‘‘An Approach based on transparency, objectivity, ethics and sustainable taxation for the common good of all stakeholders in the society.’’
The ‘‘Responsible Tax’’ approach has become a highly debated issue mainly after the discussions of ‘‘who evades tax, who avoids from tax, and who duly pays its taxes,’’ a time which corresponds to the end of the economic crisis of 2009 particularly in developed countries. The concept of tax ethics has become an issue that is questioned more and more, particularly as a result of the budget deficits increasing after the global financial crisis, the international trade becoming widespread, the opportunity provided by digital economy to multinational enterprises for developing different structures, and the corporate social responsibility approach gaining prevalence.
An important role falls on the part of tax advisors to give a direction to these discussions by taking the common good of the society into consideration. For this purpose, KPMG U.K. has set up a working group under the auspices of the U.K.-based think tank named ‘‘Common Vision’’ in mid-2014, and started to lead work aimed at defining how ‘‘responsible tax’’ conduct serving for the common good of the society should be. These works aim to re-discover what tax means under the changing conditions around the world and to set forth the purpose of responsible taxation. Jane McCormick,Global Head of Tax, KPMG International, explained at that time the ‘‘Responsible Tax’’ approach as follows:
‘‘Tax needs to be evaluated from the viewpoint of the whole society. It is quite difficult to only focus on a specific tax regulation, and understand its impact on the world in general. However, when we look at the issue from a wider perspective, we can see how important a healthy functioning tax system is for the common good of humanity. When, in the past, tax advisors came together, the issues they discussed were only limited with technical evaluations among experts. This has thoroughly changed. For me, the role of advisors in respect of the notion of responsible taxation is to ensure that the boundary between the individual and the state is drawn in the right place.
We dedicate most of our time to ensure that the taxpayers comply with tax legislation when they pay their taxes. However, while doing this, it is also important to protect their interests. Because sometimes tax regulations are not arranged in a way that provides benefit for the economy. That is what I mean with ‘drawing the boundary in the right place.’’
As tax professionals, we have both individual and corporate responsibilities towards the society in which we live. Therefore, we characterize the service we provide as Responsible Tax Advice and as members of the profession, we characterize ourselves as responsible tax advisors. What we understand from responsible tax is taxation that is transparent, objective, ethical and reliable and that is based upon the principles sustainability, for the common good of all stakeholders in the society. In practice, we believe that the tax advisor’s role in this approach is to position him/herself in a perfect balance between the taxpayer, the state and society (other stakeholders). In other words, we understand a positioning that is neither in favor of the taxpayer (real person or legal entity) nor in favor of the state, and to the contrary, a positioning that is for the common good of the society.
It would be useful to repeat a fact which we all know: states cannot fulfil their basic constitutional functions such as security, health and education without collecting tax. The right of the state to collect tax is a requirement of the need to secure the rights and freedoms of citizens. As responsible tax advisors, we help the tax payment obligation to be fulfilled in compliance with law by setting up a balance among the duties of persons to pay taxes and their personal rights. In other words, we work for the purpose of ensuring compliance with tax regulations. This function we have assumed also contributes to the State’s effort to set up a more effective taxation system.
Therefore, we advocate setting up of a transparent and open relationship among the trio of tax administration, taxpayers and tax advisors. This principle forms the basis of the ‘‘Responsible Tax’’ initiative.
We aspire to build trust for people, bring transparency for the society and make the economy stronger with our activities. As responsible tax advisors, our purpose is to build trust in the society, and to contribute to changes required for a better tax system in order to be reliable for all stakeholders.
I. Companies’ Position Against Increasing Awareness of Tax Ethics
Due to the trade volume that companies reach and the widening impact of social media, the risks that may occur as a result of non-compliance with tax laws has become a very important factor in determining a company’s value. For this reason, companies are required to develop an efficient communication strategy on their tax policies. Otherwise, if the tax positions of individuals and entities become a subject of public discussion, and if this discussion is based upon inaccurate information, this could cause a serious reputational risk. Similar to the effort made by companies to explain to society that they are not involved in any unethical conduct in terms of human rights, that they are committed to ethical rules, they must make the same effort to explain their commitment to ethical rules in their tax payment conduct. It is very difficult to build corporate reputation but it is very easy to lose at the same time. Companies should develop an efficient communication plan regarding tax strategy and tax risk management and the commercial grounds of their organizational structures only through such a method. Publishing the companies’ consolidated effective tax burden in their activity reports is one of the efficient communication methods that can be adopted.
II. A Look into Transparency from the View of State
There is full political support as we can see very clearly in the G-20’s agenda. The G-20 is a formation that brings together 19 developed and developing countries and the EU, and that represents 85 percent of the total Gross Domestic Product of the world. It covers countries like Turkey, Brazil, China as well as the EU and the U.S. It can clearly be seen that there is political will to make making the responsible taxation approach more widespread, when looking at actions to combat Base Erosion and Profit Shifting (‘‘BEPS’’). The G-20 put forth its political will with BEPS, and the actions that must be taken within this scope were first set out in 2013 and shared with the public on October 5, 2015. The purpose of the actions to combat BEPS is, in summary, to ensure that the obtained profit is taxed in the country where added value is created, and where the economic activity producing profit is performed. Following the OECD, the European Parliament’s Committee on Economic and Monetary Affairs (‘‘ECON’’), has also published, on March 16, 2016, a draft directive for certain rules against tax avoidance practices directly influencing the operation of the internal market, based upon the proposals of the European Commission.
