Blog
By GBI Deputy Director Benn Hogan
The world in which we find ourselves this January is starkly different to that of twelve months ago. The COVID-19 pandemic has created new economic chasms and magnified existing vulnerabilities among workers across global value chains. The tumult has demonstrated a need for large scale government spending in times of crisis and highlighted the differing abilities of states across the globe to provide such support.
As many companies turn their attention to the preparation of annual reports for a year like no other in recent memory, one subject which should be on the agenda of business and human rights practitioners is taxation.
There is a clear link between tax policy and human rights. State resources are a necessary precursor to the realisation of economic, social and cultural rights in particular, and decisions on corporate tax taken at head office can therefore have impacts on the rights of people across the world.
Tax planning by business impacts human rights
Corporate tax strategies often seek to take advantage of loopholes in the complex web of national tax laws, which developed in an era very different to our own.
Many national tax authorities have struggled to meaningfully account for changes in business practices, with the result that profits can be artificially (and legally) shifted to low-tax jurisdictions, a phenomenon known as base erosion and profit shifting (BEPS).
Although it is difficult to quantify, research has suggested that transfer pricing is used to reduce taxable income in developed and developing countries, with knock-on effects for the realisation of rights.
The UN Guiding Principles on Business and Human Rights do not explicitly address taxation. Nevertheless, the International Bar Association contends that “Merely complying with tax law is not enough when this results in the violation of human rights”. As the corporate responsibility to respect human rights extends to all aspects of business operations, taxation must also be considered. Responsible practice should be guided by the taxation chapter of the OECD Guidelines for Multinational Enterprises.
International reforms
There have been efforts at international reform from a joint G20-OECD project on BEPS. In 2016, the OECD launched the BEPS Multilateral Instrument, which among other things establishes minimum standards to address harmful tax practices, tax treaty abuses, and to require country-by-country reporting of corporate tax payments to tax authorities.
However, the largest reforms may be yet to come. Current proposals would seek to alter the principles of transfer pricing, establishing an effective global minimum level of taxation and addressing profit allocation challenges posed by the digital economy.
Companies should understand this when integrating the corporate responsibility to respect human rights into their operations.
In order to address taxation as a human rights issue, corporate human rights professionals could consider initial steps, including:
- Appraising senior leadership of the connections between human rights and taxation.
- Engaging finance teams and colleagues involved in setting the organisation’s tax strategy with human rights and their relevance to their work.
- Considering the impact of your company’s corporate tax strategy – including transfer pricing – in your human rights impact assessment methodology.
- Seeking to communicate transparently on effective tax rates on a jurisdiction-by-jurisdiction basis to stakeholders in annual reports.
Planning for the future
While international taxation policy changes move slowly, businesses already have an implied responsibility to consider the impact of their tax strategy on the countries and communities in which they operate as part of their responsibility to respect human rights.
Some companies have already sought to take proactive steps to further clarify this responsibility. For instance, in 2018, the B Team launched a set of Responsible Tax Principles which call on businesses to ensure accountability, responsibility and transparency in the management of their tax affairs.
As governments seek to take stock of their spending increases in 2020 and plan for a post-pandemic world, it seems likely that corporate taxation will be high on the agenda. Businesses which view taxation also through a UNGP lens will be well-placed to adapt to future changes.
Access Benn Hogan and Andrea Shemberg's blog "COVID-19 and contract non-performance: wise companies are guided by business and human rights thinking" here
Access more from the GBI blog series here