The study at hand elucidates in detail the case of avoidance of tax by the airline company Qantas Airways. In essence, the study explicate illustratively about the uproar in the media regarding incidence of avoidance of tax by other large corporations. Moving further, the study identifies the appropriate theories that can be linked to the incidence of tax evasion. The two different theories identified include stakeholder theory and the legitimacy theory with justification for selection of these specific theories. Furthermore, the study also performs a review of literature that necessarily covers the entire history of the theory, along with advantages of the specific theory along with the issues associated to using the same. Moving further, this study also illustrates the application of these two theories in the current area under consideration.
Qantas is one of the largest Australian corporations that have paid no tax for at least the last five years. In essence, the CEO of the business enterprise Qantas, Alan Joyce is one of the most prominent supporters of the proposed tax cut by the Turnbull Government. In essence, Alan Joyce is a chief executive officer that presides over a corporation that has not paid corporate tax for approximately 10 years. In spite of generating earnings of around $106.4 billion, the company has averted payment of tax on that specific bounty since the time period of 2009. This is primarily due to the generous concessions of tax in Australia, provisions of depreciation and capability to offset losses of the business concern against past as well as future earnings. Evaluation of the incidence of tax avoidance reveals that this behaviour of tax by the corporation can be considered to be consistent with other large business concerns (Scott, 2015). Corporate tax transparency data confirmed in different email exchanges with many representatives of the company that replicates that one out of five of the nation’s biggest corporations have paid no tax for no less than last three years (Freeman et al., 2017).
Sunyoto et al., (2017) suggests that not one of the biggest airlines of the Australia has paid corporate tax since the period of 2013, counting Virgin along with its subsidiaries. Households of Australian have observed electricity prices to increase; the nation’s principal energy retailer that is the Energy Australia has also paid corporate tax (Richard et al., 2016). Prior research reflects that tax cut directs the way towards enhancement in corporate investment. However, analysis of financial statements of Australian firms reflects enhanced investment. High profile Australian CEO have campaigned for different tax cut, asserting that it would direct the way towards more corporate investment, wage increases as well as jobs (Zeff, 2016).
The two theories that can be identified include legitimacy theory and stakeholder theory
Legitimacy Theory:
As correctly put forward by Christensen et al., (2016), legitimacy theory can be considered to a general perception of whether activities of a corporation are appropriate within a specific social system of norms as well as values. Business enterprises have the need of legitimacy to function appropriately. In this regard, it can be hereby said that loss of legitimacy can necessarily have serious consequences for a particular business concern since this might perhaps direct the way towards loss of public support for their actions. Libby (2017) suggests that in a bid to generate legitimacy, business enterprises might pursue corporate social responsibility. Therefore, when adverse events take place and legitimacy of corporation gets threatened, firm’s management might possibly react by way of correcting the strategy of the corporation (Hörisch et al., 2014)
A corporation might be able to minimize overall tax that it disburses and stay within spirit of the regulation, deliberately involving in strategic tax behaviour with the sole aim of minimizing tax (Mansell, 2015). This is generally taken into account to be illegitimate. Again, it is also regarded to be socially responsible account to undertake steps to curb various damaging effects of corporate tax aggressiveness on overall economic well-being of communities.
As rightly put forward by Bridoux & Stoelhorst (2014), tax constitutes a cornerstone of modern community, and a precondition for the subsistence. Capital flight ensuing from a loss caused due to tax revenue necessarily has devastating consequences for community. Again, tax evasion can directly counteract the aim of corporate social responsibility that is essentially to contribute to the well being of the entire community (Andriof et al., 2017). Therefore, there occurs an apparent conflict in the activities of the corporation that participate in the corporate social responsibility whilst circumventing taxes. Since avoidance of tax is necessarily not aligned to core values of the community, tax avoidance can prove to induce legitimizing activities. In essence, business enterprises suppose a double standard by delivering promises of responsible behaviour whilst they involve in avoidance of tax and evasion (Cordeiro & Tewari, 2015). Fundamentally, this organizational hypocrisy distinctively illustrates the conflict that subsists between Corporate Social Responsibility and avoidance of tax.
Stakeholder theory
Stakeholder theory suggests Association between firms and group of stakeholders. Stakeholders can be defined as any kind of identifiable or else individual who can exert impact on the process of attainment of objectives of an organisation, otherwise affected by the attainment of organisations objectives. This theory focuses on demands of stakeholders and their expectations. There is an association between stakeholder theory and avoidance of tax (Harrison et al., 2015).
