Is taxation ethical and fair?
When is it ethical to levy a tax and what are the ethics of seeking to minimise, let alone trying to avoid, your tax obligations?
- How can we determine what is a fair tax and who decides?
- How you raise a tax and the purpose of raising a tax should align in order for the public to perceive the levy as being for the common good.
- The general consensus is that revenue raised through taxation isn't spent wisely by government.
By Tony Malkovic. Illustration by Tanya Cooper.
There aren’t many people who don’t try to minimise their personal or corporate tax. And there are some who push that ethical line between minimisation and avoidance. More subtle, perhaps, is the issue of trying to determine whether it’s ethical to impose a tax in the first place.
It’s a big question. But not a modern one. The same sort of dilemma cropped up in the Bible, when people queried whether Jews should have to pay tax imposed by a Roman Caesar.
In what is possibly one of the earliest recorded instances of tax guidance, the gospels quoted Jesus deftly answering: “Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s."
Fair enough. But how can we determine what is a fair tax, and who decides?
Tax is war
According to Dr Simon Longstaff AO, politicians and tax authorities should think in terms of waging war – at least, in the way they justify their intentions and carry out tax policy.
He says in military ethics, there are two key principles: jus ad bellum, the justification to go to war; and jus in bello, the ethical issues around how war should be fought.
In that analogy, you could perhaps think of politicians as the generals weighing up whether to embark on a campaign, and tax officers the troops on the ground.
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“I think that’s an interesting way to think about this,” says Longstaff, the head of The Ethics Centre, which works with financial organisations to put ethical decision making at the heart of what they do.
"You might think there are some just and proper purposes for a tax being raised, but the means of raising it might be wrong. Equally, it might be the means you’re using to raise a tax are perfectly reasonable but the purposes for which you’re raising the taxes are wrong.
“So you need to separate these two things if you’re a taxing authority. Your legitimacy lies in your ability to satisfy ethical criteria in both camps concurrently. It must be raised for an ethical purpose and raised in an ethical way.
“Taxes, after all, are dues that we pay for the privileges of membership in an organised society.”
"Once you start to think about it in those terms you then begin to have a more nuanced, sensible conversation about tax where you can break it down into those components and not get too caught up when those two different issues become muddied as sometimes they do."
Good point. Because when the generals – better make that politicians – muddy things, things can turn bloody when people refuse to accept the legitimacy of a tax. The Eureka Rebellion in the 1850s Victorian goldfields and the Boston Tea Party in the US are just two of the clashes fought over the concept of “no taxation without representation”.
Fast forward to 1990 and there was the rioting sparked by Margaret Thatcher’s so-called poll tax which ultimately led to her stepping down as PM.
In Australia, you only have mention the words “mining tax” to recall the almighty kerfuffle a few years ago that led to PM Kevin Rudd being deposed by his own party. But even when a tax is considered legitimate there remain curly ethical questions to consider. Nearly everyone concedes they should pay tax.
“Taxes, after all, are dues that we pay for the privileges of membership in an organised society,” is how US President Franklin D Roosevelt put it.
The trouble is, those “dues” can be pretty pricey. And many people believe in a “less-is-more” approach. Which is basically what a tetchy Kerry Packer told a parliamentary inquiry in 1991.
“Of course, I am minimising my tax,” the late Australian billionaire thundered at nervous MPs. “And if anybody in this country doesn’t minimise their tax, they want their heads read. Because as a government, I can tell you that you’re not spending it so well that we should be donating extra."
Longstaff can see some logic in such an approach.
“There are quite a few people who are quite willing to pay tax in principle but they don’t believe the government is willing to spend their tax on good purposes,” he says. “So that is their source of objection. But it they felt that it was really well spent, then their objection basically disappeared.”
Tax ethics in the spotlight
Peter Vial CA says there are some good reasons why the ethics of taxation are again in the spotlight.Vial is Chartered Accountants ANZ’s tax leader in New Zealand, responsible for taxation policy and advocacy work with governments and regulatory bodies.
“We’re obviously having this debate because tax is critical for governments and communities to enjoy the services and support governments can provide,” he says.
Like Longstaff, he says equality is the key to a good tax.
“The main thing is a tax needs to be fair – and it needs to be seen to be fair. There needs to be a perception of its fairness,” Vial says. “Uncertainty undermines fairness and the perception of fairness.”
The problem is that “fairness”, like beauty, can be in the eye of the beholder. And things get complicated when you have the watchful eyes and competing agendas of government, business, the public and business advisors – including accountants.
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Good tax equals public good
Good tax = public good
There can be a good tax, bad tax divide. “The kind of general ethical criteria you’d come to is that it (a tax) must be in order to secure a public good,” says The Ethics Centre head Dr Simon Longstaff.
“If it turns out to be the case they were going to use taxes for funnelling money into marginal electorates, where the only good was securing the votes of people to maintain their hold on power, that would be a partial and private interest (of the political party) rather than a public good.”
So what’s changed, why is the spotlight on tax compliance and collection?
Vial says it’s simple: the way we do business has changed, largely thanks to globalisation and the internet.
To get things back in kilter, we now have the OECD and G20 nations working to prevent BEPS – or base erosion and profit shifting – where corporate profits “disappear” or are shifted to low or no tax environments.
