Between Ethics and Law: TNCs’ Behaviour in Modern Economic

Globalisation

Abstract

Purpose - The purpose of this article is to offer a critical and broad perspective

on how transnational companies (TNCs) behave in the global context, focusing

its attention on the controversial issue of tax avoidance in the UK. It pursues this

aim by taking into account not only economic globalisation, mobility of capital

and tax havens, but also ethics and corporate social responsibility.

Design/methodology/approach - This article seeks to provide an

interdisciplinary viewpoint drawing not only from well-established scholarly

literature but also from real cases and evidence, such as the scandals involving

corporate giants, such as Starbucks, Google and Amazon in the UK.

Findings - This article highlights the fundamental interplay and mutual aid of

ethics and international laws, underlining the increasing importance of corporate

social responsibility principles in todays’ business practices. However, it also

emphasises the need of reinforcing these principles with either regional or

universalistic legal approaches to tackle TNCs’ misconduct in the international

arena.

Practical implications - This article suggests that by establishing and enforcing

international business laws, increasingly aligned with ethical principles, the gap

between ethics and legislation can be consistently bridged. Hence, TNCs’

behaviour could be more efficiently controlled.

Originality/value - The paper contributes to the literature on modern economic

globalisation by providing a comprehensive and integrative perspective on TNCs’

behaviour, accounting for the interplay of socio-ethical, legal and business

principles.

Keywords: transnational companies (TNCs), tax avoidance, ethics, law,

corporate social responsibility, regional and universalistic approaches

Subject classification codes: F02, K34, M14

1

In law a man is guilty when he violates the rights of others.

In ethics he is guilty if he only thinks of doing so.

- Immanuel Kant

Introduction

Over the past decade, there has been an increased number of debates on the

controversial topic of transnational companies (TNCs) and their economic and political

role in the global world (Pries, 2013). More recently, the topic has become pressing and

on the agenda in the UK especially after the scandals regarding tax avoidance, which

have involved corporate giants, the likes of Starbucks, Google and Amazon (Syal and

Wintour, 2012). The problem has been rightly related to broader issues such as

globalisation, liberism -liberal market and trade- and capitalism (Stiglitz, 2013).

However, it actually goes much further and deeper.

In fact, issues concerning TNCs touch not only complex systems, namely the

mobility of capital and tax havens, but also sensitive matters related to ethics, corporate

social responsibility and the realm of law (Blomgren, 2011; Li, 2012; Samuels, 2001).

What has been actually under the attack of the public opinion and the British

government is the modus operandi of the transnational enterprises which, pursuing the

capitalist logic of profit, have taken advantage of the 'grey areas' not covered by

legislation without second thoughts about morality and ethics. Nevertheless, especially

in times of economic crisis and recession, accentuating the gap between rich and poor

and right and wrong (War on Want, 2013), TNCs behaviour need a changed.

Therefore, through an interdisciplinary perspective interlacing economics, ethics

as well as legal and business topics, this paper aims to provide an integrative overview

on how TNCs behave in the global context, the parameters within which they operate

2

and the social implications of their actions. By highlighting and suggesting the possible

routes and practical solutions to tackle TNCs misconduct, this paper contributes to the

literature on economic globalisation and its interplay with socio-ethical principles.

The paper unfolds in four main parts. After a definition of the concept of

economic globalisation and its effects on trade and production system as well the capital

and financial markets, the second part discusses TNCs practices and misconduct issues

related to tax avoidance and tax haven, giving current examples from the Starbucks,

Amazon and Google cases. In the third part, ethical principles and corporate social

responsibility are introduced as potential but ineffective solutions to TNCs misconduct.

Lastly, the fourth part, illustrating universalistic and regional approaches to tax

avoidance, provides more concrete answers to the discussion through a legal angle.

Economic Globalisation

Nowadays, globalisation has become a tangible force which touches and affects

ordinary life in all its aspects (Held et al., 1999). Since globalisation is a combination of

elaborate, dynamic and multi-dimensional processes, trying to define this polyhedral

concept in a general way might be a challenge and a risk: in fact, its complexity might

be underestimated, flattened or even lost (Hebron and Stack, 2011). However, in full

awareness of this limit, globalisation may be described as ‘the widening, deepening and

speeding up of worldwide interconnectedness and interrelatedness’ (Held et al., 1999, p.

