| Dave Kaufman – host: | The date was June 14th, 2022. And in the middle of a growing global economic crisis, American President Joe Biden tweeted out the following statement: “under my plan, no one making less than $400,000 per year will pay a penny more in federal taxes. But we’ll no longer have a situation where 55 of the largest corporations in America pay zero in federal income taxes on 40 billion in profits.” |
| Dave Kaufman – host: | The first sentence tweeted out by the president of the United States was a campaign promise that he’s been repeating since before he won the presidency. The second sentence, however, gave me pause. Is it actually possible that 55 of the largest corporations in the USA pay no federal income tax on 40 billion in profits? How can that be? |
| Dave Kaufman – host: | Well, what’s good for developing countries might not be the same as what’s good for powerful countries like Mr. Biden’s. As I’m sure you know already, tax policies are complicated and often they can seem unfair. However, there are solutions on the table that can both simplify how corporations pay their taxes and make things more equitable for countries owed their share of tax revenue. Let’s find out more. |
| Dave Kaufman – host: | Welcome to the second season of the New Normal, the podcast exploring management research brought to you by Delve, the official thought leadership platform of McGill university’s Desautels Faculty of Management. I’m your host, Dave Kaufman. On this episode of the New Normal, we talk with Desautels professor Preetika Joshi about tax avoidance and income shifting by corporations, whether country-by-country reporting is an effective tax avoidance deterrent, and how thought leaders believe that new technologies like blockchain and AI will make tax avoidance more difficult in the future. |
| Dave Kaufman – host: | Joining me for this episode is professor Preetika Joshi, assistant professor of accounting at the Desautels Faculty of Management at McGill University. She’s a qualified CPA with training in archival and empirical accounting research. Professor Joshi is also an experienced educator having taught accounting and tax at the university and professional levels for nearly a decade. Professor Joshi’s latest research examines whether country-by-country tax reporting has had its desired effect on multinational corporations. Spoiler alert: So far it has not. I began our conversation by asking Professor Joshi how large of a worldwide problem tax avoidance and income shifting really is. |
| Preetika Joshi: | I think it’s a pretty significant problem. The estimate can run into hundreds of billions of dollars globally. So to give you a sense, there, there was a figure that the international monetary fund had given back in 2018 and they had estimated this to be around 500 to 600 billion for globally. This that’s the estimate. So that’s probably more than a lot of the country’s GDPs put together. So I would say it’s a pretty significant problem. And this has been growing over the years. |
| Dave Kaufman – host: | I was curious about examples of societal impacts that we see from large scale tax avoidance, as evidenced by Biden’s tweet, tax avoidance does seem to have political value as a wedge issue. Professor Joshi believes that this issue is far from black and white. |
| Preetika Joshi: | I think the societal impact are harder to quantify and explain because on one hand we have developing nations. You can take nations like Barbados, Bahamas, which have this bad impression or bad reputation of being tax havens. But at the end of the day, they are developing nations. So they benefit a lot from inflow of capital that these companies bring by shifting income there. And it helps them. It helps them for employment, for investment, for development. If you go down to countries, actually we were in British Virgin Islands a number of years ago, and it is also one of the tax saving countries. But you can see the development that has cut. I could see all the major Canadian banks there and that was something very unique. So it, it makes a difference for these nations. But on the other hand, you have developed countries like Canada and the US and the Germanys of the world that say that the fair tax is not being paid. |
| Preetika Joshi: | I think to be able to quantify or identify the societal impact, what we have to understand is the problem doesn’t lie with shifting income to another country. Because as long as a company is paying tax on profits in any given country, I think it’s fine. The problem comes when these companies are able to structure their operations in a way that they end up paying no tax in any country. And then you can say that the societal impact comes from the fact that the revenue is not being generated by governments and they cannot use it for the development of their individual countries. |
| Dave Kaufman – host: | And this is where the complexities of tax laws come into play. Professor Joshi says that something that multinationals succeed at is playing within the rules as they’re designed. |
| Preetika Joshi: | The fault is in the rules. And the problem lies there because most of these rules that we talk about in Canada or globally, they were not meant for today’s economy. These rules are quite old. Some of them date back to when the Tax Act was originally written in 1917 to help finance the First World War. And the same goes for U.S. as well. Their first income tax act was written to finance the World War. So the economies, the countries have changed. Globalization has broadened changes. What has happened is that the companies have gotten way ahead than governments in terms of being able to identify the opportunities and challenges that globalization brings. |
