Accounting Forum 37 (2013) 1528

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Accounting Forum
journal homepage: www.elsevier.com/locate/accfor

Smoke and mirrors: Corporate social responsibility and tax

avoidanceA reply to Hasseldine and Morris
Prem Sikka
Centre for Global Accountability, Essex Business School, University of Essex, Colchester, Essex CO4 3SQ, UK

a r t i c l e i n f o a b s t r a c t

Article history: This paper is a reply to a comment by John Hasseldine and Gregory Morris on the Smoke and
Received 14 August 2012 Mirrors: Corporate Social Responsibility and Tax Avoidance paper published in Accounting
Received in revised form
Forum 2010: 34(3/4): 153168. The original paper drew attention to the gap between corpo-
10 September 2012
rate talk of social responsibility and actual practices, which promote tax avoidance/evasion.
Accepted 14 September 2012
Instead of critiquing the Smoke and Mirrors paper, Hasseldine and Morris raise a number
of random and often unrelated issues, including interpretation of law, tax statistics, regu-
Keywords:
Tax avoidance lation of tax agents, the role of accountants, policies of the state and the human rights of
Social responsibility corporations, just to mention a few. This paper responds in kind and argues that many of
Accounting rms their comments are ill informed.
Corporations 2012 Elsevier Ltd. All rights reserved.

1. Introduction

I am grateful to Hasseldine and Morris (2013) for reading the Smoke and Mirrors (hereafter S&M) paper. The S&M
paper (Sikka, 2010) drew attention to the gap between corporate talk and action. Many organizations claim to be ethical
and socially responsible, while simultaneously engaging in tax avoidance and tax evasion. The S&M paper did not claim to
resolve debates about the interpretation of law, human rights for corporations, the regulation of tax agents, policies of the
state or the nature of state sovereignty. These issues merit closer examination but were beyond the scope of the S&M paper.
In light of Hasseldine and Morriss (hereafter H&M) expertise in taxation and social responsibility, one might have hoped
for illumination and perhaps some answers to the issues raised in the S&M paper, but sadly little attempt is made to engage
with the main thrust of the S&M paper. It is difcult to understand why, rather than offering a sustained critique of the paper,
H&M indulge in unsubstantiated allegations and present a potpourri of random points that fail to illuminate the key issues
highlighted in the S&M paper. Furthermore, most of the comments made by H&M are misinformed, a deciency that can
be attributed to their dim awareness of tax avoidance and of associated wealth transfers as political activities that transfer
wealth and constrain the states capacity to provide public goods. There are fundamental clashes among the interests of
citizens, of corporations and of the tax avoidance industry, but H&M present tax matters in an individualistic manner, rather
than as the outcome of power relations. The superciality of their comments is, in part, also a consequence of their keenness
to defend tax avoidance and a monochromatic reading of corporate practices.
In their keenness to defend corporate interests, H&M have abolished the category of tax avoidance altogether and replaced
it with anodyne individualistic concepts such as tax-related behavior. In H&Ms world, battalions of corporations, accoun-
tants, lawyers and wealthy elites are heaving their luggage about in legislative lobbies and secrecy jurisdictions because of
a burning desire to comply with the law. They go to enormous lengths to manufacture losses, convert income into capi-
tal gains, create subsidiaries and afliates, transfer pricing games and engage in circular transactions, simply to distill the

E-mail address: prems@essex.ac.uk

0155-9982/$ see front matter 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.accfor.2012.09.002
16 P. Sikka / Accounting Forum 37 (2013) 1528

essence of the law and comply with the letter of the law. H&M have emptied the study of tax avoidance and corporate social
responsibility of any concern with politics, power, social antagonisms, social justice, or intoxication with status and wealth,
which are major features of contemporary social problems. H&Ms formulations leave little room for the study of emerging
wealth chains, the power of elites, the capture of the state and the politics of corporate social responsibility (CSR). Indeed,
their preference is for silence and exile for anyone subscribing to alternative worldviews.
Nonetheless, I am grateful to H&M because their comments provide an opportunity to clarify some of the issues about
tax avoidance and CSR and to document the gulf between our approaches. The structure of this response is somewhat
random, as it attempts to follow the points raised by H&M. This reply is organized into nine further sections. The rst
section revisits the S&M paper to provide a brief summary and background, so that the reader can have a better idea
of the issues raised. The second section refers to H&Ms objections that the S&M paper made use of non-peer-reviewed
literature. The H&M worldviews are unacceptable because they result in silence and the marginalization of key debates. The
third section responds to H&Ms allegations that the S&M paper misreported tax avoidance statistics. It shows that their
allegations have no substance. It shows that tax avoidance possibly occurs on a much larger scale and that H&M seem to
have considerable difculty seeing the corporate hand in tax avoidance schemes. The fourth section addresses H&Ms claims
about the signicance of legal interpretations in taxation matters. Sadly, their edicts rest on a very narrow and individualistic
conception of law, and they attach little weight to the role of social antagonisms in shaping law. The fth section notes H&Ms
observations about the state and state sovereignty and does not nd their pluralist conceptions very persuasive. As part of
the overall defense of the tax avoidance industry, section six notes that H&M downplay the role of accounting rms in tax
avoidance by portraying them as intermediaries, rather than as a fraction of capital that must constantly nd novel ways
to increase their prots. Their failure to locate accounting rms in any recognizable social formation prevents them from
seeing the partisan role of rms. The seventh section comments on H&Ms observations about the regulation of tax avoidance
and notes that their poor awareness of politics and of the capture of the state prevents a meaningful analysis. In line with
their stream of random points, H&M invoke human rights for corporations. Therefore, the eighth section briey presents
counterarguments. Section nine concludes the paper by drawing together the major differences between their assumptions
and the emerging critical literature.

2. Smoke and mirrors revisited

There has been a proliferation of corporate promises of ethical and socially responsible conduct. Indeed, ethics itself has
become big business, and there is no shortage of hired advisers and report writers available to enable companies to assuage
public concerns by publishing soothing CSR statements (Neimark, 1995). In the cauldron of concerns about negative publicity,
consumer boycotts and damage to corporate prots, some corporations have bolstered their social legitimacy by embracing
some socially responsible practices (Unerman & ODwyer, 2007). However, critics argue that CSR is often little more than an
impression management exercise, and claims of social responsibility neither bring corporations under democratic control
nor tame their tendency to make prots at almost any cost (Bakan, 2005; Fauset, 2006).
The above paragraph provides a brief background for the S&M paper, which highlighted the gulf between corporate
claims of ethical, or socially responsible, conduct and corporations actual practices. There are systemic factors contributing
to this gulf. Corporations are under systemic pressure from the stock markets to produce higher prots, which in turn also
enrich executives, as their remuneration is often linked to reported prots. Stock markets rarely ask any questions about the
social quality of prots, and they are indifferent to whether higher prots are the outcomes of wage freezes, the dilution of
employees pension rights or tax avoidance schemes, which can undermine social cohesion and the possibilities of providing
public goods. In an environment of conict, corporations take action to get things done by creating a variety of internal
processes, controls and reward systems. Thus, they might set tax avoidance targets, create prot centers geared toward
shaving tax bills, or reward staff and external advisers for enabling the organization to avoid taxes. Organizations create
hierarchical and surveillance systems to discipline employees, and those employees who resist them can be marginalized.
In the contemporary world, all organizations are public in that they affect the lives of ordinary people, and their survival
ultimately depends on public acceptance and trust. There is a constant need to (re)position organizations in relation to
the perceptions of society at large and to incessant talk about subscribing to social norms, fairness and codes of ethics in
attempts to win over skeptical audiences. The pursuit of fairness and good citizenship is often at odds with the internal drive
for efciency and higher private prots. Thus, internal practices may not be aligned with the promises made to external
audiences, giving rise to a gap between corporate talk and action. Over a period, organizations might be able to manage
the inconsistencies, but there is always the danger that contradictions will be exposed by unexpected events, scandals,
whistleblowers, court cases and regulatory actions. Public exposure of the gaps between an organizations talk and its
action, or its internal culture compared to its public statements, can lead to charges of hypocrisy (Brunsson, 1989, 1993,
1998, 2002, 2007), as was articulated in the S&M paper. The gap between talk and action, or the production of hypocrisy,
is not unintentional. Rather, it is actively produced by organizational values and is inserted into daily routines and reward
systems.
The S&M paper contributed to the above debate by examining the self-aggrandizing statements made by major business
organizations under the guise of codes of ethics or CSR reports, and then it compared these statements to revelations about
the organizations tax positions. Despite claims of ethical and honest conduct, the revelations of tax avoidance/evasion have
not been voluntary. They have been primarily facilitated by law enforcement agencies, courts and parliamentary inquiries.
 P. Sikka / Accounting Forum 37 (2013) 1528 17

