Global fiscal morality - a human rights and ESG issue

By Lina Klesper 

Klesper is a Legal Assistant at PKF Malta, an audit and consultancy firm

The way business is conducted is changing.  While for the longest time the primary goal was to increase shareholder returns more attention is being paid as to how certain business practices affect the environment and society.

What is argued for quite some time is that money-oriented approaches to business are outdated since such an approach cannot be sustainable in the medium to long run.  The key to success is to strike a balance between the interests of all stakeholders involved. In more familiar words, this means paying attention to environmental, social, and governance (ESG) issues involving customers, employees, suppliers, communities, and shareholders.

The mantra of ESG advocates is that companies taking ESG criteria at heart will be in a better position to receive strategic opportunities and be at a competitive advantage.

Armed with an ESG report, companies can improve transparency for investors with relevant stakeholders being able to review the company´s ESG activities and the company functions as an inspirational role model benefitting its own image. ESG reporting is therefore a good (and soon mandatory) step to publicly disclose a company´s ESG data.

However, what is easily overlooked is the importance of tax as an ESG criterion. Every year, countries around the world lose a total of $483 billion in tax to corporations and the superrich using tax havens.  Illicit financial flows and the consequential lack of revenue for governments give rise to devastating human rights impacts and some of the worst human rights failures around the world.

Especially in the global south, the effects of tax abuse are felt as a product and continuation of colonial hegemonies, fiscal extraction, and discrimination.  Most dramatic findings show, when analysing the relationship between government revenue and child and maternal mortality, that tax abuse is responsible for the loss of 600,000 children and 73,000 mothers globally if the losses in 2020 are projected over a ten-year period.

A perfect example of tax policy as a human rights issue is the case of tax haven Ireland which is to face the UN spotlight over children’s rights impacts of its fiscal policies.

In early 2023 Ireland must appear before the United Nations Committee on the Rights of the Child due to the country´s responsibility for the impacts of cross-border tax abuse on the realisation of children´s economic, social and cultural rights caused by Ireland´s manifold ways of siphoning revenue away from richer countries leading to devastating human rights impacts. Keeping in mind that Ireland is not the only tax haven, this is an interesting moment to look out for.  Look out as this month, the UN Committee in Geneva will consider evidence from civil society organisations.

The objective of having tax as an ESG criterion is to bring tax transparency to hold organizations responsible for complying with tax legislation and in particular good tax practices to meet the expectations of their stakeholders. Broadly speaking, tax justice is the overall objective when taking a human rights approach. The great importance of taxes becomes clear when uncovering that tax injustice is a human rights issue. This is a surprising connection for some people, while for others, it makes perfect sense.

The foremost logical connection between companies, ESG and taxes, means that an organization has an impact on the economy through its taxes and payments to governments.  The impacts on the economy, environment, and people and their human rights are interrelated, making room for connections between taxes and human rights and putting taxes on the spot as a metric of a company´s contribution to society.  The fact that taxes are acknowledged by the United Nations to play a vital role in achieving the Sustainable Development Goals as introduced by the Agenda 2030 shows stronger correlations between taxes and human rights.

When companies deviate from good tax practices and seek to minimize their tax obligation the government and consequently the society is being deprived of revenue and investment increasing government debt or even shifting the tax obligation to other taxpayers.  A prominent example of undermining tax compliance through tax avoidance, includes mega multinational companies whose behaviour leads to aggressive tax planning while other companies fearing to be at a competitive disadvantage.  The latter fall back onto the government fearing with increasing cost in tax burdens, regulation and enforcement.

On the contrary, when companies are paying taxes, a great contribution is made to finance public services and public sustainability projects to help alleviate poverty.  By reporting the company´s tax footprint, which measures the taxes and their effects accumulated for society by company operations, transparent disclosure is provided in the interest of investors and the public.  At the moment, companies are not obliged to report on their tax footprint. The Global Reporting Initiative (GRI), an international organization for independent standards, laid down standards for companies to report non-financial information to disclose the business´ impacts on the economy, environment, and people, including effects on human rights. Those standards are voluntary and non-binding. However, the proposed Corporate Sustainability Reporting Directive (CSRD) and the forthcoming mandatory European Sustainability Reporting Standards (ESRS) are based on the GRI standards.  But many companies are already disclosing their tax-related impacts possibly in connection with increased pressure on corporate tax transparency.

In some countries, ESG criteria have become vital for companies wanting to register with the country´s stock exchange thus elevating the importance of corporate transparency and reporting. Furthermore, institutional investors can be held liable for their investment in financial vehicles which do not pay their fair share of tax, thereby exacerbating human rights abuses.

Besides ESG, hope also lies in a draft UN tax convention as reforms on corporate tax including proposals for a global minimum corporate tax at the OECD are dragging and already deemed hopeless. At the beginning of this year, Eurodad and the Global Alliance for Tax Justice produced a full draft for a UN tax convention ´Proposal for a UN Convention on Tax´.  A UN Tax convention is intended to set up international tax standards and create a globally inclusive, intergovernmental tax body to end the scourge of global tax abuse and the relentless race to the bottom in corporate taxation.

To conclude, tax justice is clearly a human rights issue. The fact that tax policy plays such a crucial part in ensuring human rights globally, corporate tax and tax policy are becoming an important ESG criterion to look out for – for investors, shareholders, lawyers, advisors, auditors and consumers. Especially lawyers and other advisors like accountants should redefine their role in advising corporations on tax matters and are strongly encouraged to alert companies to the reputational, social, and environmental harm tax avoidance or even more in case of evasion can cause.