Enterprise, Ethics And Compliance: Networks Of

Influence And The Corporate Governance Of Taxation In

Small And Large Businesses

Gregory Rawlings

IntroductionPresentation based on interviews with

21 people in SMEs and large businesses.

Networks of influence in tax management.

The role of business ethics.

OverviewTalking About Tax: Methodology

Selecting and Finding Participants: Recruitment

Narratives of Compliance

Overview (cont…)External Advisers and Internal

Management Functions: The Role of Intra and Inter Firm Networks of Influence in Tax Compliance

Ethical Compliance and Parallel Stories: HR Policies, Environmental Standards and Good Corporate Citizenship

Conclusion: Promoting Tax Compliance Through Encouraging Business Ethics

Talking About Tax Methodology

Qualitative ResearchOpen ended questions and interviewsErving Goffman (1975): Every telling,

every narrative, is made from a specific vantage point.

This research considers such vantage points and what they may tell us about the management of tax compliance in Australia today

Selecting & Finding Participants: Recruitment

204 SMEs123 large businesses134 contacted either by letter, telephone

and/or email21 people in 20 firms interviewed; 19 in

person, two on the telephone. Nine in LB&I Segment; 12 in SME

segment

Narratives of ComplianceHigh levels of self-reported compliance.

Decisions seen as proscribed rather than made.

Belief in the Tax System.

Evaluating Tax “My husband and I very much believe

that we must pay our way, that is why I say we live in such a good country, that is well equipped with sporting facilities, with medical services. All that is because our tax dollars are spent wisely” (Interview Sydney, October 2004).

“Lets face it, everybody’s got to pay tax. There are a lot of business owners out there, who think, ‘I’ve got a business and I’m going make a huge profit and pay no tax on it’, but you can’t do that. I mean the tax is there for everyone, how else are they going to pay for the hospitals and the like” (Interview Canberra, November 2004)

“…you can’t measure the social value of taxation…at the end of the day we very seldom think about ways of getting around tax [liabilities]” (Interview Sydney, June 2004).

External Advisers and Internal Management Functions

The role of intra and inter firm networks of influence.

SME firms that did most of their own tax compliance at the top of the segment. Internal dynamics equally important as external.

Large Business Tax Governance

Finance Departments responsible for tax management and compliance.

Boards and directors have broad supervisory authority.

Independent Tax Judgements.

The Story of Tier One CapitalT1 Capital. Used by banks for reserve

requirements, includes hybrid debt:equity instruments

Deductible or frankable depending “on the line taken”

“As things currently stand, there is no universally accepted view as to how best to distinguish ‘debt’ from ‘equity’ for tax purposes or how to tax hybrid (part debt and part equity) instruments…there are a number of different definitions of ‘debt’ in the current tax law and an unacceptable level of uncertainty at the debt/equity borderline” (Australian Treasury, 2004).

“Stock settlement of principle through conversion into ordinary shares could create synthetic maturity issues in extremis, although we believe this is a corporate governance issue, not a regulatory one” (British Bankers Association, 2003: 1)

SME InfluencesNothing like the same level of

complexity as with large businesses. “Small business doesn’t have the clout,

it doesn’t have the money to spend on advice on how to reduce taxes like big business does. We don’t have the money to employ the expertise like big business does” (Interview Sydney, October 2004).

“At the end of the year, the accountant will say ‘you’ve got too much stock, you’ll have to reduce it otherwise you’ll have a big tax bill’ Stock management is very important. We will have a stock-take every year, every little bit of stock, every item has to be counted, put into the annual stock take figures. And so at the end of the financial year, if we have too much stock things just walk. When doing a stock take, well you see out there on the street, on display, we have about 200 pens on display, but like anything they go missing. People take them, we never notice, the girls are on the counter and never see it go”.

Interviewer: So people steal from the front display?

Yes, it’s a problem for every business, you can only imagine how bad it is for shops in malls, people just walk by and stuff disappears. (Interview Sydney October 2004).

“I don’t think there are any tax issues…my philosophy is to make money, pay tax that’s it. I pay $90,000 a year in company tax and have always had to pay tax on it…you have to pay what you have to pay” (Interview Sydney, October 2003)

He [the accountant] says ‘these are your options’. [For example], he’s suggested that we cut back on staff. But with staffing, I really have moral issues with putting people off. I wont put people off if I can help it, I wont restructure in a way that makes people loose their jobs. This is a very youthful industry run by twenty-some things who think they know what they’re doing, but they don’t. Look I’m old, and a lot of the people we’ve employed, especially the reps, are old, but what else will they do? It would be my last option to put people off (Interview Blue Mountains, October 2004).

Driscoll, Hoffman and Murphy, in their 1998 article, show that good ethics and good compliance “are interdependent; each is incomplete without the other” (Driscoll, Hoffman and Murphy, 1998:39).

Ethical Compliance and Parallel Stories

HR Policies, Environmental Standards and Good Corporate Citizenship

“…as a working mother, I made a conscious decision that I would create a working environment that was friendly to mothers. It’s a working environment that is flexible; people can take time off form family reasons” (Interview Blue Mountains, October 2004).

“at the end of the day I don’t make that much money, that’s not what it’s all about, you get satisfaction out of giving a job to somebody, out of starting out with people who when this business was started had nothing, and now they have a life, they have a good life, they’ve got families, a house, a car, own things, it’s seeing that, that’s what you get out of it, not money” (Interview, Wollongong, October 2004).

Large Businesses Good Corporate Citizenship

Sustainability

The risk management of reputation = a move away from tax based transactions

Conclusion Promoting Tax Compliance Through

Encouraging Business Ethics.

Profiling for meta risk management.

Two companies, two different tax management styles.