In a recent Opinion piece, KPMG Global Head of Tax, Jane McCormick, and Robert Phillips, author of Trust Me, PR is Dead, argued that tax can be seen as part of the remedy, not part of the problem to the issue of trust. “Responsible Tax thinking and principles”, they write, “enable an important re-set of the social compact, that will, in turn, go some way to addressing the vexed issue of trust and indeed leadership. CEOs and global leaders, therefore, would, in our view, do well to think about tax, before they talk about trust.” Tax is Trust, writ large.
In May 2019, Jericho Chambers convened an initial roundtable in Dublin, on behalf of KPMG International to stimulate a conversation in response to this provocation. Bringing together a wide-range of expert voices1 from across tax, academia, media, policy-making and business this is a write-up of the conversation held under The Chatham House Rule – which means we can report what was said but not who said it.
A “Fair share”, tax morale and the invisible morality bar
Legally there is no definition of “a fair share of tax” but fairness is an important perception. Tax needs to be charged according to the law but there is an important debate to be had about “tax morale”: when is tax planning acceptable and when does it go too far?
It is clear that different countries have different cultural attitudes to paying tax. Some – historically – see tax as a payment to a foreign power whereas others (e.g. in Scandinavia) see it as a contribution to a society/ state which provides everything. It was expressed by some that, generally, Ireland (where the roundtable was held) has a post-colonial attitude to tax.
There is a mantra of “fair tax” in many parts of society in Europe and for example in the language of the European Commission (EC) and European Parliament (EP). But the concept of a “fair share” is not found in legislation – for example, it does not come into the 17, 000 pages of the Irish tax legislation (nor indeed in any tax legislation in other EU Member States). If a tax assessment was litigated on the basis of fairness – either the payment being too much or too little – it would not survive in court.
Nevertheless, while there is no legal obligation to pay more tax than is strictly legally due, perception is important. Fairness without rules is no basis for tax but it does play a key role. People need trust in the system. Normally, people do not march saying “I don’t want to pay tax”, they march because they perceive that others aren’t paying “enough”, or because they believe their money is being wasted. It is the perceived injustice that drives conflict.
One delegate gave an anecdote about how, 30 years ago where he grew up in Ireland, some local businessmen had bigger houses than everyone else and it was just assumed (rightly or wrongly) this was because they under-declared their tax. Another delegate suggested that the general public would not really care whether this was through tax evasion or aggressive avoidance – the result was seen as being unfair as someone had an advantage through not paying what was due in the widest sense. This last point was contested by others and it was agreed that evasion and avoidance are very different (the former being illegal) but the fairness perception is real.
It was noted that the Irish tax authority wants taxpayers to be compliant but not make voluntary payments. It was noted that the tax compliance rates in Ireland were extremely high. The issue here is the rule of law. Tax needs to be charged according to law. This does raise a question about what is “voluntary”. Few people subscribe to: “if it’s legal I will do it.” And not doing everything legally possible to reduce a tax liability does not constitute a voluntary payment. It is, though, rare to see people talking about the contract of tax and the common good. The OECD consultation on What is Driving Tax Morale was mentioned as a good initiative. This does examine why some taxpayers (individuals or companies) have a greater intrinsic desire to comply with tax rules. A key issue which needs exploring, especially in relation to corporates, is what are the criteria for deciding if tax planning is acceptable; how is the bar on planning set?
It was noted that there is a considerable body of new tax legislation being introduced across the EU and OECD member states that is designed to prevent perceived unfair planning and activity and time should be given to digest all of these changes before determining whether more changes need to be made.
The purpose of tax
A taxpayer’s attitude to voluntary compliance will in part be determined by his or her understanding and acceptance of the aims of the tax law and how the revenue is spent
Tax does not sit in isolation. You cannot divorce the conversation about how and where the money is spent.
Tax is often used to incentivise certain investments or activities. It is an important part of a politician’s tool kit but there needs to be trust in those choices. It is also important that the public understands the rationale for a tax and that there is perceived value for money for the tax spend. For example, a proposal to introduce water charges failed in Ireland in part as it was on the back of very significant tax rate increases and in part due to the expectation that the existing exchequer receipts should be used to deliver quality water services. On the other hand, the plastic bag tax in Ireland has worked well to change behaviours because people accepted the objective of reducing waste.
