical to even when the tax actions contradict corporate codes of conduct (Slemrod 2004). Nonetheless, some companies consider tax avoidance as immoral only when it is done illegally.

Various studies indicate that tax avoidance is a product of managerial greed.  The increase in incentive compensation through share options and bonuses has resulted in aggressive earnings management to increase payment while maximizing shareholders wealth (Desai and Dharmapala 2006). Managers who opt for tax avoidance cover their motivations and actions from the concerned shareholders and other interested parties. Managers with reasons to manage earnings proactively create their public exposure by participating in corporate social responsibility activities to develop a socially –friendly image while following their self-interest regarding reputation, job security or compensation.

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