Stakeholder theory is founded on the supposition that business enterprises are not only accountable to its shareholders but also to other stakeholders. The proponent of this particular theme is Freeman (Schaltegger et al., 2017).
Shafiq et al., (2014) suggest that stakeholders are necessarily recognised on their interests in the business enterprise, not on interests of the enterprise in them. Essentially, these stakeholders can be both internal and external. However, this theory implies that a socially accountable business enterprise does not act always as per the interest of owners but also in response to the requirements of all recognised stakeholders. In this case this theory is selected as it can help in analysing influence of tax avoidance on stakeholders and illustrate the social consequences (Fernando & Lawrence, 2014).
CSR is said to be associated to global tax planning. Transnational firms that engage in CSR acts cannot always leave tax disbursements out of their CSR strategy. The worldwide tax planning needs to be arranged in line with CSR policy. International tax arrangement is a significant issue for business enterprises as well as their shareholders, authorities of tax along with consumers. Business concerns are prone to disburse as fewer amounts of taxes to the extent possible to enhance their profits that again will do good to shareholders (Jones et al., 2016). Again, tax authorities are apprehensive that business concerns are evading taxes that in turn can reduce tax revenues that are utilized for various social purposes. Thus, it is vital to have insight in the association between CSR and tax planning for different stakeholders. Therefore, the current context can also be illuminated using the stakeholder theory.
Review of literature on Legitimacy Theory
Definition
As rightly put forward by Hah & Freeman (2014), Legitimacy can be considered to be a generalized perception or else supposition that the activities of a business entity are desirable, appropriate or appropriate within certain socially developed structure of norms, values, viewpoint, as well as definitions. The legitimacy theory is also regarded as a mechanism that upholds organisations in the process of implementing as well as developing voluntary social along with environmental disclosures for fulfilling their social contract that can assist the process of recognition of aims and the continued existence in a tense and unstable environment.
As rightly indicated by Schrempf-Stirling et al., (2016), there exists an association between firm and the society. Illustration of legitimacy theory mentions that this theory is the status else wise condition that subsists at the time when value system of an entity is congruent with that of the community. Essentially, this theory is founded on theme of social contract. As such, this concentrates on several social regulations as well as norms.
Prior Studies by various scholars
As suggested by Belal (2016), legitimacy theory is used to analyse the impact of Exxon Valdez Oil Spill as declared in the annual pronouncement of North American petroleum concerns. As per the study conducted by Pattern in the year 1992, it was witnessed that a considerable increase in number of disclosures after the occurrence of this disaster. It was evident that members of the industry intended to address the threat by augmenting environmental disclosures in order to retain legitimacy. Study conducted by prior scholars also indicates the fact there is only way in which business firms can maintain their legitimacy. This is by means of disclosure of information regarding both social as well as environmental performance. As correctly put forward by Holland et al., (2016), study conducted by famed scholar named Deegan in the year 1996 helps in examining legitimacy theory for explicating diverse systematic alterations in disclosure policies in corporate annual report. However, the results of the study suggested that Australian business enterprises deliver a considerable enhancement in desirable environmental information regarding environmental prosecution. As suggested by Salihu et al., (2015), the theory of legitimacy is also used to examine the impact of external influence on environmental disclosures in different annual declarations, features of various environmental disclosures by utilizing case studies.
Future Direction
Based on prior studies it can be said that the new economic, environmental as well as social threats dictate business concerns and governing bodies, to respect regulations, values as well as norm. This theory also directs towards the need of disclosing important social along with environmental information of own accord in order to examine their compliance. As a result, legitimacy theory is said to play the function of a justifiable aspect for disclosure of information (Laguir et al., 2015). Paradoxically, the vital role of legitimacy of business concerns, institutions and community survival is stimulated, unfortunately, by different negative social along with environmental phenomena developed out of lack of legitimacy. The literature on legitimacy recommends that survival of a corporation relies on processes of legitimation and the way constant pressures and threats are handled. Also, the primary purpose of legitimation procedures is to acquire and maintain approval of stakeholders (Scott, 2015).
