There is constant debate worldwide over whether a company should pay taxes based on either what the law actually states or how it is intended to be interpreted. However, in recent years, with the rise of large technology companies the topic has gained further momentum.
Today, a company risks reputational damage and/or a wave of audits by using legitimate accounting practices, paying taxes in a low-tax jurisdiction or only in the country where its parent company resides. Although all businesses are using tax transparency to ensure they do not suffer from reputational harm, the question remains over how much tax a company should be required to pay.
Grace Perez-Navarro and Jane McCormick shared their views on the topic with Anjana Haines.
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Anjana Haines: How would you describe tax morality?
Grace Perez-Navarro: We have recently published a book on tax morality. Our analysis focuses on two broad categories of taxpayers. Firstly, there are the individuals, where we're trying to measure taxpayers' willingness to pay tax voluntarily.
In contrast, in the context of legal entities, it's a little more complicated. There, what we're trying to see is how we can encourage companies to pay tax responsibly, complying with both the letter and the spirit of the law.
So, in a nutshell, that is what tax is morality is about for us.
Jane McCormick: With regard to individuals, it’s really about what the person's motivation is to pay tax, which carries over into lots of areas, including morality and the societal factors that vary around the world.
In relation to corporates, it comes down to corporate governance. It's about the decisions a corporation takes in relation to managing its business and the societal impact that has. Around the world, we're seeing that corporate governance and tax are discussed in that context at the board level.
"This is about corporate governance and tax risk management" - Grace Perez-Navarro, OECD
Anjana: What is the difference between a company paying tax according to the ‘letter of the law’ versus the ‘letter and spirit of the law’?
Grace: We did another report at the OECD in 2010 The OECD Guidelines for Multinational Enterprises, which is not restricted to taxation. These guidelines are, essentially, a code of conduct for businesses, which were developed jointly with them. The last chapter in these guidelines, and the shortest chapter, is on taxation.
In this chapter, we tried to reflect the concept of responsible tax planning, which was very controversial at the time. As Jane said, this is an issue of corporate governance, which we included in those guidelines, incorporating the notion that tax is a risk that needs to be managed and, as part of that management, corporations need to comply with both the letter and the spirit of the law.
We included a description of the ‘spirit of the law’, which says that you really need to look at the legislative intent and the contemporaneous legislative history. We are not talking about some vague concept or looking in a crystal ball to determine what this spirit might be, but rather looking at the legislative process and what was intended by the legislation.
Jane: I tend to steer away from using the phrase ‘spirit of the law’ because I have spent a long time talking to NGOs and tax activists, and there is a bit of a danger in who decides what the spirit of the law is.
At the end of the day, I completely agree with the point that Grace is making that it's about what was in the mind of the legislator when they were enacting the law, and not what some person is currently thinking might be a good answer. So, I think it's important to focus on what the intention was of the legislator.
However, it is a controversial issue when you look at it internationally.
It's not controversial in the UK because we have a concept of progressive legislation. So, it is a principle of statutory interpretation, but you have to think about the intention of the legislator when [one is] interpreting the legislation.
In continental Europe, we have this concept of the abuse of law, which is really going towards that ‘spirit of the law,’ but other countries, and even in the US, it is more a ‘letter of the law’ interpretation.
Wherever we are in the world though, there is a global approach to this, especially if you look at international businesses; but there is also this aspect that we all have a mutual interest in the sustainability and stability of the tax system.
What we've seen is that when things clearly go against the intention of the law, it normally creates a reaction, which is not always great for business.
"Fundamentally, it is the taxpayer who is responsible for complying with the law" - Grace Perez-Navarro, OECD
Anjana: Grace, the OECD report you refer to on tax morality, which was published in September 2019, states that there are regional differences in tax morality and especially between women and men. Can you give a brief overview?
Grace: There are a lot of differences that we can detect, based on things like gender, regional variations, age, education, religious conviction, and the level of democracy in the country that they are working in.
Although the study doesn't specifically conclude this, the most moral taxpayer would be an older, highly-educated woman, who is religious.
In a nutshell, people who are older, more educated, and more religious tend to have a higher tax morale, and citizens have a higher tax morale than non-citizens.
In the gender area, there was something very interesting which is, in Africa, you have the opposite. Men have a higher tax morale than women and it's not clear why, so we're going to look at this for more details. It could be because of the way the formal and informal taxes are levied, because in some African countries you may have what are known as informal taxes, where you're selling in the market and paying a fee to someone which they may consider to be a tax on the people selling. So, there may be a different relationship with taxation in Africa as opposed to in other regions.
We don't know why women [generally] have a higher tax morale, though. Is it that women are more risk averse? Are they more rule orientated? There is this whole concept of ‘perfect girls’ where women are always trying to be perfect, and does that mean complying with rules in the strictest sense? We don't know the answer but we will be doing further research on this.
