Case Study

Case Study Project description Read the case and identify the relevant facts and moral principles; evaluate and discuss the choices and actions that you would have taken under the same circumstances, support your solution with appropriate background information company. But maybe we should reconsider whether being socially responsible means giving to charitable causes in the first place. ls that somethrng we are truly obligated to do, or are lve just following a fad? I mean, I hate to bring up the bottom line, but every dollar we give to the Boy Scouts or anybody else is one less dollar for the company and its stockholders." "Come on, Scott, you know it's not as simple as that,', responded Susan Lee. "Charitable contributions bring us good will, and it's the kind of thing the community expects an enlightened company to do, " "You may not be persuaded, Scott," Ed Framers added, "but I think what Susan says is right. ln any case, we don't need a debate about general principles, We need to figure out what we are going to do about the Boy Scouts." The meeting continued . , . CH,dPTER FITE CORPORATIONS 237 DISCUSSION QUESTTONS What do you think Baytown should do? Explain your reasoning. What business factors are relevant t0 your decision? What moral factors? Are Bayt0wn's directors operating with a broad 0r a narrow conception of corporate responsibility? Were Baytown and the other companies right to have withdrawn their support from the Boy Scouts? ls there anything wrong with companies' attempting to influence the policies of an organization like the Scouts? What do you think explains Bank of America's policy reversal? ls Lynn Martin's cynicism warranted? ScottArming doubts that businesses have an obligation to supporl charitable organizations. Do they? 1. 2. ffi CASE 5.6 Corporate Taxation IN THE UNITED STAIES, THE RAIE AI WHICH corporations are taxed ranges from I 5 to 35 percent, depending on the size 0f their income. That's a higher top marginal tax rate than in any other developed country, But 35 percent is only the nominal rate; few if any corporations actually pay that much. 0ver a recent five-year period, for example, General Electric paid 17.9 percent of its income in corporate taxes, and that includes not lust federal tax but state, local, and foreign taxes as well. EedEx paid 20.1 percent in federal tax,Amazon 6.6 percent, and Ford Motor Company 4.2 percenlThe reason for this is that the tax code provides corporations with plenty of exemptions, ln fact, a study by the Government Accountability 0ffice estimates that 80 or so business exemptions cut in half the revenue coming from corporate taxation. Two of the biggest corporate tax breaks are accelerated depreciation of machinery and equipment and deferral of income from foreign sources.BB That's one of the main reasons why these days corporations pay a smaller share of the nation's taxes than they used to. ln the I 950s, the revenue from corporate taxation amounted to about a third of total federal tax revenue or about 6 percent of the nation's income. Today it amounts to less than a tenth-that is, to about $1 out of every $10 collected in federaltax-or about 2 percent of national income. Personal income taxes and payroll taxes (which support Social Security and Medicare) provide about 80 percent of the federal government's annual revenue. For many companies, tax avoidance is a sophisticated game-almost an art form. ln 2013 it came out that Apple, the nation's most profitable technology company, was also one of its 238 ITAR']'T\,O AMERICAN BUSIN[S5 ANI] ITS BASI$ most successful tax avoiders, thanks to a complex web of international subsidiaries the company has created. Many of those subsidiaries are incorporated in lreland, where Apple negotiated a special tax rate of only 2 percent, although in fact they are run from Cupertino, California. Furthermore, even though they are incorporated in lreland, some of these offshore entities have no stated country of tax residence and thus pay no taxes at all, even though they hold tens of billions of dollars. 0ther companies, such as Microsoft and Google, engage in "transfer pricing." This shifts profits generated in the United States to offshore tax havens where the IRS can't get at them. Companies accomplish this trick by transferring intellectual property rights to specially created foreign subsidiaries, which then charge the parent company stiff licensing fees for using its own intellectual propefty. But even low-tech companies can be good at shell games like this. Caterpillar cut its tax bill by $300 million a Vear simply by putting the name of a Swiss subsidiary on the invoices for parts it sent from the United States to customers around the world. Even Starbucks figured out how to play the game. lt told shareholders that it was making large profits in Britain but filed U.K. tax forms showing losses, resulting in its paying no British taxes at all for three years in a row, despite billions of dollars in sales there. With the possible exception of Caterpillar, these companies have done nothing illegal. There is a difference between tax evasion, which is illegal, and tax avoidance, which is not. Emphasizing this distinction, Judge Learned Hand famously wrote: Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to chOOse that pattern which best pays the treasury, There is . , , nothing sinister in so arranging affairs as t0 keep taxes as low as possible, Everyone does it, rich and poor alike and all do right, for nobody owes any public duty t0 pay more than the law demands. Still, it strikes many people as unfair when corporations seem t0 be dodging their fair share of the country's tax burden, That's probably why, when news of Starbucks's tax avoidance broke, the company voluntarily agreed to pay about $16 million in British taxes. "We believe that acting responsibly makes good business sense," says Corey duBrowa, senior vice president for global communications, "and payment 0f corporate tax in the U.K. is a good example of this ethos in action." Some business commentators applaud Starbucks. "Just because tax avoidance is legal," writes John Cassidy, "doesn't mean that lt is right." Allan Sloan agrees; although lower taxes mean higher profiis, "going to extraordinary lengths to avoid taxes helps undermine companies' long term-interest by hurting society and by giving average people yet another reason to detest Big Business." The world's richest economies are now cooperating in an effort to curb the tax avoidance strategies used by multinational corporations. lt's worth notlng, Ihough, that some economists oppose corporate taxation in principle, They think only persons should be taxed. ln their view, corporate taxation involves a kind of double taxation. Corporations pay tax 0n their income, which is then taxed again when it gets passed on to individuals in the form of dividends Although the tax revenue that would be lost by abolishing the corporate income tax would have to be offset by higher taxation on individuals, doing so would, these economists believe, promote economic efficiency since companies would no longer spend so much time, energy, and money trying to avoid or reduce their taxes. DrscrJssr0N qussrIoNs ln your opinion, do corporations now pay their fair share of taxes? Explain why or why not. lf not, what should be done about it? Do corporations have a social responsibility not t0 exploit loopholes in the tax system or use accounting tricks to dodge taxes? Explain whY or whY not. lf a company like Apple is not acting illegally, is there anything wrong with its tax avoidance glmmicks? In general, is there anything wrong with either individuals or corporations arranging their affairs so as to minimize their taxes? ls that all thatApple was doing? Why do you think Starbucks decided to pay voluntarily taxes it was not legally required to pay? Was this the right decision from the moral point of view? From the business point of view? Should Apple do something similar? 5. Should corporate taxation be abolished? Explain why or why not. 6" lndividual income from dividends and capital gains is now taxed at a lower rate than individual income from wages. ls ihis fair? 7. ln orderto avoid U.S.taxes,some long-standingAmerican companies have reincorporated overseas, which lhey can do if, after a merger or acquisition, {oreign shareholders own more than 20 percent of the company. Should companies be permitted t0 relocate for tax purposes? ls their doing so morally acceptable? ls it unpatriotic? 1.