In all cases, matters that masqueraded as acceptable tax behavior, or legally permitted tax avoidance, turned out to be tax
evasion. This conclusion was reached by courts and regulators. The court judgments, nes, prison sentences and public
ridicule of the organizations highlighted their hypocrisy, as well as the gap between talk and action. These episodes should
encourage skepticism regarding corporate claims of social responsibility and should raise questions about how corporations
can be brought under democratic control, which is surely a fundamental part of any notion of social responsibility and
accountability.
Rather than engaging with the above paper, H&M construct a wish list and demand that I should have written a different
paper, amenable to their prejudices. The list is long but includes references to their favored papers and, at the same time,
neglect of papers that represent competing political perspectives (see below), the nature of law, state sovereignty, human
rights for corporations, the regulation of tax preparers, the role of accountants and much more. H&M complain that the S&M
paper relies on a handful of examples involving fraud, deceit and corruption (p. 1) to make its points, but they fail to develop
any analysis of the cases cited in the paper. They complain about my skewed reading of the literature but fail to appreciate
that the same charge applies to their own position too. Besides, fraud, deceit and corruption should be highlighted and
analyzed, and this process cannot be performed without the understanding that critical knowledge is grounded in a moral
ontology that commits us to inquire into the decits of institutions, including capitalism. We are no different from intellectual
defenders of capitalism (Arrington, 2003: 46).
H&M dislike like the concept of hypocrisy (pp. 6, 10), although it has a considerable conceptual pedigree (for example,
see Brunsson, 1989, 1993, 1998, 2002, 2007). They dismiss evidence of phony losses, tax evasion, fraud, false tax returns and
illegal tax avoidance schemes, all provided by law enforcement agencies. The reasoning for this dismissal is not evident from
their text. They assert, We are not sure what relevance such examples have in the connection between CSR behavior, corpo-
rate CSR disclosure and tax avoidance and a conclusion that charges the majority of companies with organised hypocrisy,
companies that we believe do not engage in fraudulent, deceitful and/or corrupt tax-related behavior . . . (p. 10). S&Ms
evidence of fraud and deceit and its conclusions were clear enough, and the cases cited have affected the lives of thousands
of citizens. If the general thesis of the S&M paper has any merit, then organized hypocrisy is likely to manifest itself in
many other arenas too. H&M do not challenge the thesis of the S&M paper. Their dismissal of any links between corporate
misdemeanors and claims of social responsibility leaves no basis for any exploration of socially responsible conduct. What
tests would they specify for any assessment of socially responsible conduct?

3. Silence and support for the status quo

H&M silence debate and inquiry by exaggerating the importance of peer-reviewed reports. They object to the use of
non-peer reviewed reports (p. 2) in the S&M paper. However, they do not indicate what they mean by non-peer reviewed,
although they seem to suggest that inquiry and critique must be sanctied by the invocation of the social gods preferred by
them. Their faith in peer-reviewed literature shows no awareness of the politics of scholarly journals, in which those parties
not subscribing to particular ideologies are routinely exiled (Kuhn, 1962; Puxty & Tinker, 1995). In the pursuit of grants,
chairs and status, some academics sell their souls, and in the pursuit of private prots, publishers have also been known to
publish fake journals and pseudo-scientic articles1 (Sikka, Willmott, & Puxty, 1995).
H&Ms views would purge the literature relating to ancient philosophers (e.g. Aristotle, Plato), the enlightenment
philosophes, the founding fathers/mothers of the social sciences (Marx, Weber, Durkheim, Adam Smith and others), spiri-
tual texts (Hinduism, Buddhism, Islam, Christianity) and much more. After all, these works have not been subjected to peer
review and could therefore be dismissed, regardless of what they have to say. Civil society organizations have been pivotal
in representing marginalized people and discourses to broaden the social debates about civil rights, the rights of women,
ecological problems, racial/gender discrimination, oppressive policies of the state and even organized tax avoidance, but all
such examples are implicitly rejected by H&M. In their world, the disadvantaged, the poor, the oppressed and advocates of
justice and fairness cannot speak because they are not authorized by the gatekeepers of the peer-review process. All writing
and speech are value-laden, so the issue then concerns the values that are prioritized and the sides that are taken. The S&M
paper is very explicit in its position. In contrast, H&M offer nothing to support their claims.
H&Ms obsession with peer-reviewed material also surfaces in other places. On page 8, they write, S&M only cites two
relevant articles from scholarly journals, as opposed to citing numerous reports from vested interest groups . . . (p. 8).
Why are scholarly journals to be privileged, and why do academics, including Hasseldine and Morris, not represent vested
interests? Are signicant others not able to produce analysis, critique or highlight social problems? H&M are oblivious to such
debates and to their social consequences. In their obsession, they dismiss the ndings of tax tribunals (UK Inland Revenue
Special Commissioners, 2002), courts (North Carolina Wake County Superior Court Division, 2007), US Senate committees
(US Senate Joint Committee on Taxation, 2003; US Senate Permanent Subcommittee on Investigations, 2002, 2003, 2005,
2006) and court-appointed ofcials (US Bankruptcy Court Southern District of New York, 2004), all of which were cited
in the S&M paper. Nevertheless, for some unspecied reason, H&M do not consider these documents to be part of the tax

1
The Guardian, Scientists sign petition to boycott academic publisher Elsevier, 5 February 2012. http://www.guardian.co.uk/science/2012/feb/02/
academics-boycott-publisher-elsevier Accessed 17.06.12.
18 P. Sikka / Accounting Forum 37 (2013) 1528

avoidance and CSR debate. H&M do not explain how court judgments and parliamentary investigations are to be subjected
to peer review. Their views provide no basis for constructing an informed critique of contemporary social practices.
H&M chastise others for the use of non-peer reviewed reports, but then they proceed to do the same things themselves.
For example, they cite papers by Fuest and Riedel (2009) and by Freedman (2008), both published by the Oxford University
Centre for Business Taxation. H&M wax lyrical about the Oxford University Centre but are silent about its 5 million funding
from the UKs 100 largest quoted companies,2 a dependence that encourages the promotion of selected worldviews. In
their enthusiasm for objectivity they could also have referred to the rival conferences held at the University of Essex and
organized by the Association of Accountancy and Business Affairs3 (AABA) and by the Tax Justice Network4 (TJN), but they
do not. Since 2003, AABA/TJN conferences have fostered a critical exploration of the world of tax avoidance. This process
has resulted in a large volume of critical literature (for example, de Boyrie, Pak, & Zdanowicz, 2005de Boyrie, 2005; Murphy,
2011; Palan, 2003; Palan, Murphy, & Chavagneux, 2010; Rawlings, 2007; Sharman, 2005; Shaxson, 2011; Stewart, 2008),
but H&Ms ideological antennae offer no recognition of this literature.
Despite H&Ms claims, the position remains that comparatively little attention is paid to tax avoidance, not only in
accounting literature but also in the social sciences generally. Despite writing a lengthy paper, H&M hedge their position by
stating that the purpose of this response is not to provide a full literature review (p. 8). However, they have no hesitation
in demanding an even larger review of the literature from others. Why do they engage in these double standards? Perhaps,
in accordance with the wishes of H&M, more papers could have been cited, but there are always constraints of space, and
the papers also must be relevant to the themes pursued in a study. None of the papers to which H&M allude would have
made any difference to the themes and issues highlighted in the S&M paper.

