Tax fraud: How companies use CSR to cheat the system

It’s a noble cause. An action that results in showing goodwill and loyalty towards the host communities of corporate organizations – the corporate social responsibility (CSR) which should have been applauded has created may probably be the greatest heist in corporate environment as indications are that top multinationals and their local counterparts are signing off and cutting deals in the name of providing corporate social responsibility reports Ibrahim Apekhade Yusuf

Corporate social responsibility (CSR) is an ideal that should ordinarily be appreciated but this is not so any more. Reasons: increasingly most corporate organizations are reportedly using CSR as a conduit pipe to cheat the system.

Worries over CSR-related fraud

Concerns over the likelihood of companies using CSR to cut deals, especially tax avoidance has become one issue hotly debated.

Prince Umor C. Agundu and Akeem A. Siyanbola, both of the Department of Accounting, Federal University Wukari, Taraba State, while drawing a nexus between tax aggressiveness and corporate social responsibility fluidity amongst Nigerian firms said: “Essentially, tax expenditure is expected to be administered in a manner that reasonably minimises tax burden on the focal citizens. This privilege prevails more with corporate tax payers who either engage the services of tax consultants and/or undertake corporate social responsibility (CSR) activities, which are tax deductible.”

The concern of corporate entities in this regard borders on tax planning, tax avoidance, and tax evasion.  The latter is more synonymous with tax aggressiveness (which is a common practice in the business world). Unlike tax avoidance (which is permissible) tax evasion (aggressiveness) prevails as illegal tax saving scheme, but the dividing line between them is thin. This accounts for the increasing research interest towards addressing national development issues linked with tax aggressiveness.

“Operationally, there is no parity of CSR dynamics in developed and undeveloped nations due to circumstantial disparities which the latter suffer as a result of weak enforcement of regulations, malaise of corruption, and lack of awareness of basic rights amongst shareholders. To galvanise firms in Nigeria towards compliance, intense advocacy is directed at enhancing labour relations, product efficiency, quality of life, and reduction in emission of environmentally harmful substances. These contemporary issues relating to CSR find analytical expression in Nigeria as the fluidity has national development implications.

The researchers noted that as firms seek to post positive images to the outside world, compliance with taxation and other CSR expectations are equally critical, bearing strategically on organisational sustainability and national development. Furthermore, in recognition of the imperativeness of instilling non-tax aggressive behaviour, a state government in Nigeria harnessed the public media platform to advocate the filing of pay as you earn (PAYE) tax returns and PAYE remittances.

In some climes, where scholarly inquest on CSR and tax aggressiveness relationship has intensified, there are interesting and infesting mixed results.

Citing the treatise by Huseynov & Klamm, the dons observed that the outcome illuminated the relationship of three CSR dimensions, namely, corporate governance, community involvement, and gender diversity with tax aggressiveness, using American firms that engaged external auditors for tax related services.

“Without draining CSR fluidity and compromising tax compliance, cash flow conservation by firms should match impending payments which are not closely synchronised with cash receipts; meaningfully providing the needed financial cushion for exigencies.”

Writing on the impact of new transfer pricing rules on multinational enterprises in Nigeria, the trio of Taiwo Oyedele, Anthony Curtis, Elizabeth Sweigart and Robert Smallwood all of PricewaterhouseCoopers, observed that as a result of multinational enterprises establishing operations in Nigeria and the increased volume of intercompany transactions — both in terms of the number and the value —between these local affiliates and their foreign counterparts, transfer pricing is a top-of-mind concern for the Federal Inland Revenue Service (FIRS). In an attempt to combat perceived income shifting by foreign taxpayers out of Nigeria, FIRS published new transfer pricing rules on September 21, 2012. These latest rules signal a new level of sophistication of the Nigerian government in terms of addressing international commerce and taxation and reflects the move toward formal transfer pricing rules in other developing nations. Consequently, it is critical for corporate taxpayers and their advisors to educate themselves on the new rules and understand the trends and precedents set by this recent legislation in the context of their own business strategy in the region.”

Experience abroad

According to an MSCI index that rates companies’ citizenship, Pfizer scores high in CSR, a status commonly thought to be at odds with aggressive tax avoidance. Yet Pfizer now plans to move from its longstanding base in the United States across the ocean for that very purpose.

More specifically, in a large sample of U.S. firms in which the effective tax rate averaged 26%, those ranked in the top fifth in CSR paid an average of 1.7 percentage points below what the remainder paid. In short, that’s about 6% less, after controlling for other differences that have been found to affect tax rates.

In addition, high-CSR firms were considerably more likely than others to engage in tax lobbying. According to the study, “firms in the highest quintile of CSR Index have approximately a 158% higher probability of lobbying for taxes than other firms.”

“Our findings are inconsistent with the notion that the U.S. corporate sector generally views paying the minimum in taxes as compromising integrity or good ethics,” says University of Oregon accounting professor David Guenther, a co-author of the study together with his colleagues Angela Davis and Linda Krull, as well as Brian Williams of Indiana University.

Guenther adds, “With countries competing in lowering corporate tax rates — the global average fell by almost 15% from 2006 to 2014 — it would be imprudent to view Pfizer’s move to a low-tax country as an anomaly. Perhaps some awareness of this explains the relatively mild response of U.S. policy-makers to this strategy.” Rather than implement harsh or restrictive measures, the policy-makers have tended to call for international tax reform, the professor notes.

