The issue of tax morality is perhaps the most widely debated topic in recent times. As early as the 4th century BC, Plato had observed that “Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” The framing of tax as a moral issue and bringing the issue of ‘tax morality’ into greater focus is of comparatively recent origin and is indeed, a clear sign that norms of taxation (international taxation in particular) are changing.
Conventionally, not without a good deal of twists and turns, the principle that a tax payer has a legitimate right to arrange her affairs within the framework of the law was well-recognised in the history of tax jurisprudence. However, this led to some taxpayers pushing these limits in order to minimise their tax liabilities by ensuring that they remain compliant with the letter of law in all jurisdictions in which they operate, while not necessarily being compliant with the spirit or the intent of the law.
This approach is increasingly being considered as being in conflict with the principle of ‘tax morality’ which expects taxpayers to pay a ‘fair share’ of tax in each country where they operate. This concept first gained recognition with the onset of the financial crisis in the early 21st century. Governments, around the world, were suddenly faced with expanding fiscal deficits owing to low tax collections and slow growth of the economy. This resulted in many (including governments, civil activists, media and consumers at large) questioning the contribution of Multinational Corporations (MNCs) to the general welfare of the people, from whom they were drawing their profits. The governments and civil activists raised concerns that some MNCs were taking advantage of shortcomings in the global tax system (through creation of complicated and convoluted structures) to avoid paying their ‘fair share’ of taxes, while complying by paying what was strictly due under the letter of the law.
The call for tax transparency
The international tax system has not kept pace with the change in business models employed by MNCs, i.e., shifting from country-specific models to global models (rendering of centralised services, intellectual property holding models, internet based sales, complex supply chain models, etc.).
The world today has come together to discuss and deal with the issue of tax morality. Organisations (including the Organisation for Economic Cooperation and Development (OECD), the European Union, G-8, G-20, BRIC, etc.) are getting together to debate and put in place concrete measures to ensure that MNCs across the world end up paying their ‘fair share’ of taxes.
Increased transparency is seen as being crucial in this regard. Accordingly, a plethora of changes have been proposed by tax administrators and governments across the globe. In this regard, Base Erosion and Profit Shifting (BEPS) disclosure norms on reporting aggressive tax structures, mandatory disclosure norms in different countries, name and shame policies, open tax lists, etc. are notable. Some countries have also introduced certain changes which drive the same message positively by introducing schemes which recognise and reward the highest tax payers. With these policies now, it is hoped that there would be greater transparency regarding the tax arrangements of MNCs making them accountable to governments and society/consumers at large.
Today, we are seeing a change in the way the MNCs view their obligation to pay taxes. The role of tax directors across the globe has undergone a metamorphosis, and no longer entails taking care of mere compliance or minimisation of the effective tax rate, but also an evaluation of all potential consequences, that could arise from the structuring of their tax affairs.
Given that the public at large has become keenly interested in the tax arrangements of MNCs (owing to the numerous high profile cases such as Apple, Starbucks, Amazon, etc.), more and more MNCs are waking up to the to the fact that the arrangement of their tax affairs impacts not just their financials, but also their brand recall and reputation. Given the ease with which brands and reputations of MNCs, built painstakingly over years, could be damaged by both real and perceived failures to fulfil their tax obligations, there will need to be an increased focus on complying with both the letter and spirit of the law.
The implications on brand value is not the only consideration for companies while arranging their tax affairs. With the proliferation of data, it is easier for tax administrators around the world to identify arrangements which though compliant with tax law are in essence aggressive tax planning arrangements. In essence, complying with the letter of the law may no longer satisfy governments and other stakeholders.
Despite the changing norms (some codified and some not) which are increasing the relevance of tax morality and tax transparency, some taxpayers continue to argue that so long as their arrangements are permissible under law, there ought to be no further reconsideration of their tax positions. However, several others, concerned about reputational risk or negative publicity, are basing their tax decisions on strong commercial rationale and are attempting to stay on the right side of the ethical debate.
Whatever the position adopted by taxpayers, one cannot escape the fact that tax morality and transparency, today, is a highly emotive topic all around the world. Anti-avoidance rules introduced by several countries are already reflecting this trend. For instance, the General Anti-Avoidance Rules in India, which are stated to come into force next year, will enable the tax administrators to re-characterise transactions that amount to an abuse or misuse of the law.
These, are of course highly subjective criteria and could make it hard for taxpayers to have clarity on what is the permissible threshold in tax matters. While certainty is most desirable, in reality, it may prove difficult to materialise, and both taxpayers and the government may have to reconcile to life in an imperfect tax world.
The author are partners, Dhruva Advisors LLP. Views are personal