4. Tax statistics

H&M criticize the S&M paper for an incorrect interpretation of existing tax gap statistics (p. 2). They then claim that only
2.9 billion of tax avoidance is attributable to large businesses (p. 10). Therefore, let us see how their uncritical approach
stands up to scrutiny. The amounts attributed to the tax gap, which includes tax avoidance, tax evasion and tax arrears,
cannot be ascertained with precision because those parties indulging in tax avoidance/evasion rarely volunteer information
about their activities. There is no guarantee that tax arrears will ever be collected. In addition, there is incomplete information
about the shadow or illicit economy, which frequently escapes taxation altogether. The estimates of the tax gap, including
tax avoidance, therefore depend on economic models, which inevitably depend on data and on various other assumptions.
In the case of the UK, a report published by Her Majestys Revenue and Customs (HMRC) put the amounts at 35 billion
(HMRC, 2011). In contrast, leaked government papers5 estimated the amount to be between 97 billion and 150 billion; an
academic paper put it at approximately 100 billion (Lyssiotou, Pashardes, & Stengos, 2004), and another report estimated
it to be 120 billion (Murphy, 2010). This is further complicated by the malleability of transfer pricing practices (Sikka &
Willmott, 2010). A press release issued by the European Union stated that the shadow economy is estimated to be nearly
one fth of GDP on average across Member States, representing nearly D 2 trillion [roughly 1.6 trillion or US$2.5 trillion]
in total6 . A large part of the shadow economy might have escaped taxation altogether. Another study estimated the level
of tax evasion and avoidance in Europe to be around D 1 trillion [830 billion or US$1.25 trillion] (European Commission,
2012). Another report claimed that between US$21 trillion and US$32 trillion of wealth has been stashed in offshore tax
havens and that most of the income generated by these assets might be escaping taxation in the owners home countries.
If the assets concerned generated a modest return of 3%, and the resulting income would have been taxed at an average
rate of 30%, then between US$189 billion and US$280 billion in taxes might have been avoided (Tax Justice Network, 2012).
It is quite likely that large portions of the shadow economy, of tax evasion in the Europe Union and of the wealth hidden
offshore also relate to the UK. H&M object to the gures cited in the S&M paper, but they fail to provide a critique of any of
the models that generated the above amounts.
Similarly, H&Ms claim that large businesses avoid only 2.9 billion in taxes (p. 10) does not stand up to scrutiny either.
They do not offer any theory or explanation of their chosen terms. In contrast, the S&M paper focused on companies or
corporations, concepts much greater than large businesses or their conation with limited liability companies. In the crit-
ical literature, a corporation is understood as a vehicle for capital accumulation, and this sets dening parameters for its
operations regardless of its ownership patterns . . . The corporation, therefore, is as much a capitalist organization when it
is owned by one person or family as when it is owned by a large number of shareholders in the form of a publicly listed
company (Soederberg, 2010: 13). This line of analysis brings accounting rms under scrutiny too, although they might
legally be considered private partnerships.

2
Accountancy Age, 8 December 2005. http://www.accountancyage.com/aa/feature/1782228/prole-christopher-wales-browns-buddy-goldman-sachs
Accessed 15.06.12.
3
Prem Sikka is its director and trustees include Hugh Willmott, Christine Cooper, Colin Haslam, Jim Cousins (former MP) and Austin Mitchell MP.
4
AABA is a sponsor of TJN, and the two organizations work together closely. Prem Sikka is a senior adviser to TJN.
5
Sunday Times, Brown targets celebrities tax perk, 4 June 2006.
6
European Commission, Tackling tax fraud and evasion in the EU frequently asked questions, 27 June 2012.
 P. Sikka / Accounting Forum 37 (2013) 1528 19

Historically, UK governments have not been very forthcoming with information about tax avoidance. A number of secre-
tive deals have been struck between HMRC and major corporations, often dubbed sweetheart deals, and these deals have
enabled corporations to settle long-running tax disputes by paying small fractions of the disputed amounts. Following media
leaks of ve deals, running into millions of pounds, an investigation cleared the deals but also criticized HMRC by adding
that there was no clear justication for setting up alternative governance arrangements. All cases should have followed
standard governance procedures, including being referred to the High Risk Corporates Programme Board. There should have
been independent review of large settlements, and separation of roles in negotiating and approving settlements. . . . the
Department did not always keep notes of key meetings, including meetings at which settlement terms were agreed in prin-
ciple with taxpayers (National Audit Ofce, 2012: 9). While providing evidence to a UK parliamentary committee, one tax
ofcial said that the tax affairs of some 4000 companies were under investigation by the UK tax authorities. In sharp contrast
to H&Ms assertions about large businesses, the tax ofcial said that he was unable to say how many of these were large
corporates.7 A large amount of tax payable by UK businesses has been written off. The 20112012 annual report published
by the UK tax authorities showed that nearly 5 billion in tax liabilities, larger than the 2.9 billion cited by H&M, have
been written off (HMRC, 2012: 145). Of this, 1989 million relates to Value Added Tax (VAT) payable by businesses, 635
million corresponds to corporation taxes, and 823 million relates to National Insurance Contributions (NIC) payable by
employers.
Some public revelations about the tax affairs of large businesses also problematize H&Ms claims and fuel suspicions of
tax avoidance. For example, in 2009, Barclays Bank declared global prots of 4.6 billion but paid only 113 million in UK
corporation taxes, an effective rate of 2.4%, compared to an ofcial rate of 25%.8 In February 2012, the UK government took
the unusual step of introducing retrospective legislation to halt two tax schemes that would have enabled Barclays to avoid
approximately 500 million in corporate taxes. The Treasurys press release referred to the schemes as highly abusive . . .
designed to work around legislation that has been introduced in the past to block similar attempts at tax avoidance . . . The
rst scheme seeks to ensure that the commercial prot arising to the bank from a buyback of its own debt is not subject
to corporation tax . . . The second scheme involves Authorised Investment Funds (AIFs) and aims to convert non-taxable
income into an amount carrying a repayable tax credit in an attempt to secure repayment from the Exchequer of tax that
has not been paid.9
In 2012, Vodafone, one of the worlds largest mobile phone companies, reported global pre-tax prots of 9.5 billion,
including 1.3 billion in the UK. However, the company did not pay any corporate taxes in the UK. In 2011, its UK operations
generated pre-tax prots of 1.2 billion, but Vodafone only paid 140 million in corporate taxes.10 The tax affairs of the Royal
Bank of Scotland (RBS), which was bailed out by the UK taxpayers, have also attracted scrutiny. In 2012, it was reported
that RBS bought back its own bonds (in 2009) on the market at a prot of 3.8 billion. The deal was structured in such
a way that the bank avoided paying any taxes on this transaction.11 RBS is no stranger to tax avoidance. In 2009, it was
reported that the bank avoided roughly 500 million in UK (and US) corporation taxes by using large sums of money to
create complex international tax-avoidance schemes. The deals involved investments of as much as 6 billion at a time.
The cash was moved in circles between RBS and other banks.12 A seasoned investigator said, Weve seen several cases of
US banks working with UK banks to make a prot from tax avoidance for both of them. Its very hard to ferret out unless
someone confesses.13
Wealthy elites manufacture corporate vehicles to exploit tax incentives designed for selected industries. In the case of the
UK lm industry, these practices might have resulted in a loss of 5 billion in tax revenues14 . Here is one example: Eclipse
Film Partners No. 35 LLP v Revenue & Customs [2012] UKFTT 270 (TC) (20 April 2012)15 . In this case, a partnership that
had no interest in entering the lm industry tried to secure income tax relief for its investors. The investors included highly
paid bankers, soccer players and football club managers. The partnership entered into a complex set of transactions with
the Disney Group of Companies to license lm rights and sub-license rights to distributors. The summary of the nancial

