Journal of Business Ethics

, Volume 153, Issue 4, pp 1143–1156 | Cite as

Multinational Tax Avoidance: Virtue Ethics and the Role of Accountants

  • Andrew WestEmail author
Original Paper


The techniques that some large multinational corporations use to reduce their tax liability have come under increasing public scrutiny in recent years, alongside governmental investigations and international commitments aimed at curbing opportunities for tax avoidance. Although discussion of tax avoidance activities, and their regulatory responses, is often conducted with reference to moral concepts (such as ‘fairness’), philosophical analysis of the ethics of multinational tax avoidance remains limited. In particular, the virtue ethics tradition that emphasises the agent (and his/her character) and the performance of specific roles has not been considered in detail. This paper examines how the contemporary virtue ethics of Alasdair MacIntyre can be applied to the issue of multinational tax avoidance, and considers the role that accountants play in these activities. It argues, firstly, that MacIntyre’s approach provides a more useful philosophical analysis of the issue (when compared to utilitarian and deontological approaches for example) and, secondly, that the main parties involved (MNC accountants and regulators) are likely to agree with the main tenets of this approach. The paper also contributes by reconceptualising, using MacIntyre’s scheme, the issue of tax avoidance in relation to Donald Cressey’s ‘fraud triangle’.


Accounting ethics Fraud triangle MacIntyre Multinational corporations Professional ethics Tax avoidance Tax evasion Transfer pricing Virtue ethics 

The idea that large, multinational corporations can operate in a country, earning substantial revenue by successfully selling their products and services, but pay very little (or no) income tax is one that is increasingly considered to be unfair, immoral and/or outrageous. Such views not only are expressed by activists with particular anti-capitalist ideologies, but also have garnered sufficient attention and momentum to warrant governmental investigations (such as the UK’s inquiry regarding Google’s tax arrangements (House of Commons 2013), Australia’s inquiry into corporate tax avoidance (The Senate 2015)) and international commitments by the OECD and G20 [see OECD (2013)]. Despite the efforts aimed at understanding and uncovering exactly what multinational corporations (MNCs) do, how they arrange their affairs, and the ways in which national (and potentially international) regulations can be used to restrict opportunities to avoid taxation in particular circumstances, there is little analysis of the ethics that underlie both these investigations and the actions of MNCs. However, as the debates around tax avoidance are frequently couched in ethical terms, work in moral philosophy has the potential to shed additional light on the issue, by clarifying the ethical issues involved and highlighting other possible avenues or justifications that could have practical implications. The purpose of this paper is to examine the issue of multinational tax avoidance through a contemporary virtue ethics perspective, drawing primarily on the work of Alasdair MacIntyre, as articulated in After Virtue. This provides an alternative theoretical approach that generates insights into how the issue can be addressed.

The paper proceeds by reviewing the concept of tax avoidance (in relation to similar concepts of tax minimization, tax evasion and tax fraud) and the mechanisms involved; the subsequent section provides an overview of ethical aspects of the issue and how various moral philosophies can be applied. The limitations of these applications provide the background for Alasdair MacIntyre’s virtue ethics, key elements of which are then applied to the issue of tax avoidance. Additional reasons to support the MacIntyrean approach are then articulated, and the final section concludes, highlighting the particular contribution provided by this approach and areas for further research.

Tax Avoidance

A substantial array of terms can describe efforts to reduce the amount of tax payable by an organisation, including tax avoidance, tax minimisation, tax evasion, tax fraud, tax planning, tax dodging, tax aggressiveness, tax sheltering, tax abuse, tax mitigation and tax resistance. Although some use these terms interchangeably, distinctions can be drawn based on the legality of the actions (McLaren 2008; Eden and Smith 2011; Leite 2012). Eden and Smith (2011), for example, use tax avoidance and tax minimization for methods of tax reduction that are entirely legal, tax fraud for methods that are illegal with intent (such as falsifying records) and tax evasion for activities that may or may not be illegal (falling with a ‘grey’ area). These distinctions are not consistently used, however [see Payne and Raiborn (2015) for an alternative], and conceptual confusion remains, both in the academic and popular literature (Thorndike 2015; Lanis and McClure 2015).

From the perspective of moral philosophy, distinguishing between terms based on their legality is not necessarily useful. Notwithstanding the view that the law ‘floats on a sea of ethics’ [attributed to Chief Justice Earl Warren, cited by Preston (2007, p. 21)], it is not difficult to identify examples, across various societies, of activities that may be considered ethical but which are also illegal, and of activities that are legal but may not be considered ethical. We could conceive, then, of situations in which illegal tax reduction is considered ethical, and others in which arranging one’s affairs so as to reduce one’s tax liability within the bounds of the law is unethical. Accordingly, when considering the ethics of reducing one’s tax liability, the degree to which one complies with (or fails to comply with) legal requirements is not itself of primary concern.

For the purposes of this paper, then, a single term—‘tax avoidance’—is preferred as an umbrella term that includes all efforts to reduce tax (whether legal or illegal). More specifically, the focus is on the particular efforts taken by MNCs to reduce tax, where the actions of particular corporations, such as Google, Starbucks and Apple, have focused attention on tax avoidance as a moral issue in recent years.1

There are a number of different ways in which MNCs can avoid tax. Arguably, the most significant of these involves shifting profits from one jurisdiction to another through the use of transfer pricing and/or thin capitalization. Transfer pricing refers to the setting of intra-firm prices for goods or services that are transmitted across national boundaries. As both the buyer and the seller are controlled by the MNC, it has control over the price that is set; if the buyer operates within a higher tax jurisdiction, then a higher transfer price will result in lower taxable profits and a lower overall tax liability for the MNC [see Horngren et al. (2014) for a quantitative example]. Thin capitalization refers to the practice of structuring the various legal entities that comprise the MNC such that those operating in higher tax jurisdictions have significantly greater proportions of debt than equity financing, allowing for greater tax deductions (the cost of debt typically being tax deductible), lower taxable profits and a lower overall tax liability for the MNC. In both of these cases, the MNC is in a position to unilaterally make changes that can reduce its tax liability (that is, there is no third party that prescribes the transfer price or capital structure).