Stakeholder Theory
Analysis of the history of theory of stakeholder theory reveals that during the period 1980, a stakeholder approach to specific strategy cropped up. A particular focal point in this particular movement was necessarily the movement of Richard Edward Freeman. As rightly indicated by Freeman et al., (2017), Freeman is credited with popularizing the entire concept of stakeholder. In this work, he directed towards the fact that his view of the stakeholder notion was carried out from the perspective of the corporation. In actual fact, he developed and extended the process work of scholars Ian Mitroff, Richard Mason as well as James Emshoff. In actual fact, the utilization of the word “stakeholder” stemmed from the pioneering work undertaken by the Stanford Research Institute (SRI) during the period 1960s (Richard et al., 2016). Furthermore, scholars at SRI were hugely influenced by diverse notions that were formulated in the planning division of particularly the Lockheed Company and these ideas were specifically designed from the researches undertaken by Igor Ansoff as well as Robert Steward. During the period 1960s, Ansoff was working on this subject area for SRI together with Lockheed. Again, it is also clear that business leaders were thinking as well as expressing the notion of stakeholder much before the period 1960s. As stated by Zeff (2016), four important groups were identified as stakeholders namely shareholders, workers, clientele, as well as public in general. However, as per the viewpoint of Jones et al., (2016), there is a moral or in other words normative vacuum has subsisted in this area and in a bid to fulfil the vacuum, the stakeholders notion was introduced to fill this identified gap.
As rightly indicated by Libby (2017), conventional definition of stakeholders refers to any kind of group or any individual who can exert impact or might get affected by the attainment goals of the corporation. Mansell (2015) state that whole organization can be regarded as a grouping of stakeholders and purposes of the corporation is to handle the interests, requirements as well as opinions. Particularly, the stakeholder management can be considered to be satisfied by the managers of a business concern. On one hand, managers can deal with the business enterprise for the interests as well as benefits of the stakeholders in a bid to make sure that their rights and participation in the process of decision making (Cordeiro & Tewari, 2015). On the other hand, management has the need to act as the agent of the stockholders to make certain subsistence of the firm to shield stakes of each and every group in the long term.
Definition of stakeholder theory, purpose as well as character of business enterprise along with important role of managers is not very distinct in literature and has transformed over the past years. The father of stakeholder notion, Freeman, has changed definition of stakeholder concept over the period of time. In the latest definition provided by Freeman, a new principle is added that represents a new trend in stakeholder theory. Particularly, in this new principle, consideration of the standpoint of the stakeholders and their actions is considered to be very significant. Management of firm might consider incorporating this new principle in their strategic activities. As suggested by Harrison et al., (2015), stakeholders might perhaps bring an action against failure of the directors to undertake their duties of care.
In essence, all the above mentioned thoughts along with principles of the stakeholder notion are regarded as normative stakeholder theory in the body of literature. Harrison et al., (2015) suggests that normative stakeholder theory includes the way managers or else stakeholders need to act and view purpose of the corporation founded on the ethical principles. Yet another approach of the stakeholder theory is the descriptive stakeholder theory. In particular, this notion is about the way managers along with stakeholders behave in reality. Basically, stakeholder management is considered to be satisfied by the managers of a business concern. On one hand managers must manage the business enterprise for the stakeholders’ benefits in a bid to make certain their rights and involvement in process of decision making and on the other hand firm’s management need to act as agent of the stockholder to make sure continued existence of the corporation to defend the stake of each and every group in the long term.
The theory of legitimacy is applicable in the current context of Qantas and associated corporate tax avoidance. Whilst there are regular debates on avoidance of corporate tax, a distinguishing character of the present interest is the engagement of a wider audience. This includes community in general. By evaluating both tax associated disclosures in corporation annual pronouncements as well as corporate social reports, it is important to assess the way managers of business enterprises are subject to the criticism of avoidance of tax and the way they handle the same. Utilizing the structure of legitimacy can help in identification of four disclosure themes namely philosophy of explicit tax, implicit philosophy of tax, process of conduction of tax and contribution of tax (Schaltegger et al., 2017). Evidence of inconsistency on the part of managers can be recognized from suitable responses. This is essentially attributed to uncertainty as to the condition of avoidance of tax. Again, uncertainty is obvious in the variation observed a period of time within the corporation as well as between corporations and is represented in the occurrence of disclosures, their contents and in certain cases the absence of a disclosure. In actual fact, this uncertainty is probably part of reluctance to act in response directly to criticism or to go into debate and represents societal vagueness regarding legitimacy of avoidance of tax. The governments cannot depend on attitudes of manager or else different voluntary structures in case if managers anticipate to alter behaviour of managers in association to both taxation avoidance to more tax (Fernando & Lawrence, 2014).