2). Thus, going against any logic of physics, through the compression of time and space,

there is an enormous expansion of different kinds of cultures, politics and economies

(Bauman, 2000; O'Hara and Biesecker, 2003).

With regard to the expansion of different kinds of economies, despite the fact

that globalisation is often considered as a peculiarity of the recent decades (O'Hara and

3

Biesecker, 2003), it has been stated that economic globalisation is a much older

phenomenon (Hebron and Stack, 2011). It has been occurring since the 16th Century,

with the emergence of the first transnational trade and, more precisely, with the

establishment in 1707 of the East India Company, a prototype of the contemporary

transnational companies (El-Ojeili and Hayden, 2006). However, economic

globalisation, interpreted in its current meaning, has essentially taken off since the

1970s and the 1980s (Hebron and Stack, 2011).

Starting from these years, an unprecedented bind of events of diverse nature has

led to radical and drastic changes (Held et al., 1999): in primis, political events such as

the collapse of the Bretton Woods system and the communist regime (Samuels, 2001);

together with the creation and revision of supranational institutions (World Trade

Organization -WTO-, International Monetary Fund -IMF- and World Bank) (Duanmu

and Gepper, 2002; Samuels, 2001); but also technological innovations, ranging from

computers, to telecommunications and the Internet (James, 2002); and the

overwhelming presence of TNCs (Held et al., 1999). The combination of these four

macro factors, which can be considered as drivers towards a greater globalisation, has

modified, first, the trade and production system and, second, the capital and financial

markets (Waters 2001; El-Ojeili and Hayden 2006).

Trade and Production System

Regarding trade and production, the capitalist system, urged by the USA and the UK as

well as supported by the failure of the communist system in several countries (Held et

al., 1999), has been imposed as the leading economic ideology (O'Hara and Biesecker,

2003). As a fundamental part of what Williamson in 1989 defined as 'Washington

Consensus', a set of prescriptions regarding economic policies promoted by the IMF, the

4

World Bank and the US Treasury, ‘the free market mantra of the 1980s’ (Stiglitz, 2002,

p. 16) replaced the previous protectionist and radical orientations, even if there was no

concrete evidence of its relation with economic growth. The natural consequences have

been the constant reduction of cross-border trade tariffs and investment barriers around

the world.

Looking at the world as a unified market, nation-states have encouraged

international trade and foreign direct investment (FDI) in order to stimulate the growth

of the global economy (Duanmu and Gepper, 2002; O'Hara and Biesecker, 2003).

Nevertheless, since liberalisation was also foisted on the precarious and weak

economies of less developed countries (LDC), which were not prepared to compete at

international level, the promised growth has barely happened and, when it occurred, it

‘has not brought benefits to all’ (Stiglitz, 2002, p. 19). Only when globalisation has

been embraced under specific country terms, as it was for the Asian Tigers, it was able

to bring tremendous benefits (Stiglitz, 2002). That is the reason why Stiglitz (2003) has

stated that ‘it is time that the international community faced the reality: we have an

unmanageable, unfair and distortionary tax regime’.

Such tax regime, promoting Western standards, has been imposed on countries

around the world, increasing inequality among them. Who undoubtedly has gained the

most from the processes of globalisation and liberalisation has been TNCs themselves.

As Stiglitz (2003) has claimed, ‘these international corporations are the big beneficiaries

of globalisation’. Indeed, through the free market and trade, globalisation not only

promotes and imposes capitalism as the only global system, but also enormously

empowers their role as political actors (Sklair, 2002). At the same time, in a sort of

mutual relation, especially over the last four decades, it is undeniable that TNCs have

grown in power, becoming key vehicles and architects of globalisation (Waters, 2001).

5

Thus, as the etymology of the term suggests, the word transnational implies a going

beyond the borders of state-nations, or even being above them (Toporowski, 2010).

Capital and Financial Markets

Concerning the second point of capital and financial markets, the fast, scarcely

regulated and complex global capital system has consistently suffered for the

liberalisation of finances, which has essentially enabled the development of shadow

financial operations (Waters, 2001). This means that, thanks to the growth of new rapid

technologies in telecommunications (James, 2002), the monetary transactions have

become characterised by volatility and un-traceability (Christensen and Murphy, 2004).