Substantial attention has been paid to the mechanisms of transfer pricing in particular, and the recent OECD and G20 Base Erosion and Profit Shifting (BEPS) project has considered these in detail [Actions 8, 9 and 10; thin capitalization is addressed in Action 4, see OECD (2015a, b)]. Transfer pricing guidelines published by the OECD have been available since 1979, and there has been a wealth of academic research on the issue, frequently considering legal, economic and political aspects that range from contributing factors within individual organisations to the broader ramifications for developing countries [selected examples include Rugman and Eden (1985), Pagan and Wilkie (1993), Eden (1998), Avi-Yonah (2000), Avi-Yonah et al. (2009), Reuter (2012) and Durst (2014)].

Considerably less attention has been paid to examining the ethics that underlie the practices of transfer pricing and thin capitalisation, or to assessing the moral justifications that might support these practices and/or the efforts that are aimed at curbing them. Notable work in this area includes that of McGee (2012a, 2006), Eden and Smith (2011), Payne and Raiborn (2015), Raiborn et al. (2015), Hansen et al. (1992), Christians (2014) and Sikka and Willmott (2010). Although these authors do engage with the ethical aspects of tax avoidance directly and draw on various philosophical perspectives, there is no explicit consideration of the issue from a virtue ethics perspective. There are, however, several reasons why the virtue ethics tradition can provide a useful philosophical lens through which the issue can be further examined. Firstly, it complements the two principal approaches in modern moral philosophy [deontological and utilitarian ethics, see Holmes (2007), Hales (2013)] by providing a significantly different moral perspective. That is, where deontological and utilitarian analyses focus on whether a particular action is morally permitted (or required), virtue ethicists ask what it means to be a ‘good’ person, and/or what the ‘good life’ entails. Secondly (and following from the first reason), the virtue ethics tradition, being focused on the agent and his/her character, is well suited to addressing ethical issues that involve particular roles [see Oakley and Cocking (2001) for an application of virtue ethics to the legal and medical professions]. Given that the profit-shifting techniques of transfer pricing and thin capitalisation that play such a key role in MNC tax avoidance necessarily rely on particular professionals, particularly the activities of accountants, an ethical perspective that explicitly considers agents and their roles is appropriate.2

Accordingly, this paper contributes to the existing literature by examining the issue of tax avoidance from a particular virtue ethics perspective. Before articulating that perspective, however, some consideration of how modern moral philosophies can be applied to the issue is necessary.

Modern Moral Philosophical Approaches

Much post-Enlightenment (secular) moral philosophy (other than post-modern approaches) has as its focus the articulation of rational means by which ethical dilemmas can be resolved. The two principal approaches are deontological ethics [usually associated with Immanuel Kant (2002, orig. 1785)] and consequentialist ethics [usually associated with the utilitarianism of Jeremy Bentham (1907, orig. 1789) and John Stuart Mill (1863)]. This section examines how each of these approaches can be applied to the issue of tax avoidance, while also addressing issues of justice associated with the work of John Rawls and Robert Nozick.


As a consequentialist moral theory, the central claim of a utilitarian ethic is that an agent ought to do that which maximises good consequences, where such good is variously described as happiness, pleasure, preference satisfaction or individual welfare (Goodin 1993). A capitalist approach to commercial and industrial activity is often justified on the basis that, on aggregate, it generates greater benefits for society than alternative economic models. Indeed, Tricker describes the development of the limited liability company as having made the greatest contribution since the invention of the wheel (1990, p. 253), facilitating substantial employment, wealth and growth worldwide. Implicit in such an approach is the view that giving corporations the freedom to conduct their operations in such a way as to maximise their profits (or shareholder wealth) allows those corporations to generate considerable benefits for the economy, with concomitant positive social impact (through, for example, increased employment). In this view, epitomised by Friedman (1970), social concerns are to be addressed through government regulation (or privately), and the freedom of corporations is limited by these ‘rules of the game’. Corporations and their accountants are consequently tasked with arranging affairs such that after-tax profits are maximised, and the techniques of transfer pricing and thin capitalisation are utilised in as far as the applicable laws and regulations are not transgressed [see Eden (2012) and Leite (2012) for more detailed discussion of how transfer pricing is actually used]. Although this utilitarianism is not justified by any quantitative cost–benefit analysis (which would likely be impossible given the qualitative nature of some of the costs and benefits, as well as ambiguities surrounding what and how to measure), appeal has nevertheless been made to the economic successes of countries such as the ‘Asian Tigers’ of Hong Kong, Singapore, South Korea and Taiwan [see also Dollar (2005)], as well as arguments that appeal to the logics of greater efficiency and cheaper financing for corporations that are shareholder wealth-oriented (Hansmann and Kraakman 2001). In addition, McGee (2012b) has argued (drawing on empirical studies) that the private sector is more efficient in providing goods and services than the public sector and that avoiding tax consequently generates greater economic benefits.

There are, however, difficulties in supporting a utilitarianism that does not actually provide a reckoning of the supposed net benefits of the Friedmanesque approach, or which emphasises economic benefits without considering other, social and non-quantifiable costs and benefits. There are also alternative perspectives that question the net benefits associated with multinational tax avoidance. Sikka and Willmott (2010) and the International Bar Association’s report (International Bar Association’s Human Rights Institute Task Force on Illicit Financial Flows 2013), for example, draw attention to the negative consequences of the Friedmanesque model, particularly for developing countries where the capacity of governments to effectively regulate multinational commerce is questionable, and where the social impact of reduced government revenue is of greater significance. Payne and Raiborn (2015) also provide a utilitarian argument to show that tax avoidance is unethical, stating that “If one believes that the societal harm … is greater than the benefits … then aggressive tax strategies would not meet an ethical determination under utilitarianism”. While this (as a restatement of the utilitarian approach) may be true, and while they do identify a range of costs and benefits associated with tax avoidance and with paying a ‘fair’ amount of tax, no attempt is made to quantify the net cost/benefit. Simply listing the various costs and benefits associated with tax avoidance and/or tax payment does not itself provide a utilitarian justification, and Payne & Raiborn do not actually provide reasons (quantified or otherwise) for believing that the harm caused by tax avoidance is in fact greater than the benefits.

