Fairness in Taxation

Taxation is essential to the functioning of a society—indeed, it is a strong indication that “civilization” actually exists. Consequently, the manner in which tax is levied and administered has always been a vitally important question for society as a whole and this is truer today than ever before.

Governments are increasingly being held to account for their spending yet they are finding it difficult to maintain their tax base in the face of a dematerializing economy and increasingly mobile and sophisticated taxpayers.  Domestic and international rules on the taxation of cross-border profits have not kept pace with the fundamental changes brought about by globalization and new business practices in a digital environment where intangible assets and mobile capital become ever more important. Public perceptions and expectations as well as political dynamics have also changed drastically in a very short timeframe. At the same time, there is an intensive debate in the public about where the line between what is acceptable tax planning and what counts as aggressive and no longer socially acceptable tax avoidance should be drawn.  As a result there is now a commitment to international cooperation between governments to a degree never seen before in the area of taxation. The public debate on compliance and fairness in taxation has become rancorous in many countries, carrying the risk of reputational damage for tax payers (and the professionals advising them) even when they comply with the law.

This is an extremely complex subject and I believe that it should not be left to taxation authorities, taxpayers, their professional advisors and the public to decide what constitutes aggressive and undesirable tax avoidance/planning. It requires the acceptance by all relevant parties (legislators, taxation authorities, taxpayers and the profession) of their duties with a concomitant change in attitude to determine what constitutes responsible tax planning.

I believe that this change must start with the legislators as they are in control of the matter.  It should not be beyond the ingenuity of mankind to construct an integrated and fair taxation system, clear in its intention, logical and easy to understand.  If legislators do not wish their legislation to be misinterpreted or misused it must be drafted to clarify the intent and remove the opportunity for misinterpretation.

They also need to ensure that tax law applies equally to all tax payers. Governments lose credibility with their citizens, with a consequent reduction in tax morale, if the perception is that some sectors of society are above the law or that certain taxes are “optional” if one has sufficient resources and good advisors.

Moving on to taxation authorities, it is their duty to collect the tax intended by the legislation—no more, no less. If the amount of tax due is unclear from the law, then the law should be changed. Leaving it to be decided in court always creates uncertainty. 

If taxation authorities want all taxpayers to abide by the legislation then all taxpayers should be, and be seen to be, equally targeted by administrative measures. Crucially, taxation authorities must recognize that the vast majority of taxpayers and their advisors are honest and have a genuine desire to fulfil their obligations. However, taxation systems are complex, mistakes will occur and tax authorities should not automatically assume that every failure to comply is deliberate and fraudulent.

Regarding taxpayers, their duty is to pay the amount of tax that is due according to the law—nothing more and nothing less. In order to do this they need to be able to correctly determine the amount of tax, which brings us back to the point regarding clear tax legislation.

However, they also need to appreciate that tax evasion and fraud are not victimless crimes—if they are not paying their share they are robbing other taxpayers who have to take up the slack.

Tax avoidance is more complex, especially the vexed question of “aggressive” tax planning or avoidance. While this is not illegal, there is an increasing groundswell of opinion that it can be inappropriate, especially when based around “artificial” arrangements that defeat the purpose of the legislation. Like it or not, more and more people across constituencies see a moral dimension in taxation. 

Taxpayers rarely enter into such arrangements without consulting one of the several professions competing in the field of tax advice. Qualified professional accountants are prime providers of tax advice and the only one to abide by a global Code of Ethics.

It is often said by the accountancy profession that is in a difficult position—sandwiched between its duty to clients, who demand to pay the least tax possible (a duty confirmed by many Courts of Law), and taxation authorities expecting them to act as unpaid tax inspectors. Taxpayers have become increasingly litigious where they feel that their accountant has failed to provide them with appropriate advice, including advice on what could be perceived by others as aggressive tax avoidance schemes.

However, the profession should not feel sorry for itself. It plays a vital societal role for the smooth running of the tax systems in most countries, not least due to their complexity. The profession also provides invaluable assistance to taxation authorities in managing tax compliance and collection and in assisting policy makers in both determining the costs of their programs and in the creation of new tax legislation.

We should not waste any time bemoaning the present but rather concentrate our attention on doing the right thing and on the profession’s role in the future.

The profession does have a duty of care to their clients to act in their best interest. However, “best interest” should not solely to be measured in financial terms but also in terms of social impact—in practice, managing risk. This is not an abstract concept but rather the very real risk that, in a world of near instantaneous communication, reputational damage can lead to financial damage. One can debate endlessly whether “fairness” is a concept that should play a role in taxation—the current reality is that perceived “fairness” is playing a role in the future of taxation.  

The profession is proud of its ethical principles and in acting in the public interest. We seek to stand apart from other professions that do not meet our self-imposed high standards. We need to stand by these principles, and be seen to be doing so by the world in general.

Consequently, the profession should lead the debate as to what is acceptable tax planning and what constitutes unacceptable tax avoidance. It needs to accept that being seen to participate in or promote “aggressive” tax planning could harm its reputation in the long term and possibly even lead to its licence to practice being revoked.  Finally, the profession must be forthright in its condemnation of tax evasion so that the general public is left in no doubt that tax evasion is not acceptable to the profession.

Friedrich Roedler is Chair of the Fédération des Experts Comptables Européens (FEE) Tax Policy Group. He will be chairing Promoting Fairness and Growth through Global Cooperation on Taxation (Session 2.8) at the World Congress of Accountants 2014  this November 12, in Rome, Italy. He will be joined by Bill Dodwell, Head of Tax Policy, Deloitte, UK; Stefano Marchese,  Member, International Ethics Standards Board for Accountants, Italy; Grace Perez-Navarro, Deputy Director, Centre for Tax Policy and Administration, Organization for Economic Co-operation and Development, France; and Rob Whiteman, Chief Executive, Chartered Institute of Public Finance and Accountancy, UK.