It can be seen that these works particularly focus on the principle of transparency. Transparency is a must for the state, for the taxpayers and for public interest. However, the meaning of ‘‘transparency’’ is changing over time. The issues that were formerly evaluated within the scope of ‘‘tax privacy’’ have now started to fall within the scope of information exchange. For example, the ruling that the taxpayers obtain in another country within the scope of the Action Plan for combatting BEPS needs to be shared with the authority in the country where they have taxpayer status. Consequently, the concept of transparency has gained a cross-border meaning. Another example for the repercussions of this is the initiative for keeping beneficiaries’ data in a common register. G-5 Ministers of Finance wrote a letter to their G-20 counterparts, and made an attempt for a common register to be kept for answering the question of ‘‘who is the real beneficiary’’ in companies, foundations and similar structures, for the cases of tax evasion.
Similarly, the concept of privacy in banking arrangements has also started to change. As a requirement of the U.S. Foreign Account Tax Compliance Act (‘‘FATCA’’), bank data can be shared.
As a result of globalization, there have been very important changes in sharing of personal and commercial data. Therefore, country-by-country reporting implementation issues were agreed within the scope of the automatic information exchange, transfer pricing documentation involved within the BEPS initiative, prepared based on the decision of the G-20 and under the leadership of the OECD. The scope of information collected by tax administrations is expanding as a result of local and international regulations. While all these developments are being experienced, personal privacy and confidentiality of trade secrets are also protected under tax laws. Personal privacy should not be infringed. In particular, at the time of setting up a legal infrastructure for information exchange at global level, arrangements should also be made with regard to information security.
III. Tax as an Ethical Problem
An intensive debate is ongoing at international level on this subject. Certain sides of the debate express that since tax is such an important matter it cannot be left to the conduct of individuals, it requires exercise of public force, and it is meaningless to use the concepts of ethics and transparency together.
On the other hand, the answer to the question ‘‘is tax an ethical problem?’’ is of course ‘‘Yes.’’ However, the basis of the tax payment obligation must be implementation of tax laws, and the perception of ethically appropriate tax should not surpass the perception of legality in taxation. Tax obligation is principally dependent on tax policies of governments and tax planning preferences of taxpayers, and the impact of these choices on all stakeholders and the society should be taken into consideration from an ethical perspective.
The state which collects tax by exercising public force has the responsibility to set up a just and balanced fiscal policy for the tax payment obligation. Therefore, the tax policies of governments must be set up through a consensus of all stakeholders. This is a requirement of the principle of being a social state because taxes are not voluntary like donations and aids. The person who makes a donation can feel himself good morally: however, legality is fundamental in taxation. On the other hand, if the laws do not offer a fair tax system, society would start to see it as less inconvenient to tend towards tax avoidance or aggressive tax planning by forcing moral limits.
IV. The Role of a Responsible Tax Advisor
While the state fulfills its duties towards the society, it requires revenue, and thus tax. Every individual has certain rights and certain obligations towards the state according to the Constitution. The boundaries of individuals’ rights are drawn by their obligations. According to the Constitution, the most important obligation amongst them is that everyone must pay tax depending on their financial strength in order to meet the public expenses. This fundamental principle of the Constitution is agreed by everyone.
Our objective as tax advisors is, within these boundaries, to assist the individuals in calculating their taxes in compliance with the legislation, to represent the interests of the taxpayers towards the state, and as such, to encourage development of a better taxation system and contribute to common good.
Within this framework, we start the discussion of what taxation means in Turkey and what its purpose is, under the headline of Responsible Tax. We must align the approaches of all the parties to the concept of responsible taxation so that we can build the rest on a common understanding. For this purpose, we aim to bring together the business world, finance specialists, non-governmental organizations, academics and professionals in order to scrutinize several issues such as the moral dimensions of taxation, its legality, tax justice and judicial justice, international competition; transparency in taxation, impact of tax policies on developing countries.
As tax advisors, we have an important role in establishing a healthy functioning tax system. We will, of course, continue to get advantage of opportunities in laws while we assist the taxpayers in fulfilling their tax obligations. However, we must be very clear and straightforward in what conduct should be considered as tax avoidance, and what conduct should be considered as aggressive tax planning. While protecting the rights of taxpayers, we must always keep the common good of the society at the forefront.
Furthermore, we must more actively give feedback to the tax administration regarding the repercussions of the regulations. We may contribute to the Administration in ensuring that tax policies are foreseeable, are prepared more clearly, and are compliant with the fundamental principles of law. We must avoid contravening the fundamental principles of law while attempting to ensure reliability and healthy functioning of the tax system.
This article is summarized from the interview of Abdulkadir Kahraman’s introduction when KPMG Turkey published the book ‘‘Responsible Tax’’, http://www.kpmgvergi.com/Pages/sorumlu-vergicilik.aspx.
Abdulkadir Kahraman has more than 27 years of experience in domestic and international taxation.Over the last 14 years, Abdulkadir Kahraman has specialized in Financial Services Industry. He has deep technical expertise in related tax areas of Financial Services including Transfer Pricing and Tax Controversy. He also has broad experience in the taxation of capital gains from money and capital markets.He...