CSR-friendly tax policy: Unlocking value and aligning interests

Helping business to
serve shareholders AND society
SIMULTANEOUSLY
By Wayne Dunn, President & Founder, CSR Training Institute
CSR-friendly tax policy
unlocking value & aligning interests ©
www.csrtraininginstitute.com/knowledge-centre

a win for community, government & industry!
Originally published by Triple Pundit
https://www.triplepundit.com/2015/09/csr-friendly-tax-policy-
unlocking-value-aligning-interests/
The best thing I ever learned about tax policy came from one of Professor Howell’s
economics classes I took at Stanford Business School – “what you tax, you get
less of – and what you reward, you get more of.”
It makes good sense to me, so why is it so difficult for governments to see it this
way? Tax is usually regarded as punitive, and someone always loses out. But with
Prof Howell’s piece of simple wisdom, everyone can be a winner. And isn’t that the
whole point of Corporate Social Responsibility?
We are seeing some governments making CSR policy into a tax,
setting minimum amounts that companies must spend on CSR, often
with little thought for value and impact.
So, in case any government is considering taxing CSR, this article puts
forward the case for replacing that with its polar opposite –using tax
breaks to incentivize and enhance CSR to everyone’s benefit.
Now, why would any cash-strapped government give this notion any
serious attention?
Well the answer’s simple. CSR searches
out the synergies between different
stakeholder interests – and those
include government’s developmental
priorities and investment attraction
objectives.
So, it is in government’s interests to
incentivize private sector investments and activities that create benefits
and value for them as well as for communities and corporations.
Properly designed tax policy can
drive synergies between investors,
government and community

So, it is in government’s interests to incentivize private sector
investments and activities that create benefits and value for them as
well as for communities and corporations.
And there are TWO definite candidates for this incentivization model
– Tax Credits, and Co-investment. Each offers a real carrot for CSR
work, and can be implemented separately or combined to suit
government policy.
And as I’ll show, each saves the government money in the long run
by helping deliver more successful CSR projects and avoid money-
draining loopholes, while at the same time making the country more
attractive for foreign investment.
So, let’s see what exactly how these two tax breaks might look, and
how they benefit not just the community projects but the governments
that implement them.
Tax credits – What are they? How could they work?
In its most common for, this involves the State providing companies
with a credit against tax (or royalties) owed, based on the company’s
investment in local communities.
Carefully targeted tax credits have proven to be very efficient at
creating local value and benefits and, simultaneously, developing
local capacity and infrastructure.
Acceptable spending areas and processes are defined by the State
and normally include local infrastructure projects and a requirement
for local governments to be involved in setting priorities. Some also
have a requirement for local involvement in planning and execution
as well as a local content provision.
In some cases the model can be expanded to include more than one
local government and/or regional governments. Some, such as Peru,
provide mechanisms to involve national government departments
and agencies as well.

The model can also be adapted to also include company support to
health, education, local government capacity and other government
priorities.
The level of tax credit can be 100% of what the company invests or
less and is determined by government. Companies simply deduct the
appropriate amounts from their taxes and/or royalties owed to the
State.
An Example – The Porgera Market
In 2002 Placer Dome was operating the Porgera mine in the highlands
of Papua New Guinea (PNG). The PNG government had a tax
credit policy that allowed the company and the local government to
undertake local infrastructure and capital projects worth up to 35%
of a company’s tax bill.
The local government set the priorities, including identifying and
prioritizing the projects and setting local procurement requirements.
A number of projects were identified and developed including a
community sports field and a local market.
They were developed with support and guidance from the company,
who brought project management expertise and financing, and
under the leadership of the local government. Local contractors and
labour did the majority of the work.
Porgera Market – Developed as part of the
Papua New Guinea Tax Credit Program