Once again, the countries which are affected the most by the inconsistency of capital

movements are the ones with emerging economies, since they mainly depend on them

for their development (Otusanya, 2011).

Moreover, the accelerated dispersion of capital and the need to stay competitive

on the global market have led both developed and developing countries to reduce their

corporate taxes in what has been defined as a ‘race to the bottom’ (Henn, 2013, p. 3).

However, the reason for this harmful competition is that FDI can also positively and

consistently contribute to the economies of host countries by supplying foreign

management skills, balance of payments and cutting-edge technologies (James, 2002).

Furthermore, an incredibly huge benefit, widely stressed by TNCs themselves, is related

to the direct and indirect employment effects (Dharmapala and Hines, 2006), since the

presence of transnational enterprises incentivises for new jobs and local spending

(Duanmu and Gepper, 2002).

In addition, to further minimise and reduce the amount of taxes on profits

imposed by the host countries, TNCs have taken advantage of the loopholes in the

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complexity of law to shift profits from country to country, causing what has been called

‘tax avoidance’ (Way Q.C., 2013). Although sometime they are wrongly used as

synonyms, ‘tax evasion’ is different from 'tax avoidance'. Where the former is

undoubtedly illegal, the latter may be considered as an aggressive way of bending the

rules of national and international legislation without breaking them (IBE, 2013).

Even if it might be true that both developed and developing countries loose from

tax avoidance practices (Martinelli and Midttun, 2010), the respective losses are

incomparable. The financial systems of poorer countries are far more damaged by tax

avoidance practices, such countries depend mostly and largely on revenues (Henn 2013;

Otusanya 2011). Thus, harmful tax planning has an immense impact on transitional and

unstable nation-states, as they force states to downsize their public activities, to increase

taxes on labour and, even, incur debt (Stiglitz, 2013).

Finally, the unregulated liberalisation of capital and finances has also intensified

the blurred role played by the so called tax havens: through their week regulations, tax

havens have been fuelled and have fuelled the conspicuous flows of hot money

circulating around the world (Stiglitz, 2013). Anonymity of the real owners, secrecy and

lack of transparency are the specific and main features of these jurisdictions which,

through nil or nominal tax corporations, support speculative circulation of money by

transnational companies (Dharmapala and Hines, 2006).

TNCs Practices: The Google, Amazon and Starbucks Cases

This increasing spreading of tax avoidance practices and tax havens is strictly

interlinked with how TNCs operate. Albeit there are several different methods to bypass

laws without actually breaking them, for instance tax shelters, legal trust entities and

transfer pricing, all these procedures have just one purpose: to pay less taxes (Dyreng et

7

al., 2008). With the awareness that the following explanation is simplistic and does not

do justice to the complexity of the whole system, an instance of the general 'tax-haven

avoidance' structure may be the following one.

A TNC which sells coffee has three subsidiaries: the production centre X in

Nigeria (or a LDC where labour and production costs are low), the legal or financial

subsidiary, Y, in the Cayman Islands (a well know tax haven, but it could also be a

'semi-tax' haven, such as Switzerland) and the retail branch, Z, in the UK (or another

Western country). The process starts when X decides to voluntarily sells its coffee to Y

at such a very low artificial price that it is almost equal to the cost required for the initial

production of the coffee. In so doing, the profits for company X will be likewise low

and, since the taxes are paid in proportion to the profit, the subsidiary X will pay the

Nigerian government low taxes, too. At this point Y will sell the product to Z at a very

high price, almost identical to the final retail one at which branch Z would sell to the

British customers. While, once again, the UK profit will be very low and the company Z

will pay low tax, the company will earn as much as Y sold the product to Z. However,

since Y was settled in a tax haven, where the taxes on profits are nil, the overall profit

will be incredibly high (Fröberg and Waris, 2011).

Google, Amazon and Starbucks may be considered perfect examples of the

process just described above. In the UK, the three giants have been summoned by MPs

in order to understand why their contribution to the Treasury's coffers was almost nil

over the last few years. As Campbell (2012) has reported, after three hours of

interrogation it has emerged that Google is linked to Bermuda (a well know tax haven),

Amazon to Luxembourg and Starbucks respectively to Switzerland and the Netherlands

(three countries considered semi-tax havens and where it is possible to negotiate the

corporate tax).

