Over the last year, The Responsible Tax project has touched repeatedly on the avoidance/ evasion debate – and the problems created by confusing and conflating the two issues.

Evasion vs Avoidance was raised in the first global roundtable in the current series in Paris in January 2017, when we were discussing “life after BEPS” with the OECD’s Pascal Saint Amans and others. The output from April’s roundtable on Responsible Tax and the Developing World (the second in the series), as well as meetings of international financial institutions and of academics working on the COFFERS project, brought the issue into focus once again.

A roundtable in Amsterdam in September explored the subject in greater detail – the initial conclusions and recommendations from that discussion have been shared on the Responsible Tax web platform and my KPMG colleague, Chris Morgan, also published on this subject in anticipation of the event.

Misconceptions skewing the global debate

In the context of developing countries, it was agreed at this last discussion that effective collaboration is negatively impacted by headline-grabbing, blockbuster “facts”. Furthermore, while “missing” funds for development do exist, there is a common misconception that aggressive tax avoidance by multinationals is the primary cause. This misconception is misleading and badly skews a critical global debate.

The truth is of course much more complex. Whilst tax avoidance may remain an issue it is only one part (and in my experience a reducing part) of the whole picture. At a fundamental level, for instance, issues of corruption and large scale tax fraud need to be addressed first and foremost; and, as elsewhere in the world of tax, transparency, used appropriately, is a key tool. And of course, the issues of how to tax the emerging middle classes in developing countries and how to formalize the informal economy, also have to be addressed.

With a view to unraveling and addressing the intricacies of the issue – and moving forward from the misconceptions – the question we set out to answer at the Amsterdam roundtable was whether or not avoidance and evasion are different problems with different solutions. This also leads to the question of whether it is more important to change tax laws or practices and behaviors. And, thereafter, what role do we all have to play – from corporates and their advisors, to NGOs, policy-makers, academics and the media? Different ills of course require different remedies – is this true also of avoidance and evasion?

A polarized debate

Activists tend to campaign using inter-changeable language on avoidance and evasion. Their argument, when boiled down to its fundamentals, is that corporations’ failure to pay their “fair share” of tax is starving governments of funds required for socially useful purposes. There is, therefore, no moral difference between illegal evasion and legal avoidance or, in fact, any form of tax planning. This approach tends to dominate media and public discourse, and fails to take into account the fact that there are often legitimate choices in doing business with differing tax consequences, the intentions of legislators (which are not always simply to charge the maximum amount of tax), the importance of the rule of law and the moral terrain that tax advisors– and indeed tax payers – negotiate every day. Because we all fail to deal well with complexity – media, NGOs and corporates included – we default to more simplistic constructs. However, whilst there are some instances at the dividing line where activities are purported to be avoidance but are in fact worse than this (usually because there is some misrepresentation at the heart of it), avoidance and evasion are for the most part very different issues and have different solutions.

The danger here is that the resulting debate tends to be divisive, polarizing, emotive and frequently ill-informed, with different sets of “facts” and statistics supporting or being used to validate a spectrum of opinions. The Responsible Tax initiative celebrates the belief that, collectively, we need an informed and balanced debate that can lead to better outcomes.

The starting point, happily, is that nearly everyone (even those in the strict, “it’s legal so I can do it” camp) agrees that tax evasion and fraud are wrong and should be stopped.

Logically, therefore all parties should work together to stop evasion and fraud: agreement on this should be an easy win. Of course, the practical implications are not so easy. Most evasion is based on a determined and deliberate attempt to hide assets or income from tax authorities and finding what is deliberately hidden is never as easy as it sounds. Legislative action, including automatic exchange of information and registers of beneficial ownership are really starting to make a difference but these are yet to bed down globally and more work needs to be done collectively on the practical aspects for financial intermediaries and tax authorities of collecting, exchanging and using accurate, timely information. In addition more thought could be given to where the criminals might be going next. If exchange of information becomes universal in the established financial markets, could new technology present fresh opportunities for criminal tax, and other, behavior? For example, there has been recent concern about the use of crypto-currencies in this regard.

The more conceptually difficult area is therefore what constitutes avoidance and where to draw the line on “aggressive avoidance”.

The primary solution to the question of avoidance is undoubtedly good law. In this regard, good law is law that is clear in its intention, coherent in its outcomes and as consistent as possible with prevailing international views. Such law would minimize misunderstandings about the use of domestic reliefs and exemptions as well as instances of mismatches between countries. And it is always open to countries to introduce specific or general anti-avoidance rules to counter avoidance. The BEPS project and the work of the OECD more generally has addressed some of these issues but the commercial and political complexities of the world we live in mean that we are a long way from the perfect international tax system; and in this imperfect system, judgement is required.

I have always argued that, though technically a legal duty, tax has an irrefutable moral dimension. Somehow, taxpayers need to be able to make a judgment in the grey area between what is technically legal and what is an acceptable way of conducting business or one’s personal financial affairs. It is in the area that the debate has, to date, added more heat than light. This is, unfortunately having unintended consequences – ranging from poor legislation/ organization (not least in developing economies), increased uncertainty and continuing international tax competition and protectionism. These complexities, again, can be conveniently overlooked by the headline-chasers

Flowing from this, the challenge therefore becomes not just one of legislation, but one of principles and behaviors. But how do we actively change and embed these?

Re-thinking and re-setting principles and behaviors runs to the heart of Responsible Tax thinking.

Responsible Tax thinking

The Responsible Tax approach looks to find a way between these opposites of “avoidance and evasion are the same” and “as long as it’s legal I can do it”.

Responsible Tax thinkers certainly do not evade but neither do they aggressively avoid, given their adherence to Responsible Tax principles, as supported by KPMG and outlined on the web platform.

The questions for me that run through the debate and need to be addressed include:

  1. How can we elevate responsible tax thinking to become the norm for policy makers and taxpayers? Put another way, how do we foster responsible tax leadership on the global stage?
  2. How can the conversation be moved to focus on the core issue of a common framework in which to discuss what is and is not acceptable planning?
  3. If we accept that there will always be some ambiguity in law, should we instead focus on changing cultures and behaviors?
  4. The strict letter of the law is not sufficient on its own. But how do you define the intention of the law and is it ever possible to speak realistically about the spirit of the law?
  5. Does responsibility for changing the nature of engagement on tax lie only with the policymakers and corporations themselves or also with the advisers, bankers, the supra-national institutions and NGOs too – even the media?
  6. How can coalitions be built across government, business and the Third Sector to support a new way of working and addressing the challenges both of defining what is expected of legitimate business and of working together to counter illegal activity by others?

The Amsterdam roundtable – as the report and films demonstrated – built a quick consensus and reached some constructive and maybe even surprising conclusions. It was encouraging to see how this spanned the various groups present – from major financial institutions to corporate players and their advisors; media commentators to academics and NGOs/ the third sector. We agreed that these were good and important questions and that together we could arrive at providing some good and important answers.