Business

Tuesday August 4, 2009

We all avoid tax at one time or other; but is it wrong?

Tax Insights - By Kang Beng Hoe


Unacceptable avoidance may be said to be not unlike obscenity - difficult to define but one knows it when one sees it

THE practice of tax avoidance is not a recent phenomenon. Indeed it goes further back than 1798, the year William Pitt introduced income tax in England.

It probably began as much as 6,000 years ago when the local king in a small region of Mesopotamia eventually imposed fines on those who swam across the river to avoid the dues on the local ferry.

Today the spectre of daily Klang Valley vehicular traffic meandering through subsidiary roads to avoid highway tolls is a manifestation of tax avoidance in our lives.

It is generally understood that tax avoidance is legal whereas tax evasion is not. However, according to the tax historian Basil Sabine, the term “legal avoidance” was not coined until 1906; meaning a skilful exploitation of a loophole following a close reading of the tax law.

It may be said that the modern era of tax avoidance owes its wide practice and respectability to Lord Tomlin who in the celebrated Duke of Westminster case in Britain said: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than otherwise it should be.” This was in 1936 but, since then, much has changed and the view of tax avoidance has now taken on an ethical dimension. In other words it is not enough to ask the question “Is it legal?” but the question “Is it right?” is considered relevant.

This has come about because under the Duke of Westminster definition: “Ordering one’s affairs so that the tax attaching thereto is less than it otherwise would be” has given rise to the widest possible connotations. It has fawned the ultra-complex and ultra-sophisticated arrangements put in place by multinational organisations across different countries with differing tax treatments of the same transaction. It is a small wonder then that tax authorities everywhere have tended to distinguish tax avoidance between those which are “acceptable” from those which are “unacceptable”. Taxpayer groups such as anti-globalisers, Greens and many others have assailed tax avoidance in general as “immoral” or “unethical”.

The debate surrounding whether tax avoidance has become an ethical issue has even divided finance directors of companies in Britain. They responded to a magazine survey with 57% saying that tax avoidance did have ethical implications with 43% saying that ethics and avoidance were not linked. This survey followed a KPMG report which said that the public profile of tax had become “more conspicuous” and had “acquired moral, ethical and social dimensions” for the first time. The Chartered Institute of Taxation in Britain has gone on record to say that the term “avoidance” has come to have “overtones of immorality or going too far”.

The law does not provide a sound basis for distinguishing cases of acceptable tax planning from unacceptable tax avoidance. This has merely made it more difficult to arrive at a position where ethical considerations become relevant. The courts in a number of countries have spent a lot of time deciding what is acceptable and unacceptable tax avoidance. Thus, unacceptable avoidance may be said to be not unlike obscenity – difficult to define but one knows it when one sees it.

The recent scandal involving British parliamentarians and their expense claims brings into sharp focus the ugly face of unacceptable tax avoidance. Press reports highlighted the case of a Treasury minister who had two houses, but told the tax authorities that her Burnley home was her “principal residence” for a single month in 2007 prior to selling it at a profit. This had the effect of saving her substantial tax on the profit. Public sentiment was not sympathetic over her action and a typical comment was: “... this transaction may have been legal, but it was also obviously unacceptable. Tax avoidance is clearly unacceptable now: People have to be tax compliant. This was a blatant case of tax avoidance: Clearly no one swaps their place of main residence for a month, as she claimed to have done, however legal that claim might be.”

This case clearly shows that while one can relatively easily decide whether something is legal or not, what is ethical is a much more complex question requiring consideration of a host of ancillary factors. Despite the trend towards an ethical approach on tax avoidance, its practice is far from dead. One reason is that ethics and morals can be subjective and is best summed up by one commentator: “I see this as a moral issue and have no desire to seek to impose my own moral standard on others.”

  • Kang Beng Hoe is an executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of the TAXAND Network of independent tax firms worldwide. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Kang can be contacted at
    kbh@taxand.com.my

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