Companies must obey the law, not be models of virtue

Aug 23, 2020
Originally posted on Business Post 23 August 2020.

Vague calls for better corporate ‘citizenship’ won‘t help us get through the pandemic – enforcement of the regulations will.

A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen.

At the time of the last financial crisis, it became commonplace that left-leaning civil society, academics and charities would call for business to become more socially responsible. Tax compliance was a favourite topic, with little regard paid to the existence of enforceable rules to ensure tax collection. Instead, the underlying notion seemed to be that companies, in particular, should act like citizens in some way and go beyond what is merely required under the law.

These calls are being made again in the context of the response to the pandemic, but they ring hollow when they are made without reference to the hard facts of enforcement and accountability.

Companies are not citizens, at least not in the normally accepted sense of the word. A company is nothing more than a legal structure which happens to be treated for many purposes – including taxation – as if it were a citizen. Nevertheless, in common with all citizens, companies have obligations to stay on the right side of the law.

The latest raft of measures in the July Stimulus plan ensure that companies and businesses generally will have to have tax clearance certificates to avail of the employment wage subsidy scheme (EWSS). The new EWSS replaces the temporary wage subsidy scheme (TWSS). While having this certificate is a new requirement, there is nothing new about the tax clearance process. A tax clearance certificate provides evidence that a company’s tax affairs are up to date. Publicans have needed these certificates for years in order to get their licences, as have businesses tendering for government contracts. Even our TDs need tax clearance certificates to sit in Dáil Éireann.

The tax clearance process also helps ensure that one arm of government knows what the other is doing, as mismatches can lead to embarrassment. Most people are uneasy about government funds flowing to people who are not paying their taxes. In common with many Revenue procedures, it is highly automated, and the tax clearance status of any business can be verified online. Nevertheless, this new requirement will be a challenge for quite a few businesses wanting to claim the EWSS.

It is estimated that there are some 16,000 employers currently claiming the temporary wage subsidy scheme who will not have tax clearance certificates and must apply to Revenue for them. Clearance is usually a straightforward process, but these are not straightforward times.
For instance, late payments of PAYE or Vat would normally have disqualified a business from being eligible, but late payments were in many cases permissible in recent months as tax debt is being warehoused, so this should not be a problem. There is, however, increased bureaucracy associated with the EWSS when compared with the TWSS. However unwelcome, these additional controls may be necessary.
The tax clearance certificate requirement has a broader significance. Businesses that shirk their tax obligations give themselves a competitive advantage, perhaps because their wage bills are lower if they don’t fully account for PAYE, or perhaps their margins are greater because they don’t properly account for Vat.
Similarly, businesses that shirk their responsibilities under the coronavirus restrictions by failing to provide adequate protection for staff and customers, by not making sure that their premises have been properly cleaned and reorganised or by not providing adequate training, are conferring on themselves an unfair competitive advantage.
There is little enough evidence to date that this has been the case. Yet, as the pandemic and our responses to it drag on, familiarity with the virus will lead to contempt and the temptation to cut corners will grow. The tax clearance certificate is evidence of just one aspect of good corporate behaviour which must be sustained as long as the EWSS is being claimed.
Good corporate behaviour on a continuing basis for all the measures to tackle the pandemic and not just for taxes will be ever more important. Should a belief emerge that compliance with coronavirus restrictions puts individual industries at a competitive disadvantage, the current broad acceptance of the rules could collapse.

The message that it makes good commercial sense to be fully compliant with restrictions on movement will get progressively more difficult particularly as we enter into the autumn months. Enforcement of coronavirus restrictions will become increasingly necessary. The headline events of recent days such the resignations of the chairman of Fáilte Ireland, of the Leas-Cathaoirleach of the Seanad and of the Minister for Agriculture, however unfortunate, are vital elements in the messaging.

This is why vague calls for better corporate citizenship or for businesses to “do the right thing” should be treated with some suspicion. Appropriate corporate behaviour is about businesses and companies obeying the law, however difficult, at the time of pandemic restrictions. There must be no commercial advantage available by failing to apply the rules. That in turn means there has to be enforcement. Anything else is just grandstanding.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.