8

Considering that J. Howard, Starbucks CEO (2012), has declared ‘our low

profitability in the UK is completely unrelated to any kind of license fees or inter-

company payments’, the contradictions of this statement are not difficult to see.

Especially if, looking at the data, it comes to light that Google in 2011 paid only £6

million out of an UK profit of £2.6 billion, ‘Amazon paid no UK tax in 2010 on

revenues of £3.3 billion’ (Campbell, 2012) and ‘Starbucks paid £8.6 million in total UK

tax over 13 years during which it recorded sales of £3.1 billion’ (Syal and Wintour,

2012).

As briefly touched on before, TNCs appear to be the main actors in the global

system, shaping and modifying the tax system according to their own interests.

Therefore, these companies, as Waters (2001) has noticed, have become not only more

powerful than governments themselves, but also so economically and politically

influential that they may undermine the legitimate sovereign authority of the nation-

state. Although Tanzi (2001) has used the expression ‘fiscal termites’ with reference to

tax havens, this definition might perfectly fit TNCs, too, since they slowly erode from

the inside ‘the integrity of tax system in democratic societies’ (Barker, 2009, p. 229).

According to Diaz-Berrio, in fact, ‘the social contract between states and their

citizens’ implies that ‘the latter pay taxes in exchange for public services [such as

healthcare, education and infrastructure] provided by the state’ (2011, p. 8). This means

that taxes should be seen as a legitimate contribution to the wealth of nation-states.

Thus, taxes are a fundamental principle of fairness and equality in democracies (Barker,

2009) and the lifeblood of a mutual and implicit agreement in a society (IBE, 2013).

Nevertheless, these ‘nationless’ (Toporowski, 2010) and ab-solute companies

are free-riders of economy which enjoy ‘the benefits of corporate citizenship without

accepting the costs’ (Christensen and Murphy, 2004, p. 39). They have ‘the Plastic Man

9

capacity to be everywhere and nowhere at the same time – to be everywhere when it

comes to selling their products and nowhere when it comes to reporting the profits

derived from those sales’ (Stiglitz, 2013), transferring a large tax burden on the

shoulders of individual tax payers and consumers who play by the rules and pay their

fair share (IBE, 2013).

Despite the fact that they are not lying when they shout from the rooftops ‘we

have consistently paid all taxes as required’ or when they claim to earn ‘very small

profits’ (Howard, 2012), they are still operating unethically. That is, within the letter,

rather than the spirit of the law. This is the reason why Margaret Hodge, the Labour

chairperson of the public accounts committee, in front of the CEOs from Google,

Starbucks and Amazon, has stated ‘we are not accusing you of being illegal, we are

accusing you of being immoral’ (Campbell, 2012).

Ethics and Corporate Social Responsibility

As such, the issue falls into the realm of ethics and the corporate social responsibility

(Borzaga and Becchetti, 2012; Li, 2012), since TNCs have a choice about the approach

they intend to pursue towards the law (IBE, 2013). The word ethics might be defined as

an amalgam of principles which are shared by a group of people and which guide and

orient them in discerning what may be wrong from what may be right (Kidder, 2003).

Consequently, ethics -or social morals- is a relative and subjective concept, difficult to

apply at global level.

Corporate social responsibility indicates, instead, the commitment by enterprises

to pursue ethical behaviour in order to improve the quality of life and the economic

development of the whole society (Buchanan and Huzinsky, 2010). Thus, on the same

continuum, there are two poles: on the one hand there is what may be defined as logic of

10

profit while, on the other hand, what can be called logic of ethics (Borzaga and

Becchetti, 2012; Li, 2012). It might be argued that the main goal of TNCs is to

maximise the profits for their shareholders, by keeping tax cost to a legal minimum

(Diaz-Berrio, 2011). However, especially at a time of austerity, when citizens' daily life

is directly affected by government cuts on expenditures (Samuels, 2001), paying the

right –where right means in proportion to the global profit- amount of tax, is seen by the

public opinion as a good and responsible behaviour for enterprises (IBE, 2013).