"I have spent a long time talking to NGOs and tax activists, and there is a bit of a danger in who decides what the spirit of the law is" - Jane McCormick, KPMG
Anjana: Why should a company pay more tax than it legally has to for it to be ‘morally’ tax compliant?
Jane: Tax is a matter of the law and it's really important that it's a matter of the law. The rule of law is a fundamentally important principle. So, this isn't a question of ‘here's the right amount of tax according to the law’ and ‘here is some other morally correct amount of tax’. That would cause chaos. So, it's about paying the right amount of tax, but according to the law.
However, we all know that when you are conducting business, or you're doing tax planning, there are choices that you can make – you can go this way, or you can go that way; and like all of the choices that we make in life, choices have a moral dimension to them.
So, it is really important for all of us, as tax professionals to say that these are the options that you have to structure your business, or how to plan your taxes; but let's sit back and think about the impact of that on the sustainability of the business that we are advising. We must also consider the stakeholders around that business, because that's the way it’s going to be judged.
We all know the reputational risks associated with not doing it, but it goes deeper than that, it goes to the sustainability of what we're doing for the business and for society.
Grace: Adding to that, the reality is that everyone needs to comply with the law, but this is not always as clear as you would like it to be. If it were black and white, especially in the corporate and international context, we would not be having this conversation. It would be clear what we have to do; what is legal and what is not.
And so, as Jane said, there is a range of things that you can do in tax planning, but the question fundamentally comes down to risk. You can provide your client with a tax planning opportunity and say, 'I can guarantee that this is 100% compliant with the law,’ then there is another option that is 80% compliant, or 75%, 50%, etc.
So the question is, how low do you go and, ultimately, it is for the taxpayer to make an informed decision and decide how much risk they are willing to take.
So, as Jane said at the very beginning, this is about corporate governance and tax risk management.
"The increase in audit activity overall, that is partly driven by the immense amount of public and political attention on the issues around multinationals' tax payments" - Grace Perez-Navarro, OECD
Anjana: But beyond corporate governance, there are the tax authorities. Where is the line between the company paying taxes morally and the tax authorities being over-aggressive?
Grace: Well, the tax authorities becoming more aggressive is an issue that has been coming up and I guess in different people's minds, tax authorities being aggressive can mean different things.
It may mean that they are auditing many more issues than they used to; it may be that they are tougher and less willing to settle a case, or it may mean moving towards criminal investigations that what would typically go beyond a normal audit. We have different scenarios of what might be considered to be an aggressive tax audit.
I think, in part, when we talk about the increase in audit activity overall, that is partly driven by the immense amount of public and political attention on the issues around multinationals' tax payments. Because there is political pressure, tax authorities feel they have to show that they're doing something.
There is also a separate issue about digital taxation, where some countries feel the outcomes under the existing rules are neither adequate nor fair. Therefore, they may be taking creative interpretations of the law to achieve a result that they think is appropriate. This is why it's so important to update the rules so that you don't have that result and that we have a system where there is greater trust in both taxpayers and tax authorities.
Jane: I witness this greater aggression from tax authorities all around the world. It is, generally speaking, because they are under political pressure as Grace said.
The real question is, what business should do about this; there is noise in the system, the number of times I wake up in the morning, read the newspapers, or listen to radio, and just want to scream because yet another invalid statistic is being used to support the argument that businesses are not paying the right amount of tax.
There is a real need for us in the business community to somehow engage in that discussion and get a more balanced outcome because, at the moment, the debate is very dominated by one side of the argument.
Anjana: Jane, where do advisors fit into all of this? How much responsibility should they have in terms of the tax morality debate?
Jane: Well, we believe we have a very big part in that.
It is a fact that the tax system could not operate the way that it does without us. We stand at the corner of a triangle, if you like. We have a responsibility, on the one hand, to make sure we help our clients to comply with their obligations and to do that as accurately and efficiently as we possibly can. But we also have a duty to protect the rights of the taxpayer when it comes to dealing with the tax system.
I also think we have an important part to play in the broader debate about what tax is and how the tax system should work, not as an advocate of any particular policy, but to offer our unique view. We see so many different businesses in so many different countries that we have got some experience of how policies land on the ground, what the impact is of any particular policy and how that is driving business behaviour.
Grace: In 2008, the OECD published a report on the role of tax intermediaries. When this work started, it was very much focused on the intermediary, but as we began the discussions, we recognised that they have a fundamental role to play because the tax advisors are the ones who help the companies and individuals understand how the tax law works and what they can and cannot do.
But, fundamentally, it is the taxpayer who is responsible for complying with the law. So, we need to have a discussion with both the advisors and taxpayers.
As such, that was the outcome of that work, which I think really started with this intention of targeting the intermediaries, but very quickly shifted to the view that it is far more important to have an open and transparent conversation with both taxpayers and intermediaries.
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