It was noted that tax does change taxpayers’ behaviour. In terms of growing the economy and the associated tax take, the more people who are productive the better. Therefore, there is a balance between raising revenue to provide social infrastructure and services and having a tax system which supports economic growth.
It was also pointed out that the tax system cannot be the most competitive on all fronts or it would not raise revenue. A government has to decide where and how to raise tax and what to incentivise. In Ireland, the system does shift the country from being very unequal on pre-tax earnings to being fairly equal on a post-tax position.
Competition vs. Common Good
There is a debate to be had about the use of tax as industrial policy. On the one hand, when can it be seen as an acceptable lever of economic development rather than unfair competition? On the other, when is it acceptable for the global community or supranational bodies to impose rules which can undermine tax sovereignty and cause collateral damage?
Is competition for the common good a paradox? There is tension between designing a tax system which benefits a particular country and the global common good. For example, Ireland’s industrial policy coupled with its tax regime has brought significant benefits form inward investment creating jobs and income tax receipts; but has it taken investment away from other countries or increased overall investment? There is a balance between encouraging genuine investment and having rules which could encourage artificial structures. The EU State Aid rules are one example of an attempt to stop unfair competition but it was thought that it is important that countries generally retain control over their tax policies.
It was noted there were concerns in some developing countries and in some offshore financial centres about overreach by the EC with the Blacklist of “tax havens”. Effectively the EU is asking countries to adopt standards which have not been agreed as minimum standards by the OECD, which are costly to implement and are not necessarily relevant or a priority for those countries. It was suggested that such matters should be handled by the OECD/ Inclusive Framework where affected countries would have a seat in the negotiations.
There was also the possibility of measures such as a global minimum tax undermining industrial policy and sovereignty of states. Smaller (often island) economies do not have the positive externalities of larger countries (workforce, consumer base, location, natural resources, investor base) and taking away their flexibility on tax policy could cause collateral damage. It was suggested that tax policies designed to support industrial policies for attracting real businesses should be perfectly ok. Some suggested that there should be greater cooperation and agreement between countries so none thought the other was eroding their tax base.
Transparency and complexity
There is a need for simpler, more understandable tax systems, greater transparency from companies and a more open debate. Transparency though does not just consist in publishing out more data.
Transparency between countries and between taxpayers and tax authorities is very important. The automatic exchange of information introduced through the OECD (Common Reporting System) has been very successful.
There is a need for greater transparency from companies towards the public but it must be the right information – presented in a way that sheds meaningful light. Transparency can confuse as much as it can shed light where it is simply a matter of disclosing more and more data.
It was also noted that when a company needs a competent authority agreement they work seamlessly with the tax authority – as they have a common interest. But when there is say a transfer pricing audit there is a different tone.
There is a huge role to play for education and bringing all stakeholders together – for example, to understand the difference between tax planning or tax minimisation and simply using government-sanctioned reliefs. The rights of taxpayers also have to be respected to improve trust and compliance. There is also an issue of complexity in tax systems. What is needed is a simple system which is perceived to be fair rather than complex systems with high headline rates but many tax reliefs.
A Principled Profession?
There is a need for responsible tax leadership in the profession and a way of calling out “bad actors”
There are many levels of trust at play between taxpayers, society, governments and advisers – among others. We will never go back to the days of “trust me, I’m a professional”. But often what gets lost in the narrative is that most of the job of a tax adviser is explaining tax liabilities and helping taxpayers understand and comply with the law. Responsible tax advisers need to be able to demonstrate why they are trustworthy. A question was raised as to how the profession as a whole can call out bad actors who engage in aggressive avoidance? It was noted that research being carried out by the University of Limerick is showing that, globally, many tax professionals are looking for more leadership from professional bodies. Is there, therefore, a need for more widely accepted responsible tax principles or some kind of global fair tax kitemark?
Key Questions and Next Steps
Most attendees agreed there is no definition of a “fair share” – especially one enshrined in law. This highlights a key question about “Tax Morale” – where is the line, at what point does planning which is legal go too far and undermine the rule of law even if it is legal to do it? This would be a fruitful topic for further exploration.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...