The result is two competing positions (the Friedmanesque approach and its opponents) regarding the issue of multinational tax avoidance, both apparently justified by appeal to economic and social consequences, and neither of which is justified quantitatively. Although a lack of precise predictions of consequences does not invalidate utilitarianism, the approach does rely on some estimation of consequences, and some reason to believe that such consequences are probable. This is not to say that utilitarianism cannot be applied to the issue of MNC tax avoidance, only that, at present, limited utilitarian arguments can be made both for and against the practice. Consequently, utilitarianism currently provides us with little moral guidance on the tax practices of MNCs.

Deontological Ethics

Often contrasted with consequentialist ethics, deontological approaches emphasise the importance of duty. Kant’s (2002, orig. 1785) Categorical Imperative provides the most familiar example of such an ethic in which one’s moral requirements and constraints are derived rationally from a particular principle, without being based on an evaluation of consequences. The first formulation of the Categorical Imperative requires that one “act as if the maxim of your action were to become through your will a universal law of nature” (Kant 2002, orig. 1785, p. 38). As long as agents act in such a way that their actions are universalisable, there is substantial ‘moral space’ within which their actions are morally permissible (O’Neill 1993; Davis 1993). Applied to multinational tax avoidance, the universal prescription that all corporations will avoid tax as far as possible, and that accountants will adopt whatever techniques they can in order to minimise tax, can be made without any internal incoherence. That is, although there would be consequences for government revenue, there is nothing irrational about such a prescription, in the sense of being contradictory or inconsistent (in contrast to the example of promise-breaking which, if universalised, would render the concept of making promises incoherent). Similarly, however, a prescription that corporations pay a minimum percentage of their revenue as tax would be universalisable without entailing any contradiction or inconsistency.

While this application accordingly provides little guidance, Kant’s first formulation can also be applied by considering whether, given universal human aims and needs, the universalised maxim reflects a state of affairs that can consistently be willed. Given a common need for law enforcement and protection against aggressors which relies upon some level of taxation, a prescription that all tax ought to be avoided may entail a situation which cannot be willingly maintained. While this suggests that some minimal level of taxation may be rationally justified, there does not, however, appear to be any inconsistency in willing a society in which corporations use their resources to minimise taxation once this level has been achieved.

An alternative formulation of Kant’s Categorical Imperative has found greater purchase in normative theories of corporate governance. Evan and Freeman’s (1988) stakeholder theory draws on Kant’s insistence to “Act so that you use humanity, as much in your own person as in the person of every other, always at the same time as end and never merely as means” (2002, orig. 1785, p. 46). The corporation’s various stakeholders (such as employees and suppliers) are considered to have interests that require that those stakeholders be treated as ends in themselves (through, for example, some participation in corporate decisions that affect them). In this view, the aim of profit maximisation is tempered by these competing interests, and the corporation becomes an arena in which these find some resolution (Freeman et al. 2010). Closely allied to stakeholder theory is Corporate Social Responsibility, whereby corporations actively contribute to achieving social (and environmental) aims, often as a response to various stakeholder concerns (Freeman et al. 2010; Williams 2014). On this basis, one might argue that the wider community that is ultimately served by government expenditure (on health, security, infrastructure and welfare) is a significant stakeholder, and that the transfer pricing and/or thin capitalisation arrangements of MNCs effectively treat the wider community as a means to an end only.

However, defenders of multinational tax avoidance can counter that the wider community is only one of a range of stakeholders with competing interests and that management’s role is to negotiate these competing interests. According to this view, as long as there are mechanisms in place by which each stakeholder’s interests are respected,3 Kant’s imperative could be satisfied (that is, it is not necessary that each stakeholder group has its interests satisfied in every way, or on every occasion). Furthermore, one might argue that the interests of the wider community are addressed in various ways, such that they are not treated by MNCs merely as a means to the end of profit maximisation. This could include, for example, the increased employment and investment associated with ongoing operations, the greater choice in (and increased affordability of) products and services provided by successful MNCs, as well as the investments in Corporate Social Responsibility that themselves may to some extent represent a sacrifice of shareholder interests in favour of the interests of the wider community. Consequently, although Kant’s Categorical Imperative provides a useful lens through which to consider the actions of MNCs, it does not provide a rational, moral basis upon which the tax practices of MNCs can be either justified or proscribed (that is, Kantian deontological arguments can be made both in favour of and against MNC tax avoidance).

Kant’s is not the only deontological moral philosophy, however, and other deontological arguments that refer to particular duties considered essential to the functioning of any society or that reflect certain rights that are considered inviolable can be suggested (Davis 1993). Machan (2012), for example, argues in support of tax avoidance by appealing to Locke’s (1690) doctrine of natural rights and the rights to ‘life, liberty and the pursuit of happiness’ expressed in the USA’s Declaration of Independence. Unlike Kant’s imperatives, these are not justified by reference to a particular rational argument, and consequently identifying particular inviolable rights that are fairly universally agreed upon remains problematic (how the right to life ought to be upheld, for example, remains controversial in various areas, such as abortion, capital punishment, just war and self-defence). While assertions may be made regarding an MNC’s duties with reference to certain inalienable rights, it is difficult to distinguish these from ideological commitments.