If hitherto tax avoidance was considered a commonplace, recession has

drastically changed the general perception (War on Want, 2013). Recession has so

sensitised public awareness towards it (Samuels, 2001), that now outrageous behaviours

the like of Starbucks, Google and Amazon are the reason why numerous protest groups

have been taking direct action to try to shake and budge the current status quo. UK

Uncut, a UK-based protest group established in 2010 to raise awareness and to fight

against tax avoidance, for instance, has ‘tried to shut down some of the nation's 700

Starbucks outlets’ (Campbell, 2012). Other examples might be Tax Justice Network, a

coalition founded in 2003 of activists and researchers in order to fight tax avoidance and

tax evasion (IBE, 2013), and the campaigning group of civil society NGOs which

promoted the 'Robin Hood Tax' in order to tax the financial transactions of banks.

Their voice, if rightly funnelled, may even bring to concrete changes. However,

although Yuksel and Murat have stated that the 1990s may be considered as an ‘ethics

era’ (1999, p. 386) since the growth of transnational businesses has stimulated an

international demand for setting ethical rules and standards which may be fostered by a

corporate social responsibility agenda (Blomgren, 2011), the general situation in not so

rosy. Even if TNCs are urged to ‘establish a corporal code of ethics that is globally

integrative yet locally responsive and create an ethical culture’ (Yuksel and Murat,

11

1999, p. 392), the corporate regulation is often incoherent and inconsistent, as it may be

applied in one area of business activity (for instance, environment) but not in another

one (Christensen and Murphy, 2004).

The Power of Law

Therefore, despite the fact that ethics has an incredible persuasive public power and that

corporate social responsibility stresses the critical value of public opinion (Blomgren,

2011), it is likewise true that their power to efficiently tackle tax avoidance is weak and

limited and that sly and immoral behaviour still persists (Freeman, 2004). That is what

actually happens in Starbucks. Although the company claims to do its best ‘to strike a

balance between profitability and social responsibility and […] to strive to meet high

ethical standards’ (Howard, 2012), from the data previously seen, this is a pure aporia.

Thus, as Freedman argues, ‘morality is like an outline from which details are missing.

Laws, along with conventions, fill many of these in’ (2004, p. 338).

Looking at the definition of law, it is defined as ‘a system of rules and

guidelines which are enforced through social institutions to govern behavior’

(Robertson, 1999, p. 90). This definition is very similar to the one about ethics, with the

difference that, compared to ethics, law has on its side the power of the government. It

implies that, although existing wholly independently from the law, morality may be

considered as a part of it, since ethics values are always in accordance with legal

principles (Prebbles, 2010). Since the opposite is not true (Robertson, 1999), ‘the fact

that a conduct is not illegal does not necessarily mean that it is also moral’ (Prebbles,

2010, p. 744).

Nevertheless, taking advantage of the vacuum within legislations, TNCs claim to

respect their moral duties just because they are acting within the law. It looks like they

12

protect themselves behind the shield of law. Thus, since the law, with its coercive

power, seems to be the strongest and only instrument to fight against TNCs, the logical

reaction to tax avoidance might be a change in legislation, in order to fill up the

loopholes in the system. Several remedies have been fostered and they may be divided

in two main groups. The first remedy includes what has been defined as a regional

approach, while the second one as universalistic approach (Christensen and Murphy,

2004).

A Regional Approach to Tax Avoidance

Regarding the regional approach and looking specifically at the UK case, it has been

underlined as a necessity to, firstly, update the British law: hailing from the late 19th

Century and early 20th Century, besides being evidently quite old, it is not obviously

equipped to deal with current global business structures (Way Q.C., 2013). UK law still

treats the subsidiaries of a TNC as separated and independent units rather than a whole,

allowing profit shifting, capital movements and launder profits to freely exploit the

inter-company fragmentation (Way Q.C., 2013).

Therefore, instead of prioritising the legal form in which TNCs are organised, a

so called formulaic approach would be necessary. It would allocate profits to states

according to a formula which take into consideration real factors, such as assets,

employees, sales and customers, who are the only thing which cannot be escaped

(Stiglitz, 2013). This solution has, however, two weak points. First, it might roost

against the UK market and its own interests, especially if other competitors decide not

to adopt a similar system (Diaz-Berrio 2011, Henn 2013). Second, the formulaic

approach would provide ‘no revenues to the countries that have borne the costs of

13

production’ (Stiglitz, 2013). That is the reason why a universalistic approach is needed

(Diaz-Berrio, 2011).