The end result was two valuable community assets; a high quality
sports field for local teams and youth and a community market
that fostered local commerce, small scale agriculture and local
entrepreneurship.
The project met a community need and priority. Financing was much
more efficient than if the money had been routed through the national
government and then sent back to the community for the projects.
Think of the transaction friction, potential for leakage and transaction
costs if the same money had been sent from the company to the
national treasury, allocated to the Local Government Ministry, and
the community had to develop proposal and secure the funds back
from the State to do the project.
Anecdotal evidence at the time suggested that as much 50 – 75%
of the funds would have been consumed/leaked/etc. before getting
back to the local government and local project.
Project execution had the benefit of using the mine sites world-
class project management expertise. The mine had teams that were
accustomed to managing projects such as this and the associated
contracting and equipment.
Contrast that with a situation where the project would be managed by
either a local government with limited project management expertise
and experience, or a national government that would have to send in
project management capacity from the capital.
The end result is community priorities were met and the financing
and execution efficiencies enabled much more to be done and much
greater impact than if the same projects had been attempted through
traditional tax, allocate, finance, executive models.

Benefits
Strategic integration of corporate social responsibility into tax policy
can produce benefits across a range of stakeholder interests.
Perhaps the ultimate benefit is simply a tighter alignment between
government, community and corporate interests and a more efficient
application of government and corporate resources to support
development priorities.
Other benefits include:
Benefits to Government
Improved investment attractiveness because of more efficient
CSR/Social License process and better national and community
support for key industries;
Enhanced developmental and community/infrastructure impact
from tax revenues;
Improves local governance and capacity;
Increased synergy and alignment between Corporate CSR
spending and local and national government priorities creates
finance and development efficiencies.
Structured and constructive relationships with participating
companies (this can often lead to additional partnerships,
collaboration and value)
Streamlined and integrated process results in enhanced community
level impacts;
Direct participation in project identification ensure local priorities
are targeted, enhances local ownership and facilitates improved
local project development and management capacity;
Improved ability to optimize local content (suppliers, labour, etc.)
and improved alignment with other stakeholders.
Benefits to Community

These are some of the general benefits to key stakeholders. Individual
projects often have broader and more specific types of value and
benefits.
The downside is minimal and mostly the inverse of some of the
benefits. Some examples include:
Co-investment in development
Let’s start by understanding the synergies and where there is
intersection and overlap between business, governments and the
international community.
Improved coordination enhances impact and value at the
community level and strengthens social license;
Structured collaboration with community on key projects enhances
relationship and improves understanding of community issues
and concerns;
Enables coordination of CSR spending and community
infrastructure/tax credit spending, facilitating stronger local
impacts;
Provides an opportunity for increased local procurement and
employment.
Benefits to Company
The national government may see the increased priority setting
control of local communities as a downside;
Risk of corporate-controlled government or companies imposing
their will/priorities on weak local governments;
Overall resistance to corporate involvement in public arena;
National / regional / local government lack of capacity to
effectively prioritize and partner with corporations.

When these synergies are identified and understood governments can
use tax policy and incentives to encourage corporations to target CSR
budgets towards key priority areas. The challenge is to clarify and
make irresistible the opportunities for making this synergy happen.
So, where do governments see their own priority areas lying?
Governments, international organizations and others have almost
universally subscribed to the eight Millennium Development Goals
(MDGs) that were unanimously adopted by the member nations of
the United Nations in a special Millennium session in 2000. Similar
uptake and adoption is anticipated for the seventeen Sustainable
Development Goals (SDGs) that will be adopted by the United
Nations in a special session in September 2015.
From the CSR perspective, Corporate CSR/Sustainability objectives
and investments fall into seven categories; education, health, poverty
alleviation, gender equality, environmental stewardship, partnership
development and equity/justice.
Not all projects or companies invest in all of these, but I’ve not yet
found a CSR project or activity that didn’t fit into one or more of these
categories.
If you look at the 8 MDGs and the 17 SDGs you will see that they can
fit into the same 7-point framework that corporate CSR/Sustainability
investments and activities fit into; education, health, poverty
alleviation, gender equality, environmental stewardship, partnership
development and equity/justice.
However, all too often the current practice is for industry’s CSR
investments in these areas to be done independent of those of the
various levels of government, or with limited levels of collaboration.
This is inefficient and produces a sub-optimal outcome for all
concerned.