Approaches to Justice: Rawls and Nozick

In addition to utilitarian and deontological ethics that themselves represent the dominant secular approaches to a rational moral philosophy in the modern era, the frequent phrasing of the issue of tax avoidance in terms of fairness suggests that some consideration of how modern theories of justice, a concept closely related to fairness, may contribute to this issue is warranted.

Rawls (1971) has argued that in order to achieve a fair society, any inequalities in society ought to be limited to situations in which all citizens are benefited, in particular favouring the least advantaged members of society (the ‘difference principle’) (Wenar 2013). This is derived from his ‘original position’ in which he argues that if people had no knowledge of their particular circumstances (such as social group or gender), they would agree to social arrangements without any inequalities based on such characteristics, and to the extent that differences in circumstances are inevitable, society should be organised so as to benefit the least advantaged. Applying this to MNC tax avoidance, one could argue that given the unfairness of persistent societal inequalities that are associated with social group, race or gender (Hurst 2016), steps ought to be taken to rectify this situation whenever possible. As MNC tax avoidance tends to benefit the shareholders of MNCs more directly than any other group, and as shareholders are more likely to number amongst the more (financially) advantaged members of society, the transfer pricing and thin capitalisation arrangements of MNCs could be considered unfair. Furthermore, as government is positioned (through health, education and welfare programmes for example) to provide assistance to the least advantaged members of society, actions that restrict the avoidance of tax by MNCs and that increase the capacity of government to assist the least advantaged are morally justified.

This can, however, be countered by arguing (in a similar vein to the utilitarian argument described above) that the inequality that is maintained by tax avoidance does ultimately contribute to the good of all in society (such as through increased investment, employment opportunities and greater efficiencies), and that, for the least advantaged, this represents the best of the possible outcomes. As Wenar (2013) describes Rawls’ scheme, “Those better endowed are welcome to use their gifts to make themselves better off, so long as their doing so also contributes to the good of those less well endowed”. It can thus be argued that MNC tax avoidance is actually consistent with Rawls’ principles.

Although there are further criticisms of Rawls’ approach that could be brought to bear (Kukathas and Pettit 1990; Van Parijs 2002), and there are a number of assumptions made by Rawls that could be questioned [such as the assumption that all parties are neither risk seeking nor risk averse (Wenar 2013)], it can also be countered by positing an alternative view of justice altogether. Nozick (1974) takes the perspective that justice (in relation to one’s property) is not about distributive equality, and the relevant question is not whether there are inequalities within society, but whether one’s property has been acquired legitimately. That is, as long as I have acquired my property legitimately, from someone who him/herself acquired it legitimately (and ultimately to the point of initial acquisition), then I am entitled to it, and any attempt to take my property against my will (whether legislated or not) is unjust. In this view, as long as MNCs have acquired their resources legitimately, through transactions that are voluntary, from other parties who did the same, then they are entitled to these resources.

This approach can, of course, mean that all taxation is unjust, and Nozick famously claimed that “Taxation of earnings from labor is on a par with forced labor” (Nozick 1974, p. 169; see also Feser 2000); accordingly, any efforts to restrict tax avoidance would similarly be unjust. There may, however, be situations in which taxation is permissible within a Nozickian framework. Firstly, MNCs could voluntarily agree to pay some tax, being that amount required by existing laws and regulations (or even more), when they perceive the benefits accruing to themselves (related to, for example, government investment in infrastructure and education) to be worthwhile. Secondly, involuntary taxation could be justified to the extent that adequate compensation is provided to MNCs (again, through various government investments) (Mack 2015). Either of these would be consistent with MNCs making use of the techniques of transfer pricing and thin capitalisation to ensure that their benefits or compensation are commensurate with the taxation paid.

Both Rawlsian and Nozickian approaches can accordingly be applied to the issue of MNC tax avoidance; however, as with the application of utilitarian and deontological perspectives described above, neither of these approaches to justice provides a decisive argument either for or against tax avoidance (arguments can again be made both for and against MNC tax avoidance using both approaches).

It is also worth noting that tax avoidance is sometimes proscribed with general (as opposed to a specifically Rawlsian) reference to a ‘social contract’ that binds members of society, including both individuals and institutional members. Payne and Raiborn (2015), for example, argue that business has implicitly entered into a social contract by which it has “tacitly agreed to contribute its fair share to the tax base”, and that such a social contract is legally binding. Such an argument suffers, however, from the observation that while social contract theory may provide a useful conceptualisation of the relationship between members of society, it does not constitute a legally enforceable contract. Furthermore, without more substantial consideration of the deliberation and agreement of various parties, it is equally conceivable that MNCs have tacitly agreed to both particular social responsibilities (which may include the payment of some taxation) and to use techniques of transfer pricing and thin capitalisation to reduce their tax liability.

MacIntyre’s Virtue Ethics

The previous section reviewed the principal modern moral philosophical approaches relevant to the issue of MNC tax avoidance in order to examine how they could be brought to bear on the issue. The review suggests, however, that while each approach may offer its own insights into the issue, arguments can be made both for and against MNC tax avoidance using each approach. Accordingly, where a supporter of MNC tax avoidance uses one of these theories to provide moral justification for the practice, this can be countered relatively easily by those who decry the practice (and vice versa). Given this context, this section considers how a contemporary virtue ethics perspective can be applied, in a way that avoids this difficulty.

Alasdair MacIntyre’s (2007) After Virtue provides a critique of the state of contemporary moral discourse and proposes a re-interpretation of Aristotelian virtue ethics. MacIntyre contends that the Enlightenment efforts to provide a rational basis for morality, articulated in utilitarianism and deontological ethics, have failed to achieve their purpose, with the result that contemporary moral discourse is characterised by emotivism. That is, without a sound rational basis, moral judgements have come to mean no more than assertions of personal preference, such as “Damn thievery!” or “I disapprove of theft. Do so as well’. However, despite this subjective approach to moral judgements, moral debate maintains an appearance of objectivity, where (supposedly rational) arguments are still provided in support of rival positions.