The researchers drew no conclusion as to what causes the inverse CSR-taxpaying relationship. One possibility is simply that “socially responsible firms may not consider the payment of corporate taxes to be the best means by which to accomplish their social-responsibility goals.”

However, at the same time headlines relating to corporate tax avoidance have become increasingly frequent. Household names including Google, Starbucks and Vodafone have sparked concern over their “tax planning” practices, despite some of their commitments to improve their environmental and social impacts.

The Economist recently pointed to an interesting finding published by researchers at the University of Oregon’s Lundquist College of Business: companies who place greater emphasis on their CSR efforts tend to also pay lower levels of tax. An earlier version of the paper can be found here. Before looking into the implications of these findings, I’ve done some simple analysis which looks at the top “socially responsible” companies in the US and UK, as defined by MSCI, compared with other large companies in each country.

Raising the bar of CSR practice in Nigeria

Thankfully, the need to change the tide in corporate behavior as far as effective CSR is concerned has attracted more than a passing glace by two organisations in the country.

Specifically, Oxfam and ActionAid, through their vehicle, Strengthening Public Finance in Nigeria (STREPFIN) had elected to address the gaps in CSR reporting and tax compliance by corporate.

While sharing the outcome of a baseline study by STREPFIN, the chairman of the Steering Committee, Chief David Nwachukwu in an exclusive interview with our correspondent recently said a lot of under dealings was being perpetrated in the name of CSR.

To address these lacuna, the body has since made advocacy visits to umbrella organisations in the organised private sector, including MAN, NACCIMA, shared insights into the work Oxfam and ActionAid has been doing.

Nwachukwu, who spent over 36 years in the banking before veering into private business, recalled that “One of the conclusions was that such incidences is one of the samples of what goes on across Nigerian states so rising from that pilot study, they now did a Lagos study on expenditure patterns across Nigeria. The study came up with what they called public finance roadmap for the country and it had three dimensions; public sector, corporate sector and the civil society organisations respectively. That’s the summary of the activities we had about in going through as the second phase of STREPFIN and in the last one week, we’ve paid advocacy visits to MAN, NACCIMA, Lagos Chamber of Commerce and Industry (LCCI), because these are umbrella organisations for people in the organised private sector to share the findings of the research with them.”

Echoing similar sentiments, Oluwole Elegbede, Director of Finance, ActionAid, who spoke with our correspondent on the sidelines during the sensitisation programme to engage the media on the outcome of a baseline study on financing for development, said his organisation is worried that people are moving into poverty as reverse to moving into wealth, where their lives will be better.”

Elegbede who represented the Country Director of ActionAid, Dr. Hussaini Abdu, said his organisation was worried that a lot of leakages in the system is eroding tax receipts.

Speaking in an interview, Paul Akioyamen, a tax consultant while noting that: “There is a likelihood that such practices are used for fiscal evasion. But the result and outcome of what was done did not emphatically state that there’s presence of that in Nigeria. There are occurrences of this nature in other parts of the world. The reason why it can be argued that there is no real presence of that for now in Nigeria is because if you take the statistics of the percentage of such practice to total turnover of companies, you’ll see that companies don’t spend up to 2% or even 1% of their turnover on such things. So if we take decision based approach, it simply means for you to undertake such practice within that area, then you should be committing something sizeable but that’s not the case. Companies are pretty much paying lip service to this in terms of the percentage of what they spend when compared to their turnover. There’s the probability that they would not necessarily then want to cheat the system because basically, what they’re putting down is tiny.

Citing the yearend report of Zenith Bank from 2015-2016 to buttress his point, Akioyamen said, “ From the report, what they’ve spent to the turnover of the bank for that year, and you find that a lot of wide difference, so it hardly matters. What I’m saying in essence is that the practice is still relatively new in our own environment, they’re still work in progress. So because they’re still relatively new, people have not begin to get a hang of it and begin to use that to do what’s been done out there globally.

“The essence of the research was not meant to blow the whistle on any company but to do advocacy to bring awareness to say look, there’s possibility of using this type of a thing to cheat the government of taxes that they ought to pay because they feel that they’re minding what ordinarily the government should be doing in terms of providing social infrastructure and all that.”

Tax avoidance behavior, he stated matter-of-factly, “May be due largely to the fact that the corporate entities provide most of the services for the community on behalf of government which l’m not obliged to do. It may then begin to make them behave in a way that is not necessarily right by not paying the right amount of taxes.”

Part of the recommendations made by his team during the study conducted is that CSR should be part of a policy framework. “We suggested that CSR policy is something people should be aware exist and you align it with some kind of baseline goal so you can have a government national goal for example for development may be coming out from the National Planning Commission and that goal, you key into that goal of government. So as you do CSR you’re happy to do it. The effort is not organised, it’s disjointed.  No cohesion in terms of the impact it’s having in the community.

“Donation is part of a tax deductable expenses. There is a 42 list schedule in the company income tax for example and under that list, it is said that if you donate for certain activities, you can get your tax reliefs subject to a ceiling of 10% of the profit for that year. And we find that most of the companies use their foundations to do CSR and claim reliefs. So what we’re now saying is that for those monies that don’t come to government it must be captured as expenditures though voluntary, must also be impacting.

“It is very important that whatever they’re doing , they do it right and at the end of the day nobody is shortchanged. But  by virtue of the fact that they report the correct and exact amount of costs of what they spend and not use CSR to pad expenses and put into their accounts because they’re targeting to pay lower taxes.”

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