Monday January 21, 2013
Is avoiding tax morally right or wrong?
Comment by Kang Beng Hoe
And pluck till time and times are done
The silver apples of the moon
The golden apples of the sun
THIS refrain from the Song of the Wandering Aengus by the Irish poet who won the Nobel Prize in Literature in 1923 has particular resonance today when we find all major economies grappling with the continuing search for new “apples” of tax revenue to alleviate budget deficits. The difficulty is exacerbated by the fact that many will not be able to raise tax rates on their suffering citizenry. Moreover, with the growth of international trade and increasing sophistication of business structures, the ability of multi-national enterprises to shift beyond the reach of a state's tax net is now easier and more common-place.
The recent furore in the UK over tax avoidance involving Starbucks, Google and Amazon is emblematic of a growing trend of global companies engaging in sophisticated tax avoidance arrangements.
Tax avoidance would not ordinarily be of concern to the man in the street, but the Starbucks incident appears to stand out as an exception. The vehemence of the public outcry is in part indicative of a sign of the times and the political voice which echoes it. British parliamentarians were portrayed as properly outraged authorities on television screens around the world, chiding the heads of these iconic companies as though they were errant schoolboys.
The wrong done by them is for not contributing enough to the tax coffers of the British Exchequer. They were decried to be inexorable tax avoiders engaged in conduct which is viewed to be immoral.
In the late 1930s, judicial opinion in the UK had in fact tacitly endorsed tax avoidance. The most celebrated statement came from Lord Tomlin, in the Duke of Westminster case:
“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”
His fellow law lord, Lord Clyde in another case expressed similar sentiments in much clearer terms:
“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property so as to enable the Inland Revenue to put the largest possible shovel into his stores.”
A realistic approach was adopted by Lord Upjohn in a 1967 case when he said:
“No commercial man in his senses is going to carry out commercial transactions except upon the footing of paying the smallest amount of tax involved.”
These judicial tenets have no doubt influenced the long held view by taxpayers at large that tax avoidance, being legal, is not just fair game but is even associated with an element of elegance.
The Starbucks et al case indicates how far the pendulum has swung in relation to the attitude towards tax avoidance from the difference between tax avoidance and tax evasion (which is illegal), to acceptable and unacceptable tax avoidance.
Denis Healey, one time Labour Chancellor of the Exchequer, quipped that “the difference between tax avoidance and tax evasion is the thickness of the prison wall.”
He was unaware that a term had since been coined to describe that mythical wall. “Avoision” is a word which refers to the unclear position of whether an arrangement constitutes lawful avoidance or illegal tax evasion.
Today, no professional tax adviser worth his salt will endeavour to rely on the judicial dictates of these law lords, however logical they may sound. This is because tax authorities everywhere are engaging in wide-ranging measures designed to reign in what they regard as unacceptable tax avoidance.
Thus companies operating in more than one country are more than likely to come up against Transfer Pricing rules and General Anti-Avoidance Rules (GAAR).
Transfer pricing rules have become almost an international norm widely used by states with two aims in mind across borders to guard against erosion of their respective tax base and internally to curb unacceptable tax avoidance.
GAAR, on the other hand, are broad rules targeted at unacceptable tax avoidance which is to be distinguished from acceptable tax avoidance (tax planning or tax minimisation). This distinction is central to any general anti-avoidance rule. A transaction coming within the ambit of such a rule will be void for tax purposes although valid for other purposes.
These general anti-avoidance rules are invariably framed in such broad terms that they in effect give revenue authorities broad administrative discretion. This approach has been criticised in some countries (Canada) as being unacceptable “because it is perceived to be contrary, at least in spirit, to the rule of law.”
Interestingly, while many tax systems have adopted the general anti-avoidance provision, the UK does not have such a provision. It relies on the interpretation of its courts, which can itself pose problems as Lord Simon of Glaisdale had observed. “ for the courts to try to stretch the law to meet hard cases is not merely to make bad law but to run the risk of subverting the rule of law itself.”
There will be those who would argue that morality has no place in taxation. If it is legal for one to avoid paying more than what the law says, then that should be the end to it. To then decry tax avoidance as unacceptable is tantamount to confounding the laws of logic; something cannot be both true and not true.
On the other hand, the moral stance stems from viewing all modern tax systems as involving our individual sense of trust. The historian Tony Judt says that we pay our taxes because we trust our fellow citizens to pay their share as well. Tax avoidance could be said to be when that trust is betrayed.
The debate will continue even if UK Prime Minister David Cameron appeared to have the last word on the Starbucks saga. He was quoted as saying that he was going to make sure that corporations pay their fair share of taxes. No one will be betting that he will not bring GAAR into the UK tax laws. Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd, a member firm of Taxand. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. The writer can be contacted at email@example.com