7
Financial Times, Tax ofcials reveal scale of probe, 27 June 2012. http://www.ft.com/cms/s/0/bced27fa-c085-11e1-9372-00144feabdc0.
html#axzz1zAVTCukj Accessed 27.06.12.
8
BBC News, Barclays UK corporation tax bill for 2009 was 113 m, 18 February 2011. http://www.bbc.co.uk/news/business-12511912 Accessed on
08.05.12.
9
HM Treasury press release, Government action halts banking tax avoidance schemes, 27 February 2012. http://www.hm-treasury.gov.uk/
press 15 02.htm.
10
The Daily Telegraph, Vodafone paid zero UK corporation tax last year, 10 June 2012. http://www.telegraph.co.uk/nance/newsbysector/epic/vod/
9322368/Vodafone-paid-zero-UK-corporation-tax-last-year.html Accessed 10.06.12.
11
The Independent, Zero tax for RBS on massive prots from bond trades, 29 February 2012. http://www.independent.co.uk/news/business/news/
zero-tax-for-rbs-on-massive-prots-from-bond-trades-7462573.html Accessed 15.06.12.
12
The Guardian, RBS avoided 500m of tax in global deals, 13 March 2009. http://www.guardian.co.uk/business/2009/mar/13/rbs-tax-avoidance Accessed
15.06.12.
13
The Guardian, RBS avoided 500 m of tax in global deals, 13 March 2009. http://www.guardian.co.uk/business/2009/mar/13/rbs-tax-avoidance Accessed
16.06.12.
14
Daily Mail, Film funding tax scheme abuse may be costing HM Revenue & Customs 5bn at least, 21 June 2012. http://www.thisismoney.co.uk/
money/news/article-2162591/K2-tax-scheme-Film-funding-tax-scheme-abuse-risking-inland-revenue-5bn-least.html Accessed 22.06.12.
15
At http://www.nanceandtaxtribunals.gov.uk/judgmentles/j6384/TC01963.pdf
20 P. Sikka / Accounting Forum 37 (2013) 1528

transactions16 was as follows. Barclays Bank lent 790 million to the lm partnership, and its 289 members then increased
the amount with 50 million of their own funds. Slightly more than 500 million of that cash was then paid to Disney for
rights to its lms Enchanted and Underdog. The scheme paid out 293 million to Barclays for a decades worth of interest
payments for its original loan, and it licensed the rights to the lms back to Disney, at a rate of return of 1.02 billion for 20
years. Eclipse then claimed 117 million in tax relief for interest payments to Barclays. The scheme was thrown out by the
First-Tier Tribunal, which ruled that the partnership was not conducting activities that amounted to a trade, and therefore,
the members of the partnership could not claim tax relief for interest on the borrowings used to nance the acquisition of
lm rights.
The above examples cast severe doubts on H&Ms attempts to minimize tax avoidance attributable to large businesses.
For unexplained reasons, H&M fail to see the corporate hand in tax avoidance. Therefore, some further examples should help
to develop the arguments. An Ernst & Young scheme enabled directors of Phones4u (part of the Dextra Group of Companies)
to avoid NIC by paying themselves in gold bars, ne wine, and platinum sponges.17 Subsequent legislation killed off that
scheme, but Ernst & Young devised another plan to enable higher-paid employees and directors of Phones4u (and other
companies) to avoid NIC and income taxes by securing payments through an offshore employee benet trust18 (EBT) in
Jersey. The gist of these schemes was that companies paid money into the trusts, which then lent it to their employees.
As long as the transactions looked like loans, for example, by carrying interest, the taxes on them were avoided by the
companies and their employees. The transactions for the scheme were conducted with the involvement of Regent Capital
Trust Corporation Limited (Regent), a Jersey Company, which in turn was owned by the partners of a Jersey law rm, Bedell &
Cristin. An HMRC bulletin19 explained that Dextra Accessories Ltd., and ve other companies made contributions to an EBT.
They deducted these contributions when computing their taxable prots. The trust deed gave the trustee wide discretion
to pay money and other benets to beneciaries, as well as the power to lend them money. The potential beneciaries of
the trust included past, present and future employees and the ofcers of the participating companies in the Dextra group,
as well as their close relatives and dependents. The trustee did not make payments of emoluments out of the funds in the
EBT during the periods concerned; instead, the trustee made loans to various individuals who were beneciaries under the
terms of the EBT. The legal point was whether the companies contributions to the EBT were emoluments and thus liable
for income taxes and NIC. The House of Lords held20 that the contributions by the companies were potential emoluments
and hence liable for income taxes and NIC.
Deloitte & Touche designed a scheme for the London ofce of Deutsche Bank (DB) to enable it to avoid income taxes and
NIC on bonuses totaling as much as 92 million. The judgment given in the case of Deutsche Bank Group Services (UK) Ltd v
Revenue & Customs [2011] UKFTT 66 (TC) (19 January 2011) noted that more than 300 bankers participated in the scheme,
which operated through a Cayman Islands-registered investment vehicle called Dark Blue Investment (DBI), managed by
Investec. The key idea, as summed up by a tax tribunal, was that DB arranged for certain bonus sums that were to be payable
to identied individual DB employees to be paid into the vehicle created for the Scheme and not directly to any employee.
Those sums were used to purchase shares in DBI which were allocated to individual employees. DB employees were given
rights to sell their shares and withdraw sums from the Scheme over a period, up to the amount of the individual bonus of
the employee subject to any uctuation in the value of the shares during the period. If this right was used the employee
received a cash sum. The Scheme was wound up at the end of a specied period, and sums paid to employees who had not
previously received sums from the Scheme. Deutsche Bank argued that the employees received nothing taxable when the
sums were paid into the scheme. They received shares, but no income taxes or NIC contribution liabilities arose with regard
to the receipt of those shares because they were restricted securities exempted from liability by section 425 of the Income
Tax (Earnings and Pensions) Act 2003 (ITEPA). The employees disposed of their shares by selling them at various times, and
there was no income tax liability or NIC contribution liability by reason of the sale. The tribunal rejected the scheme, and the
judge said, DBI, the company in which the restricted securities were held, was therefore in reality purely a vehicle for the
Scheme . . . the Scheme as a whole, and each aspect of it, was created and coordinated purely for tax avoidance purposes.
Leaving aside the technicalities of the cases cited above, H&M might argue that the cases were related to income taxes
and National Insurance Contributions payable by individuals and therefore had nothing to do with any corporations or large
businesses. This view is plainly wrong. All of the schemes were devised, marketed or operated with the involvement of
corporations, such as Ernst & Young, Deloitte & Touche, Deutsche Bank, Eclipse Film Partners, Barclays Bank, Disney and
various law rms. Their quests for private prots were central to the design and implementation of tax avoidance schemes,
which, upon scrutiny, turned out to be schemes for tax evasion.

16
The Independent, Exposed: the hundreds of City millionaires in lm tax loophole, 25 April 2012. http://www.independent.co.uk/news/business/news/
exposed-the-hundreds-of-city-millionaires-in-lm-tax-loophole-7676028.html Accessed 24.06.12.
17
Mail on Sunday, 6 m tax threat to Phones4U founder, 15 February 2004. http://www.standard.co.uk/news/6m-tax-threat-to-phones4u-
founder-6939897.html Accessed 19.06.12.
18
For details, see http://www.taxbar.com/documents/dextra sp.pdf.
19
http://www.hmrc.gov.uk/practitioners/macdonald-v-dextra.htm
20
MacDonald v. Dextra Accessories Ltd & Others [2005] STC 1111. Available from http://www.bailii.org/uk/cases/UKHL/2005/47.html
 P. Sikka / Accounting Forum 37 (2013) 1528 21