The discussion of MNC tax avoidance thus far reflects and provides a good example of MacIntyre’s thesis. Neither utilitarianism nor deontological ethics can provide a rational resolution to the question of whether MNC tax avoidance is ethical, and arguments that proscribe or support tax avoidance can be both made and countered. Furthermore, the current debate is frequently characterised by moral outrage over what, in some sense, appears to be unfair. MacIntyre continues to argue that not only have such Enlightenment projects failed in rationally justifying morality, but our moral debates can often be articulated in moral philosophies or approaches that are incommensurable. He even provides, as an example, the different approaches to taxation that follow from the (incommensurable) Rawlsian and Nozickian interpretations of justice, although at an individual rather than MNC level (MacIntyre 2007, p. 245). After Virtue is not, however, an altogether pessimistic work, as MacIntyre proposes a virtue ethics scheme that is essentially Aristotelian in nature, but is arguably more easily applied to contemporary structures and institutions.

This section considers how key elements of MacIntyre’s scheme can be brought to bear on the issue of MNC tax avoidance. However, rather than progress through the various elements of MacIntyre’s scheme (such as practices, institutions, internal and external goods), the issue will be examined using the fraud triangle developed by Cressey (1953). Eden and Smith (2011) have described how the fraud triangle can be applied to the issue of transfer pricing; using it here provides the opportunity to highlight not only how MacIntyre’s virtue ethics provides a philosophical alternative to the approaches discussed above, but also how it can contribute conceptually to our understanding of the issue, and in such a way that practical opportunities can be pursued.

Cressey’s (1953) fraud triangle identifies three necessary factors that are required for fraud to take place: perceived opportunity, perceived pressure and rationale. Opportunity refers to the actual circumstances that enable the perpetrator to commit the fraud (for example, by having access to the accounting records), and includes the perception that the possibility of being caught is low; pressure refers to the financial need (a ‘non-shareable financial problem’) that motivates the perpetrator to commit the fraud; and rationale refers to the intellectual justifications that the perpetrator adopts, by which the fraud is considered to be acceptable (this could include, for example, the view that everybody else does it, so it cannot really be considered wrong). Cressey argues that all three of these factors are necessary, so that removing one of them can interrupt or prevent the fraud from occurring.

Research in fraud has enabled the fraud triangle to be refined and updated over time [see Donegan and Ganon (2008), Dorminey et al. (2012) and Kassem and Higson (2012)], such that within opportunity is included the capacity of the individual to commit the fraud (such as the requisite accounting knowledge), the concept of pressure can be widened to include a range of motivations, and personal integrity affects one’s ability to rationalise fraudulent behaviour. As noted above, Eden and Smith (2011) have applied this fraud triangle to the issue of transfer pricing, and it can be applied to MNC tax avoidance more generally, without necessarily assuming that the transfer pricing and/or thin capitalisation techniques are morally wrong (whereas the term ‘fraud’ typically entails a value judgement). The underlying thesis is that MNCs that avoid tax have the opportunity, pressure (or motivation) and rationale to do so, and that if any of these factors are removed, MNCs will not avoid tax. Drawing on the discussion above concerning the motivations and justification for MNC tax avoidance, this can be presented diagrammatically, as shown in Fig. 1 [see also Eden and Smith (2011, p. 23)].
Fig. 1

The fraud triangle applied to tax avoidance

Viewed in this way, most attempts to restrict MNC tax avoidance are targeted at removing the opportunity to do so by, for example, strengthening anti-avoidance provisions or through international collaboration between regulatory bodies. From a philosophical and theoretical perspective, however, all three aspects of the triangle are of interest. The remainder of this section explores how MacIntyre’s virtue ethics scheme can inform the pressure and rationale factors of the triangle and provide greater insight into the ethics of tax avoidance.


Typically, the pressure or motivation for MNC tax avoidance comes from the need (or desire) for increased shareholder wealth (related to increased after-tax profits), and, within some of the philosophical perspectives outlined above, moral arguments can be provided in support of such an objective. MacIntyre, however, locates the ‘good’ in particular forms of activity, which he describes as ‘practices’:

By a ‘practice’ I am going to mean any coherent and complex form of socially established cooperative human activity through which goods internal to that form of activity are realized in the course of trying to achieve those standards of excellence which are appropriate to, and partially definitive of, that form of activity, with the result that human powers to achieve excellence, and human conceptions of the ends and goods involved, are systematically extended. (MacIntyre 2007, p. 187)

This description makes it clear that morality is considered by MacIntyre to be closely associated with excellence, a view that can be contrasted with morality as a means of resolving conflict (or of compliance with rules). Furthermore, there are ‘internal goods’ posited for each practice, and MacIntyre goes on to describe these as the goods associated with excellent products or processes (he uses the example of painting, in which both the end product—the actual painting—and the process of painting can be considered internal goods). In contrast with such internal goods are the external goods of wealth, status, fame and power; while these are still ‘goods’ (and not in themselves bad), pursuit of external goods over internal goods can lead to corruption of the underlying practice. MacIntyre provides an example of teaching a child to play chess; to the extent that the child is only learning in order to achieve a material reward (50c worth of candy for playing, and more for winning), the child will be motivated to cheat if he/she can get away with it. However, if the child is motivated to achieve the internal goods associated with chess (“a certain highly particular kind of analytical skill, strategic imagination and competitive intensity” (p. 188)), then he/she will not be motivated to cheat.

