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Tax transparency measures introduced by governments in some countries around the world have resulted in  information about large company tax payments being made available to the public. Pursuant to a traditional shareholder primacy model, companies must maximise profit and thereby dividend return. However this process does not take place in a vacuum. The increasing importance of  reputational risk places pressure on tax decision makers to consider a variety of stakeholders, including the community at large.

The debate and commentary on company tax payments has at times been extremely negative as media and lobby groups report upon companies that pay very little or no tax in the country in which they have a substantial presence. Aggressive tax structures come at a cost as tax systems, in trying to keep up, become increasingly complex, administration costs increase, and government revenue is lost. Increasingly corporate social responsibility and sustainability considerations impose a broader ethical obligation on company decision makers.

The longstanding conservative view of corporate ethics, that companies are founded to generate profit and thereby are not required to pursue social goals, is making way to a more liberal interpretation. Increasingly, society demands a company be held accountable for the benefits provided by separate legal entity status and perpetual succession. Viewed from this social obligation perspective, tax avoidance simply shifts the tax burden to others in society, whereas the payment of tax funds the fabric of society itself, including schools, hospitals and welfare.

Research involving 15 in-depth, semi-structured interviews in 2010, and a subsequent survey in 2011/12 exploring the nature of tax risk management practices in large Australian companies, pointed to the absence of an ethical framework or lens in managing tax risk. Therefore, the potential benefits to revenue — and to the corporations themselves — when such an ethical framework is applied to the management of tax risks needs to be explored.

Ethical framework for tax risk management

An ethical framework may be used to support and guide decision making, and may assist a company and its decision makers, concerning what is an acceptable level of tax risk. The contents of an ethical framework could be embodied in a company code of ethics to fill the void in application of the tax laws created by uncertainty and complexity and dictate where on the spectrum a company sits in terms of tax aggressiveness or acceptable tax risk.

Listed companies in Australia are already required to act ethically and responsibly, pursuant to the Australian Securities Exchange (‘ASX’) Corporate Governance Council Principles and Recommendations. The commentary to Principle 3 sets out that ‘ethically and responsibly’ is more than just compliance with legal obligations. It includes ‘being, and being seen to be, a “good corporate citizen”’. In addition, Principle 3 requires that a listed company’s core values must appear in a company code of conduct that is applied across the organisation’s decision making.

Senior decision makers in companies act as gatekeepers. They are crucial in setting the ‘tone at the top’. A recent six-country survey of banking and financial industry practitioners indicates that ‘company policies and legal requirements are the most influential factors driving ethical decisions’. Decision makers need a clear set of guiding values and principles to ensure principled reasoning, so that ‘ethical’ and ‘legal’ are clearly defined by the board, and typically included in a code of ethical conduct, with examples provided and demonstrated at all levels of the organisation.

There is much work to be done in unravelling existing ethical culture, embedding an ethical framework and ensuring it flows through the organisation, especially in relation to tax decision making. Data from our survey shows that the key individuals in large Australian companies who are decision makers on tax risk are the Chief Financial Officer (CFO) and the Tax Manager of the company. The board of directors, the Chief Executive Officer (CEO) and company policy also have a significant role. We find the CFO was involved in deciding acceptable tax risk for a company in almost all cases.

Individual ethics

Individual ethics are also relevant. Many CFOs are members of professional accounting bodies that require individual compliance with a high standard of ethical conduct, including a consideration of the ‘public interest’.

Shafer and Simmons surveyed tax professionals in both public accounting and private industry in Hong Kong. They found that tax professionals’ attitudes toward ethics impact on their decision making and those who place little importance on ethical and socially responsible conduct are more likely to facilitate aggressive corporate tax avoidance schemes.

Research into business ethics indicates that the individual attitude of company managers will affect ethical decision-making processes within a company. The individual ethics of decision makers therefore present a risk to the company that, in terms of a corporate stance on ethics, needs to be identified and dealt with. Where company goals include ethical conduct in relation to tax compliance, clearly stated procedures and practices must be enforced by the company to minimise the impact of inconsistent individual ethical preferences.

Better ethics can improve reputation

The recent inquiry into corporate tax avoidance by the Senate Economics References Committee in Australia, and media reporting of low effective tax rates paid by high profile companies, reveal that aggressive tax arrangements have the potential to damage a company’s reputation. Public disclosure may encourage improved alignment between the public interest and the company’s best interest. Companies with a low public profile, which are not exposed to reputational risk, are not subject to the same pressures. It is no longer enough for the tax function to ensure compliance with the tax laws. Tax decision makers in companies need to be able to tell a convincing story about the company’s tax to convince stakeholders and the public that the company is paying its fair share.

Ethical principles, including those of professional organisations, do not currently play a direct role in the management of tax risks by large Australian companies. An ethical framework, typically embodied in a company code of ethics, should be a key element in a company’s comprehensive tax risk management system, as for its other decisions, to ensure that the tax decisions made by individual decision makers take ethics seriously and address reputational and regulatory risk for companies.


This article is based on recently published research by Lavermicocca, C & Quilter, M 2017, ‘Tax rise management and the application of ethics by large Australian companies’, Australian Tax Forum, vol. 32, no. 4, pp. 741-756.

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