5. The role of law and tax avoidance

The S&M paper did not seek to enter into the legalistic debates over tax avoidance, tax evasion, or anything in between.
Rather, it relied on the court and regulatory judgments reached in the cases cited in that paper. There was no need to second-
guess the judges, and at no point did the paper promise to decipher the tax avoidance and evasion distinctions made by
the judges. In all of the cases, the accountants and lawyers selling the schemes considered the matters to be tax avoidance,
but upon challenge, they turned out to be cases of evasion. It is difcult to provide a meaningful response to H&M because
the basis of their musings is not clear. For example, are they referring to legal sociology, to legal science, or to something
else (Weber, 1966)? It is commonly accepted that capitalistic enterprises cannot survive without legal security, but the
predictability and certainty that H&M hanker after are something else. In general, capitalist enterprises prefer certainty so
that they can predict outcomes and consequences, but such certainty is quite distinct from the predictability of applying
legal rules to given circumstances.
The role of the law in establishing boundaries between tax avoidance and tax evasion is important, as exemplied by
Dennis Healey, a former UK Chancellor of the Exchequer, who said that the difference between tax avoidance and tax
evasion is the thickness of a prison wall (cited in Shaxson, 2011: 23). Tax evasion is an illegal activity intentionally designed
to reduce a taxpayers tax liability. Taking advantage of allowances and relief permitted by law does not constitute avoidance
and is part of wise tax planning. Individuals and corporations are expected to take advantage of tax-free personal allowances,
tax exemptions for interest earned on Individual Savings Accounts (ISAs), capital allowances on qualifying assets, relief for
interest paid on qualifying borrowing, and much more in computing their tax liability. The difculties arise with practices
that cannot be easily classied as tax planning or tax evasion or those beyond the terms envisaged by the sponsors of
legislation.21
In any case, contrary to H&Ms claims, law cannot offer ultimate certainty because in societies marked by inherent
conicts, it is always contested. It is constantly in the process of being made, but it is not nally made. The role of language
is vital because the meanings of words cannot be xed in any permanent sense. Therefore, any attempt to x a meaning is
a matter of politics and power, including the power exercised by judges. H&M might wish to ignore it (p. 7), but the legal
system is adversarial, and lawyers and accountants have interests in promoting interpretations that advance their narrow
commercial interests. Corporations also have vital interests and have been willing and able to fund political parties and to
lobby policymakers to secure desirable laws. They can also marshal nancial resources to hire lawyers to advance forcefully
their particular interpretations of the laws at the expense of relatively less powerful members of society. Thus, contrary to
H&Ms assertions, the law is not and cannot be neutral, especially as the objective of the law is to promote a particular kind
of social relationship.
There is a considerable difference between law on the books (formal law) and law in action (Weber, 1966), a point
that is totally neglected by H&M. The latter is inuenced by social antagonisms, practices and unintended consequences
and can differ from formal law. Over a period, many concepts and practices evolve and become signicant adjudicators
of tax liabilities. The concepts of taxable income, economic transactions and residence22 are vital to the adjudication of
tax liabilities, but their interpretations are shaped by practices and politics, rather than by only the strict letter of the law.
Contemporary developments also pose challenges. For example, with increased cross-border trade and easier travel, the
conventional approaches to establishing residence for tax purposes have been under strain, and practitioners and judges
have been obliged to develop working rules.
In appealing to the certainty of law, H&M might be hearkening back to the judges remarks in the case of IRC v Duke
of Westminster ([1936] 19 TC 490), a case frequently invoked by the tax avoidance industry. In this case, the Duke stopped
paying non-deductible wages to his employees and instead covenanted to make them payments, which, in accordance with
the extant law, could be characterized as annuities and would be deductible. One of the arguments was that, in substance,
the annuities were wages and should thus be subjected to the extant law on taxes. However, the UK House of Lords refused
to disregard the legal character (form) of the deeds of covenant merely because the same result (substance) could be brought
about in another manner. The Law Lords said, Here the substance is that which results from the legal rights and obligations
of the parties ascertained upon ordinary legal principles and Every man is entitled, if he can, to order his affairs so that
the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to
secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his
ingenuity, he cannot be compelled to pay an increased tax. This has been the mantra of the tax avoidance industry.
By the 1970s, with the intensication of globalization, the emergence of tax havens and an organized tax avoidance
industry, many commercially articial schemes began to threaten tax revenues. Unlike the Duke of Westminster case, the
new schemes involved multiple parties and multiple transactions, and the courts began to develop rules to address the
problems. One of these cases resulted in the development of what became known as the Ramsay principle23 . In this case,

21
The 1993 House of Lords judgment in Pepper (Inspector of Taxes) v Hart [1992] UKHL 3 (26 November 1992) established, that under certain circumstances,
the courts may refer to statements made by sponsors of legislation in the UK Parliament to interpret the meaning of that legislation.
22
An indication of the statutory rules appears in Section 829 et seq of the UK Income Tax Act 2007. These rules do not cover all circumstances and do not
specify the comprehensive tests for determining whether an individual is resident in the UK.
23
W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling [1982] A.C. 300.
22 P. Sikka / Accounting Forum 37 (2013) 1528

a taxpayer had two loans. The plan was to achieve a tax-free gain on one loan and an allowable tax loss on the other. To
achieve these tax objectives, money was sent around in a series of transactions that started and ended with the promoter
of the scheme. One of the Law Lords said, In each case two assets appear, like particles in a gas chamber with opposite
charges, one of which is used to create the loss, the other of which gives rise to an equivalent gain which prevents the
taxpayer from supporting any real loss, and which gain is intended not to be taxable. Like the particles, these assets have a
very short life. Having served their purpose they cancel each other out and disappear. At the end of the series of operations,
the taxpayers nancial position is precisely as it was at the beginning, except that he has paid a fee, and certain expenses,
to the promoter of the scheme. By prioritizing the economic substance of the transaction, the Law Lords decided that the
taxpayer did not suffer any real loss and therefore was not entitled to receive tax relief for that loss. This judgment marked
a signicant departure from the Duke of Westminster case and suggested that commercial substance, rather than the legal
form could be the guiding principle. Many cases subsequent24 to the Ramsay principle have muddied the waters further,
but commercial substance vs. legal form remains central to contemporary debates about tax avoidance. Such tensions are
apparent in almost all of the cases highlighted in the S&M paper, and corporations have become adept at constructing tax
avoidance schemes that have little/no economic substance (Sikka & Willmott, 2010).
In summary, H&Ms points about the role of law neglect the social and political context of the law and the strategies
deployed by corporations for creative compliance. Corporations routinely marshal their considerable political and nancial
resources to secure favorable laws. In capitalist societies, there is every possibility that the law serves the interests of the
dominant class. H&Ms analysis is too individualistic and ignores the systemic pressures that incubate tax avoidance.

6. The role of the state

In line with their random approach, H&M refer to the role of the state. However, despite demanding deeper analysis from
others, they are silent about the nature of the state. Their discussions seem to conceive of the state as a pluralist body,25
whereas the state can actually be conceived of as a capitalist state mired in the contradictions of capitalism and concerned
with the long-term welfare of capital (Habermas, 1976). Each line of inquiry leads to a competing analysis and is beyond of the
scope of the present paper. Nevertheless, H&Ms claims pose methodological problems. The notion of dominance, which
could arise through class interests, vocabularies, interests, ideologies, etc., is essential to any empirical test of pluralism,
but H&M are oblivious to such concerns. With their rejection of the corporate and capitalist interests implicit in the S&M
paper, there is a danger that the very idea of dominance in social formations and discourses is downgraded to a very weak
pluralistic concept of power and control. This dominance can arise both through the level of the conscious and the level
of the unconscious. It can be seen as a property of the system or of the social relations involved, which favor particular
worldviews rather than an intentional bias. Due to systematically asymmetrical social relations of power, the policies of the
state and ideological state apparatuses can secure or advance the privileges of a particular group or class. H&Ms position
on the state hardly offers any explanatory power for the contemporary debates on tax avoidance.
H&M also make references to the sovereign state, without ever explaining what the term means and how it relates to any
discussion of the issues raised in the S&M paper. They claim (pp. 4, 8) that a sovereign state imposes tax liability and creates
entitlement to tax relief. This theory has some plausibility but fails to recognize the interests that are advanced. Furthermore,
the quality of authority in a dened geographical jurisdiction is always the outcome of the comparative resources marshaled
by the state and by other protagonists. Sikka (2011) documents the case of a foreign direct investment agreement between
two comparatively poor African nations and a consortium of transnational oil corporations. The oil companies wielded
considerably more nancial resources and were in a position to impose conditions/clauses that constrained the legislative
capacities of the host nations. In particular, the clauses forbade the host nations from changing their tax laws, perhaps for
5070 years, which might have negatively affected the outcomes of the oil corporations investments. The clauses are threat
to any notion of democracy and constituted a state within a state, with the possibility of serious social strife. None of this
scenario sits easily with H&Ms claims of static state sovereignty or with the view that the tax-levying powers of a state are
not affected by corporate power.

