Most tax professionals would argue that Benjamin Franklin’s famous quote that nothing is more certain than “death and taxes” is just as applicable today as it was back in 1789. But if tax is considered a certainty, tax morality is not.
A multitude of headlines have appeared over the years, naming and shaming large multinationals that have failed to pay all their taxes. Even today, big tech companies often seem to be blamed for shifting their profits abroad.
Scandals such as the Panama Papers, released by the International Consortium of Investigative Journalists(ICIJ), are still relevant today – six years after the documents were leaked.
While it is true that debate around tax avoidance and evasion persists, the extent to which tax planning is ethical has not been settled. Above all, who is responsible for tax morality?
Blurred lines
Ultimately, it’s the tax practitioners who design aggressive tax planning strategies for their clients who should be held accountable – right? But isn’t this done at the client’s request?
Part of tax consultants’ responsibility is to minimise the tax liability of their clients by using loopholes in the law. And let’s face it, it is incredibly clever to understand and design a way for a multinational company to reduce a multimillion-dollar tax bill without it being considered ‘tax evasion’.
Somehow, yes, lawmakers have successfully created two separate definitions for tax avoidance and evasion. How can a corporation that hides financial assets in a foreign entity be so different from one shifting its profit to a low-tax jurisdiction, you ask?
The UK government has an answer: “Tax evasion is where there is a deliberate attempt not to pay the tax which is due. It is illegal.
“Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.”
But let’s call a spade a spade. Tax evasion and tax avoidance do have the similar aim of lowering or scratching a taxpayer’s liability. So no, it is not only tax evasion that deprives economies of billions in tax revenue.
The financial loss caused by tax avoidance in the UK in 2019/20 was estimated at £1.5 billion ($1.68 billion) and the cost of tax evasion at £5.5 billion, according to House of Commons data.
The ICIJ disclosed in 2021 that tax abuse led to $500 billion in lost revenue globally. That’s a big chunk of tax revenue that many – especially developing – countries could have benefitted from. But everyone knows about that.
Everyone has seen the news. Everyone has read about it. Everyone is aware of the loopholes. And everyone knows about the EU’s tax haven blacklist.
Who, then, is responsible to ensure that these billions of pounds reach governments’ accounts? Most importantly, what is causing this large sum of money to disappear from the hands of tax authorities?
The OECD would argue that establishing a global minimum tax and an allocation of taxing rights to jurisdictions would – to an extent – decrease the incentives for tax avoidance and evasion.
Would it, though? In theory, yes. In reality, we’ll have to wait and see. In the meantime, tax morality will always be about judgement. It is the same judgement that will define corporate governance.
Trust me
Taxpayers’ perceptions and attitudes towards paying or evading or avoiding tax may never be fully changed by tax administrations for this reason. But they can be influenced, especially because judgement is personal and only the personal can define what it is good or bad.
Tax morality will determine whether low tax rates and deals offered by other countries are acceptable or not, as well as how much tax the taxpayer wants to pay.
Yes, country-by-country reporting and other tax transparency initiatives have helped promote tax morality, but will they help build trust between corporations and authorities? The fact that tax authorities are increasingly aggressive around the world suggests the opposite is the case.
Taxpayers will always be subject to the law – but the question of tax morality is a separate issue. If the level of trust between tax authorities and multinationals increased, the incentives for companies to defraud or to lower their tax liability would decrease.
While multinationals often seek strong relationships with tax authorities, it is also up to tax authorities to establish trust with large corporations. Tax morality will always be in the hands of companies, but could be further encouraged by administrations.
After all, tax will always be a certainty, like Franklin said. The role of trust, meanwhile, could make a big difference in making tax morality more certain too.