Considering MNC tax avoidance and the techniques of transfer pricing and thin capitalisation, the activity of accountants as key participants in these techniques is of particular relevance, and accounting itself can be considered a MacIntyrean practice (Francis 1990; West 2016). The good accountant, then, is one who pursues excellence in accounting practice, preferring the internal goods of accounting over the external goods of wealth, status, fame and power. Consistent with MacIntyre’s example of painting, the internal goods of accounting practice could include the preparation of financial reports (such as a balance sheet and income statement) that fairly present the affairs of the organisation, as well as appropriate use of accounting techniques and principles in the process of achieving this goal (West 2016). Although critics of the activities of MNCs may claim that these accounting techniques and principles are themselves the problem, a focus on excellence (rather than compliance) has the potential to provide a different perspective.

Amongst the various accounting principles that underlie the (sometimes ambiguous) goal of fair presentation is the concept of ‘substance over form’. According to this principle, fair presentation requires that the economic substance of a transaction or an event is recorded, regardless of its legal form. An amendment to the International Accounting Standards Board’s Conceptual Framework for Financial Reporting, evident in an Exposure Draft released in May 2015, proposes re-emphasising this concept by specifically noting that:

A faithful representation provides information about the substance of an economic phenomenon instead of merely providing information about its legal form. Providing information only about a legal form that differs from the economic substance of the underlying economic phenomenon would not result in a faithful representation. (International Accounting Standards Board 2015, p. para. 2.14)

An example of the application of substance over form is found where an entity sells goods while agreeing to repurchase the goods at a later date and at a higher price. While the legal form may be that of a sale, accountants identify the substance of the two transactions as a loan, secured by the goods, and record them accordingly (see International Accounting Standard 18 Revenue). In the absence of objective measures and criteria, however, it may be difficult to identify and record the substance of a transaction where it differs from its legal form. Nevertheless, the exercise of professional judgement, as the application of both professional autonomy and specialised knowledge [traditionally key attributes of professionals, see Larson (1977)], is essential to the work of professional accountants. It is envisaged [see, for example, the Institute of Chartered Accountants of Scotland (2012)] that an accountant’s professional experience and expertise is brought to bear on specific issues in such a way that the judgements are both reasonable and justifiable. Consequently, although exercising professional judgement may not be easy, such judgements are substantially different from lay opinion.

Substance over form can be applied to both transfer pricing and thin capitalisation. With regard to transfer pricing, where one entity within the MNC does actually receive a product or a service from another entity within the MNC, a transaction has occurred, which typically requires recording by each of these parties. Although, based on different tax rates in the jurisdictions in which these entities operate, the MNC may legally structure the transaction such that the price of the product or service is very high or very low (in order to reduce its overall tax burden), the good accountant, in preferring the internal goods of accounting practice (which includes recognising substance over form) ought to record the economic substance of the transaction rather than its legal form. That is, where one entity invoices an amount that does not reflect what has really occurred, the accountant ought to ignore the invoice and provide a more accurate record.

In MacIntyre’s scheme, then, for an accountant to be considered a good accountant, he/she ought to recognise substance over form in recording the organisation’s transactions, including intra-firm transactions, in preference to pressures to increase wealth or status (either for him/herself or the organisation). One might argue that as the transactions are intra-firm, there is no objective means of assessing the most accurate amount for any given transaction. However, several observations counter this argument. Firstly, even given a range of possible transfer prices that may all reasonably reflect the economic substance of the transaction, there are also some transfer prices that do not reflect the economic substance of the transaction; secondly, as noted above, the work of accountants necessarily requires professional judgement concerning matters that cannot be objectively determined (such as estimating the proportion of doubtful debts) and, thirdly, nobody is in a better position to make such a determination than the organisation’s own accountant.

A similar case can be made for applying substance over form to thin capitalisation. Although there may be a range of arrangements by which the subsidiaries of an MNC may be financed, if the subsidiary is actually financially sustainable, such that it is able to continue successfully as an operation in its own right, then the degree to which the existing financial structure reflects the economic substance of the operation can be questioned. Firstly, one can ask whether an entity that is financially sustainable is, over time, generating a positive return on investment to the holders of equity capital [this return being the cost of equity capital that is not recognised as an expense in the income statement, but which is nevertheless factored in calculations of residual income (Horngren et al. 2014)]. Consistently reporting an accounting profit that is negligible (or nil) does not reflect the economic substance of an organisation that is financially sustainable (and that must be covering its cost of equity capital).

Secondly, the degree to which the entity is financed by debt can be questioned—the economic substance of debt financing is closely related to risk, debt typically involving the assumption of risk by lenders, with the risk increasing as the proportion of debt financing increases. To the extent that the MNC does not actually take on greater risk when the subsidiary has a greater proportion of debt financing, then the legal form of this arrangement does not reflect the economic substance of debt financing. One could argue that intra-firm loans do not actually reflect the assumption of any additional risk by the MNC at all, and applying substance over form would then require reclassifying all debt financing as equity financing. However, if the subsidiary is an investment centre and treated as an independent entity in practice, then some degree of debt financing may be legitimate. It is possible, then, to envisage an economic substance to financial structure that can be discovered if the nature of the relationship of the parties is correctly understood. The good accountant (in pursuing the internal goods related to accounting) ought to recognise this economic substance (reflected in, for example, the debt-to-equity ratio) and report it as accurately as possible. This is not to say that the assessments involved are easy, but, as noted above, there is no doubt a range within which the economic substance is reasonably recognised (and a range in which it is not), and it is the organisation’s accountant(s) who is best positioned to make such a professional judgement.

In MacIntyre’s scheme, the good accountant is motivated to prioritise the achievement of internal goods, and thus to apply substance over form when faced with intra-firm transactions, or reporting on the capital structure within the MNC. MacIntyre identifies the qualities and dispositions that are required in order for the internal goods of any practice to be achieved as the virtues, and he considers three virtues to be essential to all practices: Courage, Justice and Honesty. It is clear from the discussion thus far that all three of these virtues are applicable to both transfer pricing and thin capitalisation. Where an accountant is facing imperatives from senior executives regarding profit maximisation and tax minimisation, Courage is required to investigate the economic substance of a given arrangement and to apply substance over form in the accounts when faced with possible loss (either in terms of personal remuneration or reputation). Honesty is applicable and implicit in the concept of substance over form itself, where the accountant is required to reflect what has actually occurred rather than its legal appearance (and where substance over form is considered to underpin fair presentation). Justice is also necessary where substance over form ensures that the price that is recorded reflects the reality of the underlying transaction or arrangement, in terms of attributing to each party their due, as far as possible.


As indicated above, the rationale for MNC tax avoidance can be linked to a belief that increased profits and greater shareholder wealth lead to greater overall societal prosperity. MacIntyre’s view of commerce and industry is, however, opposed to such a capitalist perspective and instead (following Aristotle and Aquinas) focuses on the goal (telos) of individual and collective flourishing. MacIntyre identifies a number of injustices associated with capitalism, including its insatiable acquisitiveness and the defects in character that are displayed by its key players on particular occasions, as well as the fundamental and enduring disparity between those who have access to capital and those who do not [see MacIntyre (2002, p. 147)]. He is not, however, opposed to productive work, which in many forms can be characterised as practices, and which is necessarily housed in various types of institutions. Although MacIntyre does not go into great detail regarding how commerce and industry ought to be arranged, there are several observations that can be made.

Firstly, the practices and the institutions that house them ought to promote the common good of individual and collective flourishing. MacIntyre (1994, p. 285) gives the example of two fishing crews, one comprised of those who are motivated solely by a desire to increase their own wealth (and who are thus motivated to leave if the incentives change), and the other comprised of those who have a genuine interest in the practice of fishing and the wellbeing of their fellow crew members, and whose activities thereby benefit both themselves and the community. As suggested by this second fishing crew, the MacIntyrean rationale for both practices and their related institutions lies in the pursuit of excellence that contributes to individual and collective flourishing; this can be contrasted with the prevailing rationale for MNC tax avoidance, based on the pursuit of greater effectiveness in enhancing shareholder wealth.

Secondly, MacIntyre’s opposition to modern capitalism does not necessarily imply a trust in the institutions of government as the remedy, and he accepts neither Marxism nor liberal social democracy as viable alternatives. So whereas much of the existing debate on MNC tax avoidance is couched in terms of governmental institutions pitted against multinational capital (reflected in the OECD BEPS project and the various governmental enquiries in the UK and Australia), MacIntyre’s view suggests another alternative, which appears to be more suited to very small-scale economic activity and local communities [although he does not discount operating within a larger economic context, see MacIntyre (2008, p. 268)]. Despite not providing much detail regarding how this could actually be implemented, particularly given an increasingly globalised world in which one’s community may not be geographically local, some application of the principle of subsidiarity to the questions relating to the purpose of, and rationale for, an MNC’s operations appears to be appropriate [see Mele (2005)]. That is, instead of an ambiguous appeal to maximising the greater good for the wider (typically national) community, the rationale for the institutions of productive activity lies in their contribution to the flourishing of their local communities (even if these are not geographically local).

A revised ‘tax avoidance triangle’ can now be suggested, which provides an alternative conceptualisation of the issue of MNC tax avoidance. This incorporates the regulatory efforts that are aimed at restricting opportunities to avoid tax (not discussed in detail in this paper), as well as the ways in which MacIntyre’s virtue ethics affects ‘pressure’ and ‘rationale’ (Fig. 2).
Fig. 2

A reconceptualization of the factors involved in tax avoidance

For accountants working at MNCs, this conceptualisation highlights the importance of two questions regarding the motivation and rationale that lie behind one’s accounting choices: To what extent is excellence in accounting practice, particularly through the recognition of substance over form, the primary motivator? To what extent are the MNC’s accounting choices justified by how they contribute to the flourishing of those most closely involved with the MNC?

A Further Justification

This paper has argued, firstly, that when considering the ethics of MNC tax avoidance (as opposed to its legal, regulatory or economic aspects), the perspectives provided by utilitarianism, deontological ethics, Rawlsian justice and Nozickian justice do not provide sufficient moral guidance. Secondly, the virtue ethics tradition, being more focused on the agent and his/her role, provides a more appropriate perspective, and MacIntyre’s contemporary virtue ethics can inform the role of accountants working within MNCs.

While the provision of such an alternative approach to the issue of tax avoidance and the reconceptualization of a tax avoidance triangle is itself of merit (particularly considering the difficulties in applying other moral philosophies to the issue), it is also worth considering a justification for accepting the MacIntyrean approach that goes beyond its philosophical distinctiveness.

It is apparent from the earlier discussion that, when considering how arguments concerning MNC tax avoidance may be framed by MNC accountants and regulators (or indeed, anyone arguing either for or against MNC tax avoidance), there are a number of moral perspectives that could be used to justify either position, and that, even if both parties adopt the same overarching philosophy (such as utilitarianism), the details of its application can be disputed. As noted earlier, arguments using these various moral approaches can be both made and countered. In contrast, there is reason to believe that both regulators and MNC accountants display agreement with some of the key tenets of the MacIntyrean approach described above. Professional accounting bodies unequivocally support the concept of fair presentation and the importance of recognising substance over form, and accountants in MNCs are accordingly required to apply this principle with integrity, objectivity and due care. The preference for excellence in accounting that is required in MacIntyre’s scheme is thus already implicit in the requirements of professional accounting ethics. Similarly, as many of the regulatory efforts are directed at discovering the economic substance of transactions and capital structures [see McMechan (2013) for an overview], opponents of MNC tax avoidance are unlikely to find this approach problematic.