7. Accounting rms as intermediaries

As part of their defense of the tax avoidance industry, H&M assert, By denition, accounting rms operate as intermedi-
aries between corporate taxpayers and tax agencies . . . Prior research suggests that accountants, acting in their intermediary
role, do not just act as exploiters of the tax system but have an active enforcer role to play in tax systems (p. 9). Thus, in
one stroke, H&M have downgraded all of the literature that draws attention to the predatory practices of accounting rms,
including their roles in money laundering, tax evasion, bribery, corruption and cartels (for some evidence, see Mitchell &
Sikka, 2011; Mitchell, Sikka, & Willmott, 1998; US Senate Permanent Subcommittee on Investigations, 2003, 2005). Instead,
their paper seems to suggest that rms might be acting for the welfare of society. They offer no theory of society, nor do

24
For example, see IRC v Burmah Shell (1982) STC 30; Furniss v. Dawson (1984) AC 474 and the House of Lords decision in Macniven (Her Majestys
Inspector of Taxes) v. Westmoreland Investments Limited.
25
This by itself does not amount to a theory of the state.
 P. Sikka / Accounting Forum 37 (2013) 1528 23

they explain how conceptions of welfare come to be formed. No doubt, it is etched on the foreheads of the partners of major
accounting rms that they must advance social welfare, but their conceptions are likely to be shaped by their education,
income, wealth, class and business interests. H&M do not say anything about who benets from this alleged enforcer
role and why accountants might be willing and able to perform this role. More importantly, if accounting rms, as the pri-
vate police force of capitalism, are so good at enforcing the law, then why has their assumption of this role resulted in the
proliferation of tax avoidance schemes?
Accounting rms may be regarded as intermediaries, but they are not the innocent victims of market ideologies. Rather,
as capitalist enterprises, they are purveyors and beneciaries of an enterprise culture, in which bending the rules to make
prots at almost any cost is considered to be a highly marketable skill (Hanlon, 1994). The entrepreneurial accounting rms
maximize their prots by manufacturing tax avoidance schemes, training their staffs to market the schemes and assigning
revenue generation targets for tax departments with little regard for the consequences for the state or for the broader
society. The rms know (see below) that what they are doing is on the boundary of unacceptable practices and possibly
even fraudulent, but the pull of private prots and wealth accumulation is too strong. The S&M paper cited various cases
to draw attention to the sham of professional services and to corporations claims of merely acting as intermediaries. It is
informative to examine some of the evidence.
After investigating the role of the major accounting rms in the marketing of abusive tax avoidance schemes, the US
Senate Permanent Subcommittee on Investigations (2005) concluded that the sale of potentially abusive and illegal tax
shelters is a lucrative business . . . and some professional rms such as accounting rms . . . have been major participants in
the development, mass marketing, and implementation of generic tax products sold to multiple clients . . . [The] tax shelter
industry was no longer focused primarily on providing individualized tax advice to persons who initiate contact with a
tax advisor. Instead, the industry focus has expanded to developing a steady supply of generic tax products that can be
aggressively marketed to multiple clients . . . dubious tax shelter sales were no longer the province of shady, y-by-night
companies with limited resources. They had become big business, assigned to talented professionals at the top of their
elds and able to draw upon the vast resources and reputations of the countrys largest accounting rms . . . (pp. 6, 9).
Another report stated that a sophisticated offshore industry, composed of a cadre of international professionals including
. . . accountants . . ., promotes offshore jurisdictions to U.S. citizens as a means to avoid taxes and creditors in their home
jurisdictions. These professionals, many of whom are located or do business in the United States, advise and assist U.S.
citizens on opening offshore accounts, establishing sham trusts and shell corporations, hiding assets offshore, and making
secret use of their offshore assets here at home (US Senate Permanent Subcommittee on Investigations, 2006: 1).
The business values of major accounting rms were also highlighted by a UK legislator who said, There are armies of
bankers, lawyers and accountants who ensure that even though the letter of the law is respected, increasingly immoral
ways are found of perverting the spirit of the law to ensure that tax is avoided . . . To hide its true purpose, the tax avoidance
industry adopts the language of real business, so technical innovation and reinventing your business model do not mean
nding new products, services and markets, and new ways of supplying them. No, they mean registering your business in a
tax haven and becoming a non dom to avoid tax while still enjoying the, admittedly decreasing, benets and services which
make this country the civilised place that it is.26
The values of major accounting rms have been highlighted in many court cases. It is helpful to examine the case of
RAL (Channel Islands) Ltd v. Customs & Excise Commissioners (2002), VAT Decision 17914,27 which involved complex
offshore structures to avoid paying Value Added Tax (VAT) on the turnover generated by a gaming machine company. The
court papers noted that the scheme was designed by KPMG. A number of features should be noted. KPMG had no previous
business relationship with the company. It cold-called the company and offered a presentation on possible VAT savings,
subject to a condentiality undertaking being agreed upon. The visual presentation was entitled KPMGs VAT Mitigation
Proposals for Gaming and Amusement Machines. It contrasted 4.2 million in VAT then payable with no liability by using
complex offshore structures. KPMG would charge 75,000 plus VAT for an evaluation report and counsels opinion and a fee
of 25% of the rst years VAT savings, 15% of the second and 5% of the next three years savings. The avoidance scheme had
sought to exploit European legislation, and a note from KPMG told clients, In our view HM Customs & Excise (Customs) will
regard these planning arrangements as unacceptable tax avoidance and will seek to challenge the arrangements. However,
a similar concept for telecommunications ran for nearly four years in most Member States of the EU before the UK, French
and German Governments secured the unanimous agreement of all 15 Member States to amend the primary legislation and
stop the concept. Since at the moment we are not aware of any widespread use of these planning arrangements, and the
fact [sic] that some EU Member States do not charge VAT on gaming machine income, unanimous agreement to amend the
EC legislation could be difcult to achieve. KPMG listed more than 80 steps that the client company had to undertake with
almost military precision to make the scheme work. These steps included attention to control of the companies and the
appointment of skeletal staff in the Channel Islands to satisfy the letter of the law concerning the control and ownership of
companies.

26
Hansard, House of Lords Debates, 17 March 2011, col. 375 http://www.publications.parliament.uk/pa/ld201011/ldhansrd/text/110317-0001.htm
Accessed 18.06.12.
27
Available from http://www.bailii.org/uk/cases/UKVAT/2002/V17914.html Accessed on 15.06.12.
24 P. Sikka / Accounting Forum 37 (2013) 1528

Another US investigation also focused on the organizational practices of KPMG (US Senate Permanent Subcommittee
on Investigations, 2003). The report noted that KPMG had an extensive marketing infrastructure to sell its tax products,
including a market research department, a Sales Opportunity Center that works on tax product marketing strategies, and
even a full-edged telemarketing center staffed with people trained to make cold calls to nd buyers for specic tax products
. . . Numerous internal emails by senior KPMG tax professionals exhorted colleagues to increase their sales efforts (p. 8).
Further, tax professionals were directed to contact existing clients about the product, including KPMGs own audit clients
. . . KPMG advised its employees, in some cases, to make misleading statements to potential buyers, such as claiming that
SC2 [the code name for an avoidance schemes] was no longer available for sale, even though it was, apparently hoping that
reverse psychology would then cause the client to want to buy the product. KPMG also utilized condential and sensitive
client data in an internal database containing information used by KPMG to prepare client tax returns in order to identify
potential targets for its tax products . . . Developing and selling a tax product to a client did not, in many cases, end KPMGs
involvement with the product, since the product often required the purchaser to carry out complex nancial and investment
activities in order to realize the promised tax benets . . . KPMG enlisted a bevy of other professionals, including lawyers,
bankers, investment advisors and others, to carry out the required transactions (p. 9). The rm colluded with lawyers to
manufacture favorable opinion letters regarding the schemes (pp. 10 and 11). Its senior ofcials set revenues generating
goals for various tax groups and urged them to increase their sales of designated tax products to meet those goals (p. 52).
The Senate Committee noted that KPMG required some potential purchasers of the tax products to sign nondisclosure
agreements and severely limited the paperwork used to explain the tax products. Client presentations were provided on
chalkboards or erasable whiteboards, and written materials were retrieved from clients before leaving meetings. The staff
was instructed not to keep certain revealing documentation in its les or to purge the les (p. 108).
The above example provides a brief glimpse into the practices of the secretive tax avoidance industry. It is difcult to
reconcile any of the above with H&Ms claims that accounting rms merely act as intermediaries. In common with many
other corporate entities, accounting rms too seek to maximize private prots. Fines, penalties and public exposure have
simply become another business cost (Mitchell & Sikka, 2011). It is difcult to see how CSR and tax avoidance/evasion
debates can be advanced by simply considering accounting rms to be agents and intermediaries.

