FATCA and other similar agreements are on the march, and tax avoidance is high up the international policymaking agenda.
It will have escaped the notice of few that the practice of tax planning has recently come under attack, with the affairs of multinationals as well as private individuals and certain jurisdictions suffering intense criticism.
FATCA and other similar agreements are on the march, and tax avoidance is high up the international policymaking agenda.
As the discussion has progressed, much ink has been spilt over where the line between ‘legitimate’ tax planning and ‘aggressive’ or ‘immoral’ avoidance should be drawn, or whether the only line that should matter is the line of law.
One question less explored is what this all means for the tax planning industry itself; in other sectors, crises have historically prompted the development of new standards – so does today’s tax planning industry need an ethical revolution?
Globalisation has been a major catalyst for the debate: interconnected transactions and global supply chains mean that traditional boundaries have become fluid.
As readers will know from the flurry of coverage that has emerged in recent months, a corporate giant like Google is able to establish a structure which employs thousands of people in Britain, makes billions of sterling in revenue in Britain, but permits Google to pay a mere fraction of 1% of that revenue in tax to the United Kingdom because its transactions are formally executed in Ireland.
Many, of course, argue that this is wrong, that Google is shirking its responsibilities; that there is a moral imperative above and beyond the letter of the law for corporates and individuals to pay a fair contribution to society.
The tax planner’s response
Yet whether this moral obligation exists for Google or not, many in the tax planning industry would retort that ethics should play no role in the tax planner’s work above and beyond commitment to the law. Many regard the right to freedom of establishment as a crucial component of a free international market. There is a strong case that tax and regulatory competition restrains governments from excess.
As proponents of the rule of law, these practitioners view their role according to the principle that every citizen is entitled to know his legal position. Tax specialists must understand the myriad differences between systems, and as responsible advisors they are under a duty to help clients comply efficiently.
It is the duty of the tax planner – so the argument goes - to observe the rules and to guide others to take full advantage of the freedoms open to them. If there is something wrong with tax systems – a feature of the rules which allows for behaviour which is detrimental to society or even immoral – this should be dealt with through legislation and policymaking, and not rely on the voluntary behaviour of law-abiding taxpayers, or those that advise them.
Where should the industry go from here?
While one can argue that it is not for tax planners to impose a personal moral code upon their clients, it can often be appropriate to draw moral issues to the attention of clients within the advisory role. By infringing generally accepted moral codes, the planner and client could incur financial and reputational costs. Educating them on these risks enables the client to make more informed judgements that take into account the moral alongside the legal.
Whether the individual practitioner believes that ethical concerns should play a role in tax planning or not, there are basic ‘ethical’ principles that any good tax planner should adhere to, whether for reasons of ethics or simply prudence. The following three principles are a start:
The scrutiny test
The planner should ask whether the plan will withstand scrutiny. If it relies upon non-disclosure, then the plan is unlikely to meet even the legality test, let alone be morally defensible. If the plan is legal, but if revealed would be judged harshly in the public eye, then the plan may be of questionable morality.
The substance test
A plan without substance will be subject to criticism. The “substance over form” tests utilised by the Court to cut down on tax avoidance often center around the question of whether the transactions described had commercial substance. To establish a plan which is not aligned with the underlying commercial reality is to take a commercial risk, regardless of its morality.
The hypocrisy test
Planning should not be manifestly hypocritical. A plan which is designed to claim benefits intended for citizens who make charitable donations, when as a matter of commercial reality there is no underlying charitable donation, is likely to be regarded as a particularly ugly theft. The legislature has granted incentives to encourage morally admirable actions. Abuse will invoke censure from others which will carry with it its own consequences, both social and financial.
While the academic debate over legitimate versus aggressive avoidance will likely continue for some time, the tax planning industry has a more urgent, practical need to seek out common ground and move forward. This is a start.
FATCA and other similar agreements are on the march, and tax avoidance is high up the international policymaking agenda.
As the discussion has progressed, much ink has been spilt over where the line between ‘legitimate’ tax planning and ‘aggressive’ or ‘immoral’ avoidance should be drawn, or whether the only line that should matter is the line of law.
One question less explored is what this all means for the tax planning industry itself; in other sectors, crises have historically prompted the development of new standards – so does today’s tax planning industry need an ethical revolution?
Globalisation has been a major catalyst for the debate: interconnected transactions and global supply chains mean that traditional boundaries have become fluid.
As readers will know from the flurry of coverage that has emerged in recent months, a corporate giant like Google is able to establish a structure which employs thousands of people in Britain, makes billions of sterling in revenue in Britain, but permits Google to pay a mere fraction of 1% of that revenue in tax to the United Kingdom because its transactions are formally executed in Ireland.
Many, of course, argue that this is wrong, that Google is shirking its responsibilities; that there is a moral imperative above and beyond the letter of the law for corporates and individuals to pay a fair contribution to society.
The tax planner’s response
Yet whether this moral obligation exists for Google or not, many in the tax planning industry would retort that ethics should play no role in the tax planner’s work above and beyond commitment to the law. Many regard the right to freedom of establishment as a crucial component of a free international market. There is a strong case that tax and regulatory competition restrains governments from excess.
As proponents of the rule of law, these practitioners view their role according to the principle that every citizen is entitled to know his legal position. Tax specialists must understand the myriad differences between systems, and as responsible advisors they are under a duty to help clients comply efficiently.
It is the duty of the tax planner – so the argument goes - to observe the rules and to guide others to take full advantage of the freedoms open to them. If there is something wrong with tax systems – a feature of the rules which allows for behaviour which is detrimental to society or even immoral – this should be dealt with through legislation and policymaking, and not rely on the voluntary behaviour of law-abiding taxpayers, or those that advise them.
Where should the industry go from here?
While one can argue that it is not for tax planners to impose a personal moral code upon their clients, it can often be appropriate to draw moral issues to the attention of clients within the advisory role. By infringing generally accepted moral codes, the planner and client could incur financial and reputational costs. Educating them on these risks enables the client to make more informed judgements that take into account the moral alongside the legal.
Whether the individual practitioner believes that ethical concerns should play a role in tax planning or not, there are basic ‘ethical’ principles that any good tax planner should adhere to, whether for reasons of ethics or simply prudence. The following three principles are a start:
The scrutiny test
The planner should ask whether the plan will withstand scrutiny. If it relies upon non-disclosure, then the plan is unlikely to meet even the legality test, let alone be morally defensible. If the plan is legal, but if revealed would be judged harshly in the public eye, then the plan may be of questionable morality.
The substance test
A plan without substance will be subject to criticism. The “substance over form” tests utilised by the Court to cut down on tax avoidance often center around the question of whether the transactions described had commercial substance. To establish a plan which is not aligned with the underlying commercial reality is to take a commercial risk, regardless of its morality.
The hypocrisy test
Planning should not be manifestly hypocritical. A plan which is designed to claim benefits intended for citizens who make charitable donations, when as a matter of commercial reality there is no underlying charitable donation, is likely to be regarded as a particularly ugly theft. The legislature has granted incentives to encourage morally admirable actions. Abuse will invoke censure from others which will carry with it its own consequences, both social and financial.
While the academic debate over legitimate versus aggressive avoidance will likely continue for some time, the tax planning industry has a more urgent, practical need to seek out common ground and move forward. This is a start.
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