In the era of of technology and globalization, the belief that tax is a social contract is under pressure. The world is searching for the answer to the question of “whether tax is a legal or an ethical issue”. According to Chris Morgan, Head of Global Tax Policy, KPMG International, the discussion on tax will continue increasingly and take on a global dimension.
Maxim Gorky says; “In the carriages of the past, you can't go anywhere.”
In a world where new rules are established and the existing ones are lifted in terms of taxation, it is possible to perceive the rules as a new car while a new road is ahead. Tax professionals take this change into consideration within the frame of their purpose while interpreting their work. This is because tax concerns a large number of parties and stakeholders. Sustainable Development Goals also include tax.
Chris Morgan, Head of Global Tax Policy, KPMG International, attended to the Cross-border Tax Challenges in the 21st Century Seminar organized by IFA Turkey as a spokesman. Following the seminar, Chris answered KPMG Gundem’s questions.
You were KPMG’s Head of Tax Policy at the time when the debate about whether tax is just a legal issue or it has an ethical dimension was becoming quite heated. Do you think the debate will intensify or will things continue as normal?
First let me give you the answer we came up with to that very question about whether tax is just a legal issue or whether it has an ethical or moral dimension. I think this question demonstrates very well why often the different stakeholders in the tax debate are starting from different premises. Some people say it is purely legal and therefore “if it’s legal I can do it”. Others see it as primarily a moral question and imply that they can somehow determine the “right amount of tax” another should pay and that certain taxpayers (usually corporations or the more wealthy) should strive to pay as much tax as possible. Both positions however undermine the rule of law. The first because it, legalistically, ignores what the law is supposed to achieve; the second because it is subjective. Our answer to the question is that the amount of tax paid has to be determined according to the law and legal definitions. However, usually, there are choices to be made about structures, planning, and interpretation and - as with all human actions - these carry moral or ethical judgements. Therefore tax is both a legal and an ethical/moral issue.
I think it is clear that the tax debate is only going to intensify and become increasingly global. This is inevitable as governments seek to raise more revenue while, at least as regards corporation tax, modern business models make it harder and harder to determine where tax should be paid. The whole debate about how to tax the so-called “digital economy” is a good example. Many European governments and the EU institutions take the view that if tech companies have large revenues in Europe they should be paying a significant amount of corporation tax here - even if they do not have a taxable presence under the existing international rules. The media often portrays this as an issue about avoidance or tax justice. The view from the US tends to be that all the value and intellectual property has been generated in the US and this revenue will be subject to tax or relief according to their laws. The recent US tax changes will probably just make this debate even more complicated.
As another example, if you look at the UN Sustainable Development Goals it is clear that there will have to be a significant increase in tax collected in developing countries to finance them. This takes us straight into the debate about whether or not multinationals are “paying their fair share”, there should be rebalancing between the source and residence principles, and to what extent is it possible to broaden the tax base and tackle the informal economy in these countries. I think it’s clear that different people will take very different views on many of these issues. The Responsible Tax Debate which we started in the UK and have now taken global, is aimed at trying to get the various stakeholders to understand each other’s points of view and all the facts, in order to come up with shared solutions rather than starting from a partial and adversarial position.
What kind of risks does the intensified debate carry for stakeholders? Do you see a trend amongst the stakeholders’ tax policies?
I think the risk is that, when the debate becomes heated, partial, and politicized, it risks driving bad policy. There is clearly a danger of this happening, for example, in the debate about the digital economy I mentioned before. Many governments are under political pressure to increase the tax take and to address what is seen as tax avoidance or an unfair system. While there is some truth in the concerns the debate is often very unbalanced. It is important that business responds in a positive and collaborative way rather than just denying the possibility of change. If we cannot find a globally agreed solution we will see an increase of unilateral taxes on digital activity – there were at least eight the last time I counted. This will be bad for business as it will create cost, complexity and probably double taxation. Consequently it will be bad for the economy, as technology is