Case Study

One way that business affects government is by avoiding taxes by exploiting or creating tax loopholes. Doing this improves corporate profits, meeting one of business's responsibilities. However, businesses also have responsibility to contribute financially to the governments whose resources enable them to grow and prosper. Those contributions are needed to maintain and promote a sustainable world, as evidenced by tax payment being included as a key performance indicator in determining the Global 100 most sustainable corporations. A key question is where should business draw the line between retaining profits to enhance shareholder wealth and contributing its fair share to government?

As the United States government looks for ways to deal with a growing deficit, greater attention is being paid to the issue of corporate taxation. The Center for Investigative Reporting evaluated the earnings and assets of Silicon Valley tech companies and compared them to taxes paid. It concluded that Silicon Valley giants, such as Apple, eBay, Google and Yahoo, were paying effective global tax rates well below the top U.S. corporate tax rate of 35 percent. Non-tech companies such as General Electric, Coca-Cola, and Procter and Gamble also reduced taxes with offshore holdings. However, because tech companies deal with intellectual property, they are more easily able to shift their intellectual property to tax havens.

In the 1980s, Apple pioneered an accounting method that sent profits to the Caribbean by way of Irish subsidiaries and the Netherlandshence the title "Double Irish with a Dutch Sandwich." Observers estimate that hundreds of companies employ that tactic today. A U.S. Senate Investigative Panel, headed by Senator Carl Levin (D-MI), is exploring the overall issue of corporate tax avoidance. According to Senator Levin, "The resulting loss of revenue is one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear."

1.Who are the stakeholders and how are they affected by these corporate tax-saving strategies?

2.Do companies have a responsibility to pay a fair share of income tax to local, state, and federal governments? Who determines what that fair share should be?

3.The U.K. government has declared that corporate tax avoiders will no longer be able to bid on government contracts. Critics believe that corporations will find a way to work around it. If it were possible to design a foolproof system, would you support the U.K. policy? Would you recommend it to other governments?