KPMG International (KPMGI) is pleased to respond to the OECD Consultation on “What is Driving Tax Morale”.

We consider this a very important issue and commend the OECD for focusing on it.

In particular we believe that increasing tax morale could assist in:

  1. Making the tax system more efficient by improving voluntary compliance and so reducing the cost of collection for tax authorities;
  2. Reducing costs to taxpayers where demonstrated higher tax morale leads to greater trust and so fewer tax audits and quicker resolution of uncertain positions;
  3. Increasing tax revenues which can be used either for investment in social infrastructure or to reduce rates or other taxes according to the country’s needs;
  4. Allowing for a more open and better quality dialogue between taxpayers and revenue authorities and government which should lead to improved tax legislation;
  5. Potentially, allowing for simplification of tax laws given that complexity is sometimes driven by the need for anti-avoidance rules which can then create anomalies and uncertainty and can drive more tax planning.

We agree with the analysis set out in the document and the policy recommendations which are made. We have set out some thoughts below on further areas or issues, which the OECD may wish to consider in developing this work. In particular we recommend carrying out further research to understand in more depth:

  1. The relationship between trust between taxpayers and tax authorities and the level of tax morale;
  2. The relationship between trust in institutions as a whole and tax morale – perhaps as part of the OECD TrustLab project;
  3. As regards individuals: the reasons for the correlation between the various socio-economic and institutional factors identified and tax morale;
  4. As regards businesses: the criteria which are used in deciding upon a company’s approach to tax and the boundaries it sets in its tax strategy.

What is driving tax morale?

Page 10 of the Consultation refers to the World Bank’s forthcoming theory of change for tax compliance, which puts trust as a central issue. We agree with this analysis. For example, in March 2019 we held a round table in Cape Town3 looking at whether the current global corporation tax system was fit for purpose in Africa. This session was attended by a number of African tax authorities, companies from the region, professionals and academics. The key theme which emerged was trust. On the one hand, corporate delegates noted a lack of expertise in some tax authorities and considered they compensated by aggressive tactics. They noted disputes could drag out for over 10 years, and one case was cited where an inspector had raised an assessment for millions, but when challenged, immediately reduced it to thousands. On the other hand, tax authority delegates noted cases where companies refused to provide information, or claimed to be taxed on a (low) deemed profit. Both parties felt the other held all the power: the companies believed the tax authorities and governments could ultimately act with impunity, whereas the tax authorities felt companies controlled all the information. It was clear that an increase in trust would pave the way for a more open dialogue; one in which information could be shared as companies would be less defensive and tax authorities would not feel the need to impose arbitrary assessments. Trust, therefore, needs to be reciprocal.

However, we consider that – while very important - trust is not the only element in tax morale. Page 9 of the Consultation, and note 1, defines tax morale as “the intrinsic emphasis added motivation to pay tax.” In other words it is something internal to the taxpayer – whether an individual or a company. This means a taxpayer could lack trust in the capacity or even the integrity of a tax authority or a tax regime but still have an intrinsic motivation to pay what they consider to be the right amount of tax according to the law. We consider the OECD could usefully carry out further research in this area. As set out below, this is particularly relevant to the corporate sector.

Figure 1.2 on page 14 which shows countries with a higher tax to GDP ratio have a higher tax morale is very interesting. It would be useful to understand better what is driving that dynamic and also the impact of actual tax rates on both individuals’ and companies’ tax morale.

Another area which could be usefully studied is the impact on morale of law which taxpayers think is capricious – for example because it treats taxpayers in objectively the same situation differently or creates uneconomic results. This is an issue of how tax policy is perceived rather than tax certainty or how the law is applied.

Individuals and tax policy

We agree with the analysis set out under the section on individuals, specifically that identifying trends between socio-economic and institutional factors and tax morale may assist in the design and administration of tax policy.

Our main comments reinforce the OECD’s recognition that more detailed country-level research is required to implement truly tailor made approaches. Whilst understanding the correlation between socio-economic and institutional factors is useful, in order for tax administrations to take effective action, there needs to be a stronger understanding of why such a correlation exists.

To use one socio-economic factor as an example, across the global analysis and the regional analysis for Latin America and Asia, there was a consistent correlation between age and tax morale, being that older individuals are likely to have higher tax morale. One of the report’s findings is that lower tax morale among young people suggests a role for taxpayer education programs to be integrated into school curricula. This recommendation appears to be based on the assumption that younger people have lower tax morale because they do not understand the fiscal contract as well as their older compatriots. Whilst this may be the case, it would be beneficial for research to be undertaken at the country level to see what causes younger people to have lower tax morale. Whilst lack of education may be a key component, it would be interesting to see whether wider demographic and economic trends (for example ageing populations and generational wealth inequality) have affected younger people’s interpretation of the fiscal contract, a change which education alone would not be able to counteract. Undertaking further, deeper, research at a country level on what causes the correlations between the factors and tax morale should allow tax authorities to effectively health-check the fiscal contract in their jurisdiction, which should in turn allow them to deploy more tailored and bespoke approaches to maximizing tax morale.