8. Tax avoidance regulation

H&Ms random points also make references to a variety of regulations designed to discourage tax avoidance. These
therapeutic points bear no relationship to the S&M paper. While all regulations have the potential to change behavior,
H&Ms ramblings are again not grounded in any explicit social theory that might explain the nature of conict and co-
operation. They sing the praises of voluntary codes adopted by banks (p. 11) but neither develop the points nor consider any
evidence that shows that banks have been actively involved in numerous cases of tax avoidance/evasion (for example, US
Senate Joint Committee on Taxation, 2003; US Senate Permanent Subcommittee on Investigations, 2002, 2003, 2005, 2006).
H&M also refer to the UKs Disclosure of Tax Avoidance Schemes (DOTAS) regime (p. 10), which was modeled on US laws,
and for some reason, they expected the S&M paper to evaluate its effectiveness. Their own reading is very monochromatic
and fails to note that some accounting rms have become very adept at regulatory arbitrage, and in pursuit of private prots,
they are not constrained by the regimes designed to monitor abuses. A former Commissioner of the US Internal Revenue
Service (IRS) said, Companies (and wealthy individuals) pay handsomely for tax professionals not just to nd the lines, but
to push them ever outward. During my tenure at the Internal Revenue Service, the low point came when we discovered that
a senior tax partner at KPMG (one of the Big Four, which by virtue of their prominence set standards for the others) had
advocated in writing to leaders of the companys tax practice that KPMG make a business/strategic decision to ignore a
particular set of I.R.S. disclosure rules. The reasoning was that the I.R.S. was unlikely to discover the underlying transactions,
and that even if we did, any penalties assessed could be absorbed as a cost of doing business (Everson, 2011).
A report by a US Senate committee noted that KPMG senior personnel undertook a calculated and deliberate decision
not to comply with US law, which required the registration of tax avoidance schemes (US Senate Permanent Subcommittee
on Investigations (2003). The report noted that some KPMG senior staff feared being caught and reasoned, Based upon our
analysis of the applicable penalty sections, we conclude that the penalties would be no greater than $14,000 per $100,000
in KPMG fees etc. For example, our average deal would result in KPMG fees of $360,000 with a maximum penalty exposure
of only $31,000. This further assumes that KPMG would bear 100% of the penalty. In fact . . ., the penalty is joint and several
with respect to anyone involved in the product who was required to register . . . [A]ny ultimate exposure to the penalties are
abatable if it can be shown that we had reasonable cause. . . . To my knowledge, the Firm has never registered a product under
section 6111 . . . (p. 28). The cold cost-benet analysis was then accompanied by consideration of competitive advantage,
and a KPMG ofcial added, Should KPMG decide to begin to register its tax products, I believe that it will position us with
a severe competitive disadvantage in light of industry norms to such degree that we will not be able to compete in the tax
advantaged products market (p. 29). This business strategy was emboldened by the belief that the tax authorities lacked
the enforcement resources, and a KPMG ofcial added, In speaking with KPMG individuals who were at the Service . . .
the Service has apparently purposefully ignored enforcement efforts related to section 6111. In informal discussions with
individuals currently at the Service . . . has conrmed that there are not many registration applications submitted and they do
not have the resources to dedicate to this area (p. 29). The KPMG ofcial then concluded, I believe the rewards of a successful
marketing of the OPIS [code name for a tax shelter scheme] product . . . far exceed the nancial exposure to penalties that
 P. Sikka / Accounting Forum 37 (2013) 1528 25

may arise. Once you have had an opportunity to review this information, I request that we have a conference with the
persons on the distribution list . . . to come to a conclusion with respect to my recommendation (p. 29). The above example
provides a brief glimpse into the internal practices of a major accounting rm and is far removed from the unproblematic
regulatory assumptions made by H&M. They continue to see the tax avoidance industry through rose-colored glasses, rather
than seeing it as an opportunistic fraction of capital that must sell its services to boost its prots. A theoretically grounded
approach would encourage skepticism and an appreciation of the dynamics of regulation, rather than an unproblematic
regurgitation of rules.
Without offering any theory of regulation or of the state, H&M also mention the introduction of a general anti-avoidance
rule (GAAR) for combating tax avoidance (p. 10). This rule would primarily focus on economic substance rather than just the
legal form to adjudicate tax avoidance schemes. This suggestion has some potential, but H&M are silent as to why, despite
the Ramsay principle being advocated by the courts in 1982 (see above), the UK government has been reluctant to embrace
GAAR. In 2011, a UK government-appointed committee published a report on the possible introduction of GAAR. It concluded
that it is clear that purposive interpretation, specic anti-avoidance rules and DOTAS are not capable of dealing with some
of the most egregious tax avoidance schemes (HM Treasury, 2011: 20). The report then recommended the introduction of
GAAR for what it called highly articial and abusive tax schemes. At the same time, the committee stated that introducing
a broad spectrum general anti-avoidance rule would not be benecial for the UK tax system (HM Treasury, 2011: 3). In
essence, it is a watered down version of the GAAR that can be found in other countries, and critics claim that it is unlikely to
have the desired effects (Murphy, 2012). The poverty of the committees proposals becomes clear when it is noted that it did
not include any representatives of NGOs, trade unions, civil societies or critics but included a representative of the corporate-
funded Oxford University Centre for Business Taxation (see above). The committee was chaired by Graham Aaronson QC,
well known [lawyer] for representing large business and wealthy people in tax disputes.28 Perhaps if H&M had a theory of
regulation, the state, the capture of the state or the politics of regulation, they might have been able to offer a meaningful
commentary, but such considerations are not evident from their snippets.

9. Corporate human rights

For some unknown reason, H&M feel compelled to emphasize the human rights of corporations (pp. 6, 12) without
offering any explicit theory or context. However, not a word can be found in their paper about the human rights of people
(and other living beings) negatively affected by tax avoidance/evasion (Sikka, 2011). It is not possible to debate H&Ms views
within the space available in this paper, as any debate must address questions about the nature of the corporation and
of the state and the nature of democracy. Nevertheless, H&M cannot be permitted to escape lightly, and some alternative
comments are appropriate.
In capitalist economies, corporations already enjoy property rights, but there are numerous contradictions and complex-
ities. Corporations, as legal persons, do not feel the hunger, heat, cold, homelessness, pain or sorrow experienced by natural
persons. Unlike individuals, corporations cannot be incarcerated, they have no conscience, and they are typically not subject
to the same social controls and reputational constraints as individuals (Bakan, 2005). In addition, they often wield control
over more resources than many nation states, and they can thumb their noses at the laws of countries, especially poorer
countries (Deva, 2012). Shareholders have few remedies against such excesses. Of course, they can sell their shares to show
their displeasure about immoral, unethical or illegal practices. This scenario assumes that the shareholders have relevant
information and are bothered about corporate practices, especially if they increase their returns. In any case, selling shares
alone will hardly discipline managers. If a corporation is seen as a nexus of stakeholder interests, then there is the further
problem that non-shareholders interests have little power under corporate laws to call corporations to account. Larger
public protests could have some effects, but such activities cannot be organized easily. H&M might respond by arguing that
suitable legal constraints can be designed, but the problem is that not only do corporations fund political parties, but they
also can use their considerable resources to run political campaigns and secure preferred policies29 . This ability inevitably
weakens the inuence of the average citizen regarding democratic choices and must pose a serious threat to the future of
democracy and the enjoyment of human rights.
Corporate practices affect every person on the planet, and corporations therefore cannot be considered to be private
entities, but people have few rights to intervene in corporations affairs. For example, people are not allowed to see corporate
tax returns and related correspondence to determine whether avoidance of taxes is affecting the provision of education,
healthcare, pensions, security and their life chances. Apologists are quick to claim that legal persons are entitled to privacy,
that the public provision of corporate tax returns has costs, or that the information is technical and would somehow not be
understood by ordinary people. In other words, they construct the deepening of democracy as a kind of burden that must
be restricted or seen through some technocratic lens, but they have no difculty advocating rights for corporations. These
apologists do not say anything about how concerned citizens and excluded stakeholders are to advance their claims for

28
The Guardian, End the cuts to staff dealing with tax avoiders, 17 April 2012. http://www.guardian.co.uk/society/2012/apr/17/end-cuts-staff-tax-avoiders
Accessed 26.06.12.
29
See the US Supreme Court case of Citizens United v. Federal Election Commission, 558 U.S. 50 (2010).
26 P. Sikka / Accounting Forum 37 (2013) 1528

Table 1
Conceptual differences and assumptions.