Legitimacy theory can be considered to a general perception regarding activities of a corporation are appropriate within a specific social system of specific norms as well as values (Fernando & Lawrence, 2014). It can be observed that business enterprises have the need of legitimacy to function seamlessly. Loss of legitimacy can necessarily have serious consequences for a business concern since it might direct the way towards loss of public support for their actions. However, as rightly put forward by Jones et al., (2016), in a bid to generate legitimacy, business concerns might perhaps consider pursuing corporate social responsibility. Therefore, during the time when various adverse incidents take place and legitimacy of the organization gets threatened, administration of the business enterprise might possibly respond by means of correction of strategies of the company. As correctly indicated by Belal (2016), stratagems for generation of legitimacy comprise of informing public regarding corporate activities that again correct prior deficiencies, altering perceptions as regards external stakeholders and altering the point of focus by shifting attention from various problem areas.
Holland et al., (2016) mentions that concept of license to function can be illustrated as an approval for activities of a corporation, granted by the regional community as well as other stakeholders. Again, licenses to function are primarily in grained in beliefs, viewpoints as well as perceptions of the regional population along with other stakeholders. In essence, it is necessarily intangible, dynamic as well as non-permanent as beliefs; viewpoints along with perceptions are necessarily subject to alteration as new information is gathered. In essence, the license to function has the need to be earned and thereafter maintained. Essentially, taxes are said to constitute an important part of the modern community, and a precondition for the subsistence. In point of fact, capital flight ensuing from loss of revenue from tax is said to have devastating consequences for the entire community. Laguir et al., (2015) recommends that evasion of tax is said to work against the purpose of corporate social responsibility that is to contribute to the overall well being of the community. Therefore, there is an apparent conflict in the activities of the firms that involve in activities of CSR whilst circumventing taxes. As avoidance of tax is not aligned to the main values of the community, avoidance of tax can be said to induce legitimizing activities. Business concerns can suppose a double standard by delivering promises of dependable behaviour whilst they participate in tax avoidance as well as evasion.
As correctly indicated by Richard et al., (2016), tax avoidance can be considered to be a corporate social issue that is critically significant to long term viability of the firm and ability of the government to operate. Aggressive avoidance of tax arrangement for maximization of shareholder wealth can be regarded to be problematic, as governments are left powerless to maintain fundamental services when incomes are stripped and necessarily sent to lower jurisdiction of tax. Zeff (2016) suggests that ethical performance can be considered to be foundation of the notion of corporate social responsibility, a complicated mix of social requirements firms accept as part of the corporate citizenship role. Essentially, there is an ongoing debate regarding the constituents of tax avoidance and CSR issue. Nonetheless, tax avoidance in the area of CSR is a heated discussion among academics, watch dogs as well as think tanks. In order to comprehend the meaning as well as purpose of tax avoidance, specific research linking a wide range of CSR actions with avoidance of tax is required as tax decisions of the firm exert influence on broad range of significant non-financial stakeholders. This includes government, workforce along with community (Libby, 2017). Presently, the theory of stakeholder can be aptly applied for understanding the linkages between taxation and CSR. Business concerns are prone to disburse as fewer amounts of taxes to the extent possible to enhance their profits that again can positively influence shareholders. Again, tax authorities are concerned that business concerns are evading taxes that in turn can lessen tax revenues that are utilized for various social purposes. It can be said some stakeholders get positively affected while others get affected negatively, both economically as well as psychologically (Freeman et al., 2017). Therefore, optimum decisions are founded on an evaluation to determine the net outcomes of the decisions taking into consideration all the stakeholders as well as all probable results.
Conclusion
The above mentioned study helps in understanding evasion of tax by airline corporation Qantas Airways. Basically, this study presently illustrates tax avoidance by the company Qantas as well as several other large corporations. Thereafter, this study selects the legitimacy as well as stakeholder theory and justifies selection of these two theories in the current case. Adoption of stakeholder theory and legitimacy theory together with justification for adoption of specific theories can help in understanding application of the same in the area under deliberation.
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