We agree with the proposal on page 27 to consider further the links between tax morale and gender.

We also recommend that the relationship between trust in institutions as a whole and tax morale could be researched in more detail – perhaps as part of the OECD TrustLab project referred to on page 26 of the Consultation.

Overall, we recommend that the surveys continue to be repeated over time so that at a global, regional and country level, the wider social, economic and political trends (for example, the political engagement of different sectors of society) can be analyzed to see how they affect tax morale over time.

Businesses and tax certainty

We agree with the analysis set out under the section on businesses and that looking at factors providing tax certainty is a good proxy for tax morale. We have two specific drafting points. However our main recommendation relates to identifying what creates tax morale within a company.

What does tax morale in companies consist of? While what drives perceptions of tax certainty is certainly a good proxy, it is not identical to tax morale. As indicated in the Consultation, where there are concerns about tax certainty in a country (for example unclear legislation, inconsistent application, lack of expertise in tax authorities) it is likely that companies will respond by, for example, reducing investment or requiring a higher return on investment made. This is a rational response to uncertainty. However, there is not a direct read across to tax morale. Once a company has decided to make an investment - even if it requires a higher return on capital than for an investment in a more benign environment – it might nevertheless decide to engage with the tax authorities and the tax system on a voluntary, responsible basis. The key question is, therefore, what drives such an intrinsic motivation in a company?

Some companies have published their tax strategies or have principles setting out their attitude to tax management. We note that on page 39 there is reference to the B Team4 and to BIAC5 tax principles. The BIAC principles state: “Tax is a business expense which needs to be managed, like any other, and therefore businesses may legitimatelyrespond to tax incentives and statutory alternatives offered by governments emphasis added.” The B Team Principles state: “We will not undertake transactions whose sole purpose is to create a tax benefit which is in excess of a reasonable interpretation of relevant tax rules emphasis added.” Clearly different parties could understand the meaning of “legitimately” and “reasonable interpretation” differently. But it is clear that companies (or many companies) do in practice have an approach to deciding what tax planning is and is not acceptable.

There will be many factors that will weigh differently for different companies and in different jurisdictions. These will include: consideration of the impact of adverse publicity if they are thought by the public to be engaging in aggressive tax planning; the risk of damaging the relationship with the tax authority; the cost and management time, which can be tied up in defending tax planning; the sophistication of anti-avoidance legislation and tax penalties. Some companies may also have pressure from investors to adopt a certain approach on tax.

There is, however, often another factor which is harder to quantify. For example, The B Team document “A New Bar for Responsible Tax” says that “Tax is vital to fund public services and infrastructure that are critical to societies.” This indicates an approach to tax management which is truly “intrinsic” and goes beyond calculating the risk of adverse publicity or doing a cost benefit analysis - more “extrinsic” factors. It could be termed an ethical or moral stance but whatever the definition there does not appear to be a common set of terminology for discussing how companies set this bar and we consider it would be useful for the OECD to engage directly with companies to understand better how they make tax decisions. Part of such discussion could also involve trying to identify to what extent tax morale in companies is mainly driven by key personnel, such as the finance director and head of tax – and is linked to their own personal tax morale -, and to what extent it flows from a wider corporate ethos.

Drafting points

One point we think needs clarifying is the statement on page 29 that: “MNEs may seek incentives to compensate for lack of trust in parts of the tax system. For MNEs and other large firms, the possibility of informality is remote. Nevertheless, as a result of having more political and economic power, MNEs have other options, including the possibility to secure tax exemptions.”

We agree that (generally speaking) multinationals do not engage in tax evasion (informality) and note the research referred to in 2.1 showing that domestic firms evade more than foreign and state owned firms. However juxtaposing evasion/informality with seeking tax exemption could appear to be equating the two and we think there is a need for clarity here. There are cases – probably in the past more than the present – of multinationals demanding excessive tax exemptions in return for making investments. In terms of tax morale, such behavior by an MNE could perhaps be compared to a small domestic firm simply under reporting. However in many cases MNEs ask for exemptions or specific agreements precisely because the law is unclear and the investing company requires certainty before deciding upon making an investment. These are cases of MNEs trying to clarify the law, not circumvent it.

In other cases unproductive exemptions may be offered by the investee country. These may be a result of misplaced harmful tax competition between developing countries, and it is an interesting question whether or not MNEs with a high tax morale should or do refuse to accept them even though they are offered to and accepted by competitors. But using such exemptions should not be equated with companies acting in the formal sector, which simply evade the tax which is due.

Another point we think would be worth clarifying is figure 2.3 on page 33, which looks at the frequency with which tax uncertainty has seriously affected business decisions. The table shows this occurs more in developing countries. However, we assume this is not showing that companies change their business decisions where there is uncertainty more often in developing than developed countries, but that there is more uncertainty in developing countries (generally) which means business decisions are affected more often.

If you would like to discuss any of the above further, please do not hesitate to contact Chris Morgan, Head of Global Tax Policy, at