| Dave Kaufman – host: | One way that governments have adapted is by introducing the OECDs country-by-country or CbCr plan, essentially large multinationals have to provide an annual tax return called the CbCr report that breaks down their financial tax statements by jurisdiction. Professor Joshi believes that CbCr creates transparency, which has been sorely lacking in the world economy. |
| Preetika Joshi: | Country-by-country reporting has transformed significantly the global landscape in terms of how transparent information is. This was one of the first initiatives that was adopted by so many countries simultaneously. And the back one of this initiative is an exchange agreement that countries have signed on. So to just give you a little bit of context there, country-by-country reporting does not introduce a tax. It’s not a tax rule. It doesn’t make companies pay tax. It’s a disclosure requirement. It requires large multinational corporations to file a form, disclosing its global allocation of activities and profits in all jurisdictions it calls home. So for example, Apple would be filing this form in US. RBC would be filing this form in Canada, but then US and Canada would take that form filed by say Apple and RBC respectively. And they would share it with the tax administrations of every single country where these companies have operations. So for the likes of Apples, that’s probably every single country in the world, right? So what this has done is it has levelled the playing field in terms of how much information was being disclosed consistently by the same company in different countries. With the objective that this will allow these countries to coordinate their effort, to fight tax avoidance on an international level. |
| Dave Kaufman – host: | Professor Joshi’s 2020 paper, published in the prestigious Journal of Accounting Research, argues that country-by-country reporting deters both tax avoidance and income shifting |
| Preetika Joshi: | What my research suggests is that the initial reaction, and I would like to say that my sample was made about European Union multinational corporations, but there’s no reason to believe that other companies in other countries will behave otherwise. So the research suggests that the initial reaction was definitely that there was a reduction in tax avoidance. I do not find a reduction in profit shifting, meaning that, you know, this reduction of tax avoidance doesn’t seem to be driven by firms reducing the level of profit being reported in low tax countries. |
| Dave Kaufman – host: | However, not all CbCrs are created equal. The public CbCr applies to multinational companies with a combined revenue of over 750 million Euros companies under that threshold are held to a less rigorous standard professor. Joshi says that the public private debate is highly contentious. |
| Preetika Joshi: | Why do we have this private versus public debate going on? Because a lot of people feel that maybe private will not be good enough and you need that added scrutiny and pressure that comes from public country-by-country reporting. Now it really is an unanswered question in terms of what is the cost benefit difference between the two, of course we can think about public country-by-country reporting, being more effective in deterring bad behaviour, but you also are imposing additional cost on a firm, right? You’re making them disclose information which may be proprietary or which may be sensitive. And this may be imposing unnecessary cost or burden on a company — who is to answer the question if it’s justified. I mean, hopefully people like us who can go and look at that, but we really don’t have a setting where we can compare and contrast public and private directly to answer this question. So this is just a debatable question as to if we think public is better or private is better. |
| Dave Kaufman – host: | She is clear that there’s no definitive answer. She argues that in many ways, having all the information of a public CbCr at your fingertips can still leave many questions lingering. |
| Preetika Joshi: | It begs the question that do we by me, I mean, people like me and you Dave, and the public of the world, do we need to know how much taxes alike of Googles and Apples are paying in every single country? Is that information that is useful? Like what do we do with that information? Do we fully understand that information? What if there is like a complex tax structure going on? Are there losses in a given country which led to a company paying no tax in Germany? So can we appreciate the information being disclosed and can be appreciated fully and use it fully, like going to the Starbucks example? Like what happened there? When people found out that basically Starbucks had not paid any tax in UK, like since 2009, for four years, they had paid nothing. And they had been making close to 400 million pounds and there was a lot of outcry and, you know, there were boycotts and then they went and they said, okay, we’re gonna pay tax. |