Similarly, the notion of commercial institutions existing in order to benefit the common good of individual and collective flourishing is not altogether foreign to contemporary business practice. The studies by Collins and Porras (1994) and Waterman (1994) recognised highly successful companies that have not prioritised the maximisation of shareholder wealth over all else, appreciating the need to perform their characteristic work well (thereby providing superior value to customers and other stakeholders). This approach is also recognised in the mission or purpose statements of a range of companies, such as Bristol-Myers Squibb: “To discover, develop and deliver innovative medicines that help patients prevail over serious diseases” (Bristol-Myers Squibb 2015) and Darden Restaurants: “To nourish and delight everyone we serve” (Darden Concepts 2015). Although there are also examples of companies that clearly articulate their primary goal of maximising shareholder wealth, this suggests that there is some awareness of the imperative to serve a common good through productive enterprise, and that it is not necessarily the case that such an imperative must be subordinated to the view that the single-minded pursuit of shareholder wealth will generate the greatest societal benefit.4 Accordingly, there is some reason to believe that the alternative rationale derived from MacIntyre’s approach would be acceptable not only to those opposing MNC tax avoidance but also to (at least some) MNCs themselves.

Rather than the issue of tax avoidance being considered an ‘us versus them’ conflict between tax regulators and MNC accountants, this perspective therefore highlights areas in which there appears to be some agreement. This itself provides some justification for closer attention being paid to the issues raised by a MacIntyrean analysis—pursuing areas in which both parties already demonstrate some agreement may be more productive than regulatory efforts (and counter-efforts) that are dependent upon political factors. Furthermore, as this approach is consistent with the accounting profession’s focus on fair presentation, the criticism that MNC accountants need not accept this ethical approach (preferring, for example, a utilitarian concept of the ‘good’) is mitigated by the observation that such accountants do, as members of the profession, willingly accept the focus and goals of their profession.5

Concluding Comments

This paper has examined the ethics of MNC tax avoidance from the perspective of MacIntyre’s virtue ethics. In doing so, it has highlighted the difficulties of providing a rational justification that either supports or proscribes MNC tax avoidance with reference to modern moral philosophies of utilitarianism or deontological ethics, or by appeal to either Rawls’ or Nozick’s concepts of justice. MacIntyre’s contemporary interpretation of Aristotelian virtue ethics provides an alternative perspective on the issue, and by linking this to two factors of Cressey’s fraud triangle as applied to tax avoidance, the two factors that are not typically the subject of anti-avoidance efforts, it provides a further reconceptualization of the issue.

In particular, by addressing ‘pressure’, which includes the motivation for MNC tax avoidance, MacIntyre’s approach draws attention to the pursuit of excellence in the practice of accounting, and how this necessitates the recognition of substance over form. As this principle lies at the heart of the primary techniques of MNC tax avoidance (transfer pricing and thin capitalisation), the preference for internal goods of excellence that is required of the good accountant ought to supersede the motivation to pursue greater shareholder wealth. In a similar vein, MacIntyre’s approach provides an alternative ‘rationale’, through his emphasis on the common good of individual and collective flourishing, when compared to the traditional justification for capitalist business.

The importance of ‘pressure’ and ‘rationale’ highlighted in this paper suggests a number of areas for further research. The existence of MNC operations that appear to be financially sustainable over the long term, but pay negligible amounts of tax, questions whether substance over form is actually considered by accountants in practice. Research that investigates the factors that motivate and the justifications that accountants within MNCs provide for their choices may provide an indication of the degree to which accountants’ own moral views differ from or agree with the ideals of excellence in accounting practice and of individual and collective flourishing. MacIntyre’s reticence in providing a detailed examination of how the common good can be achieved within an increasingly globalised society also suggests that further research regarding how exactly accounting practices could contribute to the common good is warranted.

It is also noticeable that although ‘substance over form’ is a key aspect of fair presentation, professional accounting bodies are silent on how this concept might relate to transfer pricing and thin capitalisation [as Murphy (2012) notes, accounting standard IAS 24 (Related Party Disclosures) addresses issues of disclosure rather than measurement]. Accordingly, there are also practical implications for the profession—how ought professional accounting bodies provide guidance to their members regarding the application of substance over form in relation to transfer pricing and thin capitalisation?

Lastly, from a more philosophical perspective, if we believe that moral progress is made more likely when common ground between opposing parties can be identified, then the perspective provided by MacIntyre not only provides an alternative approach to understanding the issue, but also points to shared understandings that may ultimately contribute to progress in moral, if not yet political, terms.


  1. 1.

    Reference is sometimes made to ‘egregious tax avoidance’ as being of particular interest. However, this is not adopted as the term ‘egregious’ itself suggests a value judgement. Instead, the approach adopted in this paper is to review the issue of tax avoidance from different moral perspectives, such that any moral judgements would be the result of this review, rather than being pre-supposed.

  2. 2.

    Note that this remains the case even if the MNC is itself considered to be a moral agent [French (1979, 1995), but see Velasquez (2003) for an alternative view]. However, in so far as it is possible to examine and evaluate the activities of human agents acting in specific roles within the MNC, this is considered preferable (in terms of allowing for a more specific and nuanced analysis) to examining the MNC as a collective.

  3. 3.

    Such as through various stakeholder engagement initiatives and processes; see Jeffery (2009) for examples.

  4. 4.

    See also Xu’s (2004) study that highlights the role of non-pecuniary motivations in starting new businesses.

  5. 5.

    One could argue, however, that there may be some circumstances in which accountants, even having accepted the goal of fair presentation, would be justified in ignoring the concept of substance over form—such as when doing so would result in less tax being paid to an oppressive government (apartheid South Africa, for example). However, as such a choice is made qua accountant, the onus would be on him/her to justify why the pursuit of fair presentation (substance over form) ought to be overridden.


Compliance with Ethical Standards

Conflict of interest

Dr. West declares that he has no conflict of interest.

Ethical Approval

This article does not contain any studies with human participants or animals performed by any of the authors.


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Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  1. 1.School of Accountancy, QUT Business SchoolQueensland University of TechnologyBrisbaneAustralia

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