Hasseldine and Morris Critical

Methodology Individualistic Political economy

Tax avoidance Economic Political
Tax decision Private Public
Society Stable Conict
State Pluralist Capitalist
State sovereignty Fixed Negotiated
Accounting rms Intermediaries Fraction of capital
Law Unambiguous Contested
Corporations Limited liability companies Any vehicle for private accumulation
Dialogue Peer reviewed and constrained Open and free dialogue

rights. Perhaps, in time, deeper debates will be published in accounting journals about such matters, especially as human
rights are being violated in the rush to make bigger private prots.

10. Summary and discussion

In his 2012 budget speech, UK Chancellor George Osborne described tax evasion and aggressive tax avoidance as morally
repugnant.30 The erosion of tax revenues is also a major cause of the deepening economic crisis and has constrained the
governments ability to intervene in the economy. It has formed the basis of austerity programs that are inicting misery
on millions of people (Christian-Aid, 2008; Mitchell & Sikka, 2011; Shaxson, 2011). Judging by recent press coverage, there
appears to be a heightened social awareness of the corrosive impact of tax avoidance. In contrast, H&Ms paper is an example
of an emerging strand of literature that downgrades tax avoidance altogether by neglecting social conict, class, ideology,
the capture of the state and concerns for social justice and fairness (see also Gracia & Oats, 2012).
The main thrust of the S&M paper was that corporations soothe public anxieties by publishing corporate social responsi-
bility (CSR) reports and by making promises of good citizenship, but these actions do not always match their tax practices.
In many ways, this exchange has been frustrating, as H&M have failed to critique the S&M paper. Instead, they offered a
potpourri of random unrelated points rarely grounded in any explicit theory, evidence or analysis. They failed to locate
their points in any social theory or conception of society, the state, conict, continuity and change. This failure has enabled
them to mount a defense of the tax avoidance industry and to abolish the conceptual category of tax avoidance altogether.
Their main argument appears to be that I should have written a different paper, covered different issues, or supported their
ideological preferences. Instead of focusing on organizational hypocrisy, they believe that I should have written about law,
the regulation of tax agents, state policy on tax disclosures, tax preparers and corporate human rights, just to mention a few
topics. All of these issues might well be worthy of study, but they were beyond the scope of the Smoke and Mirrors (S&M)
paper. H&M themselves could have written one or more papers on those issues, but they have chosen not to. H&M have said
that there are insufcient examples (p. 2) in the S&M paper to justify its conclusions. In common with other defenders of
the status quo, H&M place critics in negative spaces. Their critique is easily declared to be unconvincing (p. 2), while little
evidence, theory or analysis is apparently needed to support the status quo. H&M fail to cite even one example of a company
whose tax practices accord with its claims of ethical conduct or CSR statements.
Clearly, there are major differences between H&Ms perspective and a critical approach to studying tax avoidance/evasion.
These differences are summarized in Table 1, and it is appropriate to conclude with a brief commentary.
The shortcomings of H&Ms position primarily relate to their methodological choices. Throughout their paper, they adopt
an individualistic methodology that prioritizes the individuals interpretation of law and economics to reach decisions, and
they neglect the social and political environment that provides the context of their actions. In contrast, a political econ-
omy approach would examine the social structure, institutions, history, power, conict, ideologies and interplay between
structure and agency to understand the construction of tax avoidance, law and related strategies.
In accordance with their individualistic methodology, H&M have portrayed tax avoidance as a purely economic decision,
in which the directors somehow must make the appropriate choices, perhaps choices consistent with the welfare of the
company and its shareholders. In contrast, tax avoidance should be seen as a political decision that revolves around transfers
of wealth. Such transfers are facilitated by asymmetries of power relations rather than by economic logics alone. Tax-avoiding
corporations are a classic case of free riders that expect to enjoy public goods and the benets of social institutions without
making a proper nancial contribution. Tax avoidance is not a private decision because its consequences affect all citizens
and their social rights.
Throughout their paper, H&M seem to assume that a society is stable and harmonious, whereas tax avoidance occurs in
societies marked by inherent antagonisms emanating from class, distribution of income, wealth and power. After all, the less
well-off can hardly hire lawyers and accounting rms to enable them to construct novel avoidance schemes. Much of the

30
The Guardian, Budget 2012: lets see George Osbornes tax return, 23 March 2012. http://www.guardian.co.uk/commentisfree/2012/mar/23/
budget-2012-george-osborne-tax-return Accessed 20.05.12.
 P. Sikka / Accounting Forum 37 (2013) 1528 27

conict concerns the accumulation of wealth and power, although for many citizens, it is often a case of dignied survival.
As conict is a property of the system, it can be managed, but it cannot be eliminated. In a conict-ridden society, regulators
and citizens must be constantly vigilant because the tax avoidance industry always has incentives to devise new avoidance
schemes.
H&Ms examples of the construction of the law and of regulations seem to assume that the state is pluralistic, as it
listens to demands and processes them to achieve the desired objectives. This formulation, at best, can only focus on the
policy input and output and tells us very little about the operations of the state, why some policies are prioritized and
why others are marginalized. For example, why has the UK state been unwilling and/or unable to reform tax havens falling
within its jurisdiction, or why, despite their involvement in marketing tax avoidance schemes, are UK accounting rms
rarely prosecuted? Such matters cannot be addressed without examining power and politics. In contrast, a critical approach
locates the state in social formations and considers it to be capitalist, albeit with a relative degree of autonomy (Arnold &
Sikka, 2001; Sikka & Willmott, 1995), because the states own survival is dependent on the long-term welfare of capital. It
must institute policies and practices to manage contradictions and create condence in capitalist organizations. Therefore,
DOTAS, GAAR and the prosecution of tax avoiders/evaders are seen as part of the processes of managing the contradictions of
capitalism, rather than any ultimate solutions to social problems. In principle, the states lawmaking powers are supreme in
any dened geographical area. However, such powers are compromised not only through ideology, the centrality of capital
to all policymaking and lobbying, but also by the coercive nancial clout of corporations. Conict in domestic and global
contexts shapes state sovereignty and the degree of autonomy that it enjoys.
H&M reduce accounting rms to anodyne concepts, such as intermediaries, and thus they fail to see the rms as active
players in social conict. Their categorization of rms as intermediaries places no weight on their own interests as fractions
of capital. The latter helps us to understand why, despite nes and imprisonment for their partners, some rms continue
to sail close to the wind. In common with other capitalist enterprises, they must increase private prots, and they do so by
marketing novel avoidance schemes.
In societies marked by inherent antagonisms, the law is also the outcome of conict and can serve the interests of
the dominant class, although the state might wish to portray itself as some kind of a neutral arbiter. There is also conict
concerning the social meanings of words, concepts and laws that are to be privileged (Sikka, Puxty, Willmott, & Cooper, 1998).
Such conicts are managed through the mobilization of political and nancial resources. In an environment of conict, the
meaning of law cannot easily be xed in any permanent way. In addition, practitioners and judges also develop rules that
can serve some interests and neglect others. Thus, the law cannot be seen as neutral, xed or unambiguous.
The business world is dominated by corporations, and that includes not only transnational and domestic companies but
also other forms of business vehicles, for example, major accounting and law rms. Neglect of the latter omits signicant
players from analysis and from possible regulatory reforms. Therefore, the eld of analysis must be broadened to cover any
organization that is focused on capitalist accumulation. This expansion would help to develop a fuller picture for possible
reforms.
In line with critical traditions, this paper has advocated for the possibility of an open dialogue so that a plurality of
social actors can access public spaces to articulate their positions and submit topics and issues for public consideration
(Habermas, 1989). This scenario holds out the possibilities of critical reection and informed choices, a project vital for the
reinvigoration of politics and democratic choices. Unlike H&M, competing discourses are not to be stied simply because they
have not been subjected to some form of idealized academic peer review. It is unacceptable that only the assumed experts
make decisions about economic and political matters. If anything, we must remove the aura of expertise from taxation and
corporate accountability so that matters can be subjected to general public discussion. H&Ms position leads to a kind of
refeudalization of society, in which only the privileged few are permitted to speak. With inequalities in income, wealth and
power, the access to public spaces is already severely constrained, and H&Ms preferences would silence NGOs and civil
society organizations, which have done so much to provide visibility to marginalized people and discourses.

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