A Universalistic Approach to Tax Avoidance

A universalistic approach would be able to establish and promote multilateral fiscal

bodies, at European and, possibly, at international level (Diaz-Berrio, 2011). As both

Stiglitz (2013) and Campbell (2012) have sustained, the main purposes of those

institutions would be the creation of a unified legislation which can respect ‘the right of

democratic governments to determine a tax rate appropriate to their circumstances’

(Christensen and Murphy, 2004, p. 42). This may be considered as the best option, since

it would be unanimously done. Nevertheless, it is also the most difficult to put into

practice, as it requires global synergy and a longer amount of time to come into effect.

In fact, global cooperation would be required in order to fix minimum standard of

transparency not only within the OECD but also to all less developed countries (Diaz-

Berrio, 2011).

A possible first step towards this direction, for instance, might be related to the

International Accounting Standards Board (IASB) (Diaz-Berrio, 2011). Founded in

2001, the IASB is responsible for promoting and developing International Financial

Reporting Standards (IFRS), which are the global principles for international business

affairs. Similarly, although voluntary and at the discretion of the companies, in 2010,

the European Commission developed a proposal, the Common Consolidated Corporate

Tax Base (CCCTB), in order to adopt a new tax code. This set of rules has been

promoted in order to determine tax base of TNCs which operate in several EU member

states. The CCCTB has fostered the formulaic approach mentioned above. In fact, if

inscribed in a universalistic solution, it would provide a common platform for

14

measuring and proportionally attributing the profits which companies make and,

eventually, it would be an efficient solution to tackle tax avoidance (Martinelli and

Midttun, 2010).

Overall, having a single over-arching international body leading the change and

making the fairly dramatic amendments, the 'universalistic approach' would also remove

the good competition among jurisdictions (Way Q.C., 2013). However, since tax

avoidance causes serious damages to nation-states, failing to tackle it while doing very

little to actually fight against it would be indefensible. The problem is to choose

between a tax system based on fairness and equality or on its attractiveness to TNCs

(War on Want, 2013). It is a tough decision which essentially reflects the choice

between ethics and profits.

Conclusion

By shrinking time and space, technologies and communications have fostered a greater

interconnectedness and interdependence of the global world and economic globalisation

has received great benefits from this situation (O'Hara and Biesecker, 2003). Stiglitz

(2013) might be right when stating that the system is wrong and it has been moulded by

lobbyists from large multinationals. However, although the marketplace and its TNCs

actors are emerging as the main challenging forces which promote capitalism and

individualism through the logic of profit (Sklair, 2002), there are also positive sides.

In fact, the same interconnectedness and interdependence strengthen by

globalisation has likewise supported and encouraged the diffusion of human values and

the harmonisation of worldwide ethics (Samuels, 2001). Thus, higher standard of moral

responsibility and obligations have been raised by the process of globalisation. Even

though the concepts of ethos and corporate social responsibility may be too feeble and

15

weak to fight against stronger opponents supported by laws (Blomgren, 2011), the voice

of public awareness can urge and drive changes, even in legislations. Laws are not

always morally right but they may be improved, so that the gap between ethics and

legislation can be increasingly and consistently bridged.

Therefore, through an interdisciplinary perspective interlacing economics,

ethics as well as legal and business topics, the goal of this paper has been to provide a

comprehensive overview on how TNCs behave in the global context, the parameters

within which they operate and the social implications of their actions. By making

suggestion on the possible routes and solutions to tackle TNCs misconduct, this paper

has sought to contribute to the literature on economic globalisation and its interplay

with socio-ethical principles.

Indeed, if the system as it is now is not good enough, alternative counter-

measures and solutions have to be found. Albeit difficult or against the tide, there is

always a loophole through which solutions can be implemented. It is just necessary to

be aware that every change requires patience since innovations need time for their own

development, but even more for their diffusion.

Declaration of conflicting interests

There is no conflict of interest to declare.

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