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withdrawn their support from the Boy Scouts?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?
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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?
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