For example, education and health are often key issues for local
communities and a priority spending areas for industry’s CSR budgets;
especially when operating in remote areas of emerging economies
where deficiencies of infrastructure and reach can be significant.
Without active coordination and collaboration with governments, the
impact of social investments by industry can be reduced and often
negative impacts created.
To illustrate this, industry may build schools or health centres without
knowing government’s location prioritization and rationale, resulting
in a disruption to government plans, challenges in staffing and
ongoing operations, or worse yet – the perception of competition.
Economic development and poverty alleviation are also key
community priorities and easily recognizable needs. Closely linked
to these are various training initiatives that seek to provide local
residents with foundational skills and resources that facilitate options
to improve livelihoods.
Now, all of these areas are often targeted with industry CSR budgets
and regularly include collaboration with local communities and
stakeholders in their development.
And they are also often targets of governmental programs as well as
direct programming by NGOs and other development actors. But too
often there is little coordination between the players and the ultimate
losers are everyone.
When governments and industry don’t take advantage of these
synergies it means that communities receive less positive impact and
fewer benefits while project funders (industry, government, NGOs
and others) generate fewer benefits for greater financial outlay.
So the solution is for Governments to use tax incentives and co-
investment frameworks to encourage corporate CSR investments to
focus on priority areas.

One of the key challenges to successfully implementing this sort of
co-investment model is that the parties, government and industry, are
often not able to consummate seemingly natural partnerships.
However, tax-based incentives can be the catalyst to creating these
partnerships and making them work.
For example, if the education
ministry had plans for school
construction in areas near a
mining project there could be tax
incentives such as a partial tax
credit and/or increased deduction
allowance provided to encourage
the mining company to target
some of its CSR investment to co-invest with the education ministry on
their priorities.
In this example there can sometimes be additional value realized
through utilizing a company’s project management capacity, similar
to that described in the tax credit section.
Other areas where a similar approach could apply include health,
economic development, etc.
Natural Partnerships | Unnatural Partnerships: The Industry-Government
Partnership Capacity Gap
In my experiences throughout the world, the State’s ability to
collaborate effectively with the private sector on CSR/Co-investment
in Development is nearly always hindered by its lack of capacity to
work with the private sector.
Departments like Health, Education, Local Government and others do
not have a history of collaborating with the private sector to partner
on projects. Too often individuals within the departments simply lack
the experience or training to enable them to work effectively with
private sector partners to collaborate on these initiatives.

The private sector also has limited capacity for working with
government departments, and this combination results in valuable
opportunities being missed, or projects performing poorly.
Training and mentorship have proven to be helpful at bridging this
partnership capacity gap.
Conclusion
The above examples should be seen as indicative rather than
exhaustive. The takeaways are:
Companies are investing in local development as part of their
social license and CSR strategy.
These investments are often aligned with government development
priorities;
Governments can use tax policy to target and increase the
developmental impact of private sector investment and operations
without adding to companies’ tax burden
This can be an efficient way of meeting developmental priorities
and can produce a broad range of stakeholder benefits, including
improving a country’s investment attractiveness.
Value is lost for all parties when partnership
opportunities and synergies are missed

Should Business Serve
Helping business to serve society and
shareholders, SIMULTANEOUSLY.
Should Business Serve
WAYNE DUNN, PRESIDENT AND FOUNDER
SHAREHOLDERS?
SOCIETY?
IT SHOULD SERVE BOTH.
Wayne Dunn is President & Founder of the CSR Training Institute and
Professor of Practice in CSR at McGill. He’s a Stanford Sloan Fellow
with a M.Sc. in Management from Stanford Business School.
He is a veteran of 20+ years of award winning global CSR and
sustainability work spanning the globe and covering many industries
and sectors including extensive work with Indigenous Peoples in
Canada and globally. His work has won major international awards
and has been used extensively as ‘best-practice’ by industry and
academia.
He’s also worked oil rigs, prospecting, diamond drilling, logging,
commercial fishing, heavy equipment operator, truck driver and
underwater logging, done a couple of start-ups and too many other
things to mention.
Wayne’s career includes big successes, and spectacular failures. He
hopes he’s learned equally from both.
www.csrtraininginstitute.com

CSR-friendly tax policy: Unlocking value and aligning interests

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