| Preetika Joshi: | And they paid this like voluntary tax. There’s nothing called voluntary tax. Like if you and me think that, let me just go pay something to CRA what does that even mean? We just can’t go and pay to the CRA. We have to owe them something to pay them, or they just refund the money back to us, you don’t donate. That’s basically a donation and I’ve heard conflicting views here. But my understanding is when Starbucks made that payment in the UK, it was what is that payment even for. So was that a good outcome? I don’t know. I’m not saying I’m not taking sides here. I’m just saying it’s debatable. |
| Dave Kaufman – host: | At least anecdotally, the Starbucks story shows that public pressure is a useful tool for tax avoidance. |
| Preetika Joshi: | I think public pressure can definitely play a role. And both anecdotally that is like in the real world, and from a research perspective, we have seen this. We have seen that when there is more public scrutiny, there is definitely a bit of a better behaviour on the side of the firm. So I think public pressure can definitely play a role, but the question is how much information does the public need is a different question, right? Like I don’t think I disagree at all with the point that a fair amount of public scrutiny and pressure on these firms makes them maybe abide and not behave badly. I’m using these terms loosely a little bit here, but definitely. And that’s why all of these leaks that come to light, like the Panamas, the Paradise, and you see the names of these companies and these people that it makes a difference. |
| Preetika Joshi: | So I think there is a definitely a room for public pressure in this fight. I’m just not sure if the public fully would understand the details of that public country-by-country reporting to use it properly. I don’t know if the UK result was appropriate, because what if the reason Starbucks was not paying tax in UK had to do with valid tax plan or had to do with losses they had or credits they caught. Like, we are not privy to that information because it’s the Starbucks and the Apples of the world. We all get the sense of that. Oh, they should be paying tax, but it’s not just the Starbucks and Apples, right? It’s you are making every company do this. So is it justified to impose tax on these other companies, which are not Starbucks and Apples and disclose similar information? |
| Preetika Joshi: | And like I said, it’s a genuine concern companies have that they may be disclosing proprietary information in terms of when you are reporting your global allocation of your, it’s pretty detailed. This reporting, you have to report the number of assets, the number of employees, your assets, your income, your equity, your taxes paid in every country you are operating. What about the regular companies of the world, which are not Apples and Starbucks, they’re doing it too. So can we justify this extent of disclosure? I think that we don’t know. I think we can make an argument both ways why this public country back country reporting could be effective, but on the other hand, why it may not be effective. So I really think that this is somewhat of an unanswered question that researchers needed to address it. |
| Dave Kaufman – host: | There are other methods currently being tested to deter tax avoidance and income shifting. Professor Joshi is especially interested in how blockchain technology and AI could lead to even more comprehensive financial accountability. |
| Preetika Joshi: | So it’s interesting. I actually have a project that we got funding from federal government for, and it, it looks at that. So in that question, broker we’re trying to do is we’re trying to create an experiment to study. How if blockchain was adopted by tax administrations, what would that do? Would that lead to taxpayers in general, not avoiding taxes. I think on a theoretical perspective, it’s easy to make that argument given that blockchain is immutable and irrefutable. Then you have this real time record of transaction. If you think about a perfect world where we can actually adopt and implement blockchain, I definitely think that it would be a huge deterrence. Australia actually is after a number of years and spent investing quite a significant amount of money has adopted a pilot blockchain for a certain industry for tax purposes. So it’ll be interesting to see what they find here. |
| Preetika Joshi: | I think the challenge with stuff like blockchain comes, is it practical? Do we practically think that are feasible that Canada or the us will be adopting blockchain on like a national level to see those results? But we have other technologies we have, you know, I have another paper that looks at other technologies like machine learning or robotic process automation. And I am finding that if the national tax agencies are adopting these technologies on one hand, it’s making them more effective. On the other hand, it is deterring tax avoidance because companies are thinking that there’s higher chances of questionable activities being caught or detected |
| Dave Kaufman – host: | As our conversation was wrapping up. I asked Professor Joshi what compels companies to actively avoid paying taxes in the first place. Her response helped me see why these multinationals act in the manner that they do. |
