Power Sheet – April 14, 2016

The issue is taxes paid by corporations. News articles based on the Panama Papers over the past 11 days have revealed to the world what tax experts have always known, that it’s possible to set up labyrinthine networks of shell companies to conceal income and reduce or completely avoid taxes. As a result, millions of people around the world are now reasoning as follows. 1: Most of this activity sounds as if it’s meant to deceive, and why would someone try to deceive unless they’d done something wrong? 2: Further, if Vladimir Putin does it, as he apparently does, then it’s probably illegal or at least slimy. 3: Panamanian law enforcement yesterday raided the offices of Mossack Fonseca, the law firm that set up these shell companies, which must mean there was criminal activity going on. 4: Companies have been shown to do this same kind of thing, moving money around the world in mind-bending schemes to avoid taxes. 5. Ergo, global companies are tax cheats.

The fact that this argument fails on factual and logical grounds is irrelevant. It’s what many people think. The European Commission on Tuesday called for the world’s biggest companies to disclose more data on the tax they pay worldwide – more evidence, or so it would appear to many, that mega-corporations are nefariously escaping their obligation to pay tax.

So here’s the problem for business leaders. They do indeed move money all over the world and play tax laws like a violin in order to minimize their taxes – and for the most part, it’s all legal. Certainly crimes may be committed inside vast organizations, but famous companies like Google, Amazon, General Electric, and Starbucks have no interest in breaking laws because they can reduce taxes so dramatically within the law. And such behavior is more than just legal; it’s arguably ethical as well. If the managers of a company can legally reduce its expenses, they’d be derelict in not doing so. Otherwise they’d be at a competitive disadvantage, endangering jobs and everything they do.

Ah, you say, but what if the public, even through flawed logic, becomes enraged by corporate tax-minimizing behavior? That’s been happening in Europe, where big U.S. companies including Google and Starbucks were revealed to have paid U.K. tax that was only a minuscule fraction of their revenue there. In response, both those companies have voluntarily paid more tax than they owe. Is that a wise move that helps shield valuable brands? Or is it just throwing money away, especially when some vocal critics became even more enraged by the “offensively” small extra amounts the companies paid?

News will keep trickling out of the Panama Papers for months, so this issue won’t go away soon. What’s the right response? For business leaders this isn’t a black-and-white issue, though much of the public will see it that way. Right-vs.-wrong choices are easy. Right-vs.-right questions like this – Minimize tax legally but maybe harm reputation? Pay more than you owe but maybe harm stakeholders? – are the kind that test leaders most severely.

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