Vial says the anti-BEPS measures being introduced are an international game changer, with the onus on governments to get it right.
“This is an issue that will now affect everyone around the world. The outcome of BEPS will be law changes at the unilateral and multilateral level and it will change where businesses pay their tax.”
With the global economy, many transactions now take place not in a country but via the internet. Different countries apply different rules, leading to an asymmetry.
“If those give rise to different outcomes and advantageous tax outcomes, then that is not illegal or tax avoidance [to benefit from those outcomes],” he says. “What the BEPS project is about, and what the OECD and G20 are saying is that we want countries to introduce some new rules that take into account the tax treatment or laws in another country.
"So in NZ, if these rules were introduced, then a NZ company would have to look at the tax treatment in Australia and then make an adjustment. Or the Australian business would have to look at the law in NZ and make an adjustment to bring the Australian treatment in line with the NZ treatment.
“It’s quite a radical shift in the way countries tax. The critical thing is that governments make their law as clear and transparent, and certain as possible, so there aren’t ambiguities or inconsistencies.”
For the anti-BEPS measures to work, we also need a radical shift in the way we think about tax and trade.
“Countries have been trading with each other for hundreds of years but in the 1920s rules were introduced to ensure businesses can’t be taxed twice on the same income,” says Vial.
“Those rules were introduced to avoid double taxation. What the OECD and G20 are now doing is trying to introduce rules to prevent double non-taxation, that is profits not being taxed anywhere.”
Some 80 BEPS countries met in Kyoto in June last year to bed down an approach, saying the meeting marked a new era in international tax cooperation by establishing a level playing field worldwide.
"Rather than businesses and individuals struggling to work out what is a fair share of the tax, they have to focus on complying with the law."
A lot is at stake. The OECD and G20 estimate that revenue losses from BEPS might be as much as US$240b a year – or up to 10% of global corporate income tax revenues.
Vial says the anti-BEPS initiative has had a rapid gestation, about five years compared to the sometimes glacial speed of working out global trade deals.
“The UK introduced a diverted profits tax (DPT) a couple of years ago,” Vial says. “Australia has proposed a diverted profits tax and introduced a multi-lateral anti-avoidance law. So Australia and the UK are ahead of the pack in that respect.”
Other countries, including New Zealand, are addressing parts of the OECD plan now and are looking at things such as interest limitations and hybrid entities and instruments.
The spirit or the letter?
Vial says a critical aspect of the debate on the morality of tax minimisation is that different rules for different countries doesn’t necessarily equate to tax avoidance.
“Almost all businesses will be ensuring that they comply with the tax law in each country in which they operate,” he says.
Which is where business advisors and accountants come in.Vial says chartered accountants have a special role to play by ensuring their clients meet their obligations.
“But are we talking here about compliance with what we would call the black letter of the law or the spirit of the law? This is where we get into more challenging territory.
“Where law is clear, transparent and certain then obviously it’s easy for business to comply. When you get into the ‘spirit of the law’ then it’s very hard to pin down.
“I come back to the onus being on governments to ensure that the black letter of the law is as clear as possible, and by extension that the policy intent of the law is also clear."
"Also, who is to say what is a fair share of the tax?” asks Vial. “Businesses and individuals must meet their legal obligations. But a fair share of the tax, is that some kind of suggestion you should pay more than your legal obligation, that you should be making a donation of additional tax?
“To me, that’s not right. It’s uncertain, unpredictable, very subjective and inconsistent with this need for the law to be fair and to be seen to be fair. I think rather than businesses and individuals struggling to work out what is a fair share of the tax, they have to focus on complying with the law and being cooperative with revenue authorities."
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Advisors, he says, must focus on the law. Chartered accountants must also and meet their obligations under the profession’s Code of Ethics and professional standards requirements.There’s also work done to help shape better tax policy.
“At CA ANZ, we’re working with the government all the time to ensure the tax rules are drafted as best they can be and are as certain as possible,” Vial says.
“So we’re a big stakeholder in the tax system, through the professional body in both Australia and New Zealand.”
BEPS Down Under
New Zealand Revenue Minister Judith Collins in March released proposals for new measures to reduce tax avoidance by multinationals. Company tax is 15% of New Zealand’s total NZ$63b tax base.
In Australia, a Senate inquiry into tax avoidance and aggressive minimisation focused on international companies operating in Australia. Executives of Microsoft, Apple, Google and the like were hauled before the inquiry to explain how they could amass billions of dollars in sales, yet pay relatively little tax.
The ATO is keen to show who pays, and who doesn’t pay, tax. It now publishes a list of 1,900 of Australia’s top public and foreign companies operating in Australia and discloses how much corporate tax they pay.
The list points out that more than 650 of the firms – that is, more than a third of the country’s top companies – pay zero tax in Australia, despite many of them recording many billions of dollars in sales.
The ATO stresses that no tax paid does not necessarily mean tax avoidance. But the court of public opinion and ordinary taxpayers – who pay a top income tax rate of 45% in Australia and 33% in New Zealand – might not see it that way.
Tony Malkovic is an award-winning freelance writer. This article first appeared in the April/May 2017 issue of Acuity Magazine and can be read online in full for free here.