| Preetika Joshi: | Honestly, if you ask companies, I don’t think this, they look at it as avoiding taxes. The fundamental question is how much tax should a company be paid, right? I mean, that’s, that’s basically what this is all about. If you talk about a company, the company should be paying a tax that they owe based on the level of profit they have, but companies have operations, those operations privy them to deductions and credits. So it’s not simple as taking their income and multiplying it by a certain tax rate countries give a huge incentives for R and D because they want research and development that’s innovation, right? So if a company’s investing heavily in R and D, they will be paying a very low amount of tax because that’s how the tax system is intended. From a company’s perspective, this is an expense. And, you know, we have these theories in research that we go based on that tells us how people behave. |
| Preetika Joshi: | And one of those theories is something called an agency theory. And the agency theory basically says that it’s a principal agent problem is what it is. The owners of the company, big company are shareholders, but the people who operate the company are managers. So that’s the principal and the owner agent owner kind of situation. The job of these managers is to maximize returns and benefits for shareholders. Before, a very simple sense of what that maximizing return was, things like profitability of the company and share prices, right? Because higher the share prices more returns. The company is making what drives share prices. Very simply, profits. Of course, other stuff does, but very simply more profitable, more valued. The firm is higher, the share prices. So in some ways people can think about that. It is a job of the managers or the agents of the company to maximize the profitability. So these managers will tell you things like if you are expected to keep our overhead low, our salary cost low, why are we not expected to keep our tax cost low? Why is that expense different? |
| Dave Kaufman – host: | This sounds to me like being beholden to shareholders is above everything, above the tax system of the countries, in which they operate. Everything comes back to driving that stock price up and increasing that shareholder dividend. |
| Preetika Joshi: | If you talk about companies and not NPOs, the whole objective of that company is to maximize the wealth of their shareholders. So these companies will tell you, and you know, I’m gonna draw a parallel to a COVID initiative that came up and I was interviewed a few times on this issue, and you must be there too. When the COVID benefits were given to companies. And then the companies later on used them to pay back, you know, some dividends or something to their shareholders. When those managers were asked, they said, well, we didn’t do anything wrong. We were given this incentive. We took it because we were eligible. We didn’t like fudge the system, but we had the money. So we kind of maximized returns to our shareholders |
| Dave Kaufman – host: | In a 2020 investigation. CBC news analyzed the financial statements of 53 public companies that disclosed receiving over 10 million under the Canadian emergency wage subsidy program, or CEWS. They found that nearly 30 of them issued quarterly payments to shareholders while collecting the subsidy. As Professor Joshi said, they didn’t do anything wrong. They just played within the rules. |
| Preetika Joshi: | I think the disconnect comes in the view we have as a society. The view is changing from just being concerned about your wealth and your returns to kind of looking at the overall the world, the global economy, and, you know, benefiting everything, everybody. So the question really comes is what we think is a fair level of tax. I do believe that most companies and I can’t quantify what that is, are probably just using the deductions and credits and incentives provided to them. They hire very expensive tax advisors who know exactly what to do. And I was one of those tax advisors in different life. And they reorganized this company’s operations in a way that it minimizes their tax liability. We do that too, as individuals, right? We try to organize our operations in a way that we pay lower tax. For example, you know, if you are a doctor, who’s making a lot of money, but you make it through your corporation and you have childcare expense, you take enough money out of that company so you can maximize your childcare deduction. So I don’t think the companies are doing anything different, but because of the scale of these companies being so big and being so global, they benefit from taking advantage of these tax deductions and breaks in different countries, which was not meant to happen. And when all of that is put back together, you have companies which are paying tax at 4% and 5%. |
| Dave Kaufman – host: | Professor Joshi’s research shows that country-by-country reporting has a positive, albeit minor impact on tax avoidance deterrence. And she is confident that gains in blockchain and AI technology could be significant contributors to the improvement of transparency and accountability. However, as long as shareholder capitalism remains the standard, companies will always be looking for that way to increase their quarterly shareholder dividend. And for as long as companies take advantage of tax rules that are beneficial to them, what is fair and equitable will only depend on one thing, are you a shareholder or not? |
| Dave Kaufman – host: | Stay tuned as we navigate this new normal together. The New Normal has been brought to you by Delve, the official thought leadership platform of McGill university’s Desaultels Faculty of Management. I’m your host, Dave Kaufman. Producers of today’s episode, Dave Kaufman, Robyn Fadden and David Rawalia. The technical producer of the new normal is David Rawalia. |
