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Is a company morally wrong to actively manage its taxes?

Appearing before the UK Public Accounts Committee, Google V-P for Northern Europe stated, "We pay all the tax you require us to pay", adding, "The company's tax arrangements are not just a personal choice, but a responsibility to shareholders to keep costs down". British MP, Margaret Hodge replied, "We are not accusing you of being illegal; we're accusing you of being immoral".

Margaret Hodge, UK Labour MP for Barking, is Chair of the PAC that is holding an enquiry into perfectly legal tax avoidance. Her public condemnation of companies which she considers pay less tax than they ought, reveals her crusade against high profile multinationals. "HMRC should publically name and shame those who promote or use tax avoidance schemes", she opines.

Prime Minister David Cameron has also launched into the assault on multinationals. In an overt reference to one multinational, he stated that "businesses that thought that they could dodge taxes needed to 'wake up and smell the coffee'". Further, he stated that, "foreign multinational companies who avoid paying large corporation tax bills in the UK 'lack moral scruples'”. Social media is full of this sentiment.

This 'welfarism' approach to raising tax compliance has been fuelled by politicians, social media, and disgruntled members of the public. This storm is prominent in the UK and Europe, in countries that are still struggling with massive austerity, and where governments are hunting high and low for ways to increase the tax take.

This populist tide does not seem to fully factor in two important and fundamental problems in the UK. One is the absence of a General Anti-Avoidance Rule (‘GAAR’) which typically acts as a backstop to taxing legislation. The other, which is a wider problem, is that UK and many other countries’ taxing laws adopt a conventional approach in the sense of levying tax against a "permanent establishment" within their borders, and this struggles with global companies that operate in a 'virtual' space. Traditional high street retailers have found ammunition in this debate for their consumer war against on line e-tailers. This taxing conundrum is widespread and is heavily occupying country members of the OECD as they grapple with these difficult issues. The OECD has stepped up its work in related areas with the "BEPS" Report on Tax "Base Erosion and Profit Shifting". This focuses on global developments that have implications for corporate and international tax matters. The OECD intends to develop a comprehensive action plan by June of this year.

Significant risk threatens should hasty actions occur off the back of poorly researched and populist criticism. The UK public debate needs a good dose of caution. The OECD BEPS work is seeking deliverables within seemingly impossible timeframes.

Some semblance of balance to this debate is provided by EY's very own Mark Otty, Managing Partner for EMEA, who has publically stated, "the only way to resolve this issue is through a legal code. I don't see how you can have any assessment on payments of tax except other than what is in the statute. The simplest solution is to stop banging on about morality and change the law. It comes back to the law". He warns; "this morality test - it becomes very difficult if you don't know what the rules are or who the arbiter is".

This viewpoint is founded on the essential fact that 'morality' is subjective, and can vary widely across different individuals, and also with time. A non-tax example involves New Zealanders' views on whether a government is morally wrong in selling down state owned assets?

So what of this ‘morality’ tax debate in the New Zealand context?

Going back to the 2009 bank tax cases, Justice Wild, in his High Court judgment against the BNZ, made comment that the impugned transactions had operated at a substantial cost to the New Zealand economy and the New Zealand tax base. He noted, “The unchallenged evidence of Professor Evans was that the transactions had a total cost to New Zealand society of NZ$335.6 million, much of that from the deadweight cost of moneys transferred out of New Zealand, and permanently lost to the New Zealand economy”.

However, this consideration was deemed unhelpful by Justice Rhys Harrison in the following tax avoidance case against Westpac Bank. The Judge said, "Evidence was led from Professor Evans about the economic implications and social cost of the transactions for New Zealand society.....  None of these factors assists in determining whether a taxpayer’s use of deductibility provisions in a particular transaction is evidence of tax avoidance".

At a ministerial level, Revenue Minister Peter Dunne has been reasonably consistent in his public statements that large multinationals need to pay their ‘fair share of tax’. While Mr Dunne echoes the sentiments in the UK of late, the all important difference is that the Ministers call for ‘fair share of tax’ have typically accompanied proposed changes of tax law, rather than out of an emotive vacuum. The contrast to the UK, and Europe, is exemplified in changes to New Zealand's thin capitalisation regime, where Mr Dunne said, "The tax laws relating to foreign investment are a delicate balancing act. We want to ensure that a fair amount of tax is paid, but do not want to discourage investment.”

Further contrast may be found on a topic that would certainly have whipped up a storm in the UK with Revenue Minister Peter Dunne publically stating last year that New Zealand isn't a tax haven for wealthy foreigners by using trusts here. He said, “I think the term 'tax haven' is a gross exaggeration because it implies illegality, it implies evasion, rather than legitimate tax avoidance.” PM John Key said Mr Dunne had got it right.

We have in excess of 3,500 sections of tax law and administration. These have evolved over many years, as has the accompanying jurisprudence. Tax is a matter of companies complying with rules debated and promulgated by Parliament. It is not a matter of what is perceived to be ‘fair’, or morally right.

While this ‘legalistic’ approach is supported as the only sustainable model, companies should not underestimate how tax morality in some guise or other does exist as an undercurrent to Governmental and tax authority actions. On this point, it is worth noting that the IRD are overtly linking tax compliance with a social agenda (refer their 2012 Tax Compliance Focus), with references that our taxes serve the needs of our communities, provide hospitals, healthcare, and good-quality education.

Companies do need to be cautious and very prepared given the significant increase in media and public debating of all matters ‘tax’, particularly if they operate in Europe, but also closer to home here where this is an increasing trend. In addition, there are developments in financial reporting that require greater transparency, including developments in reporting ‘uncertain tax positions’.  That said, it is hoped that New Zealand will adhere to its more considered approach in following due process and the law.

Andy Archer
Partner – Tax (Auckland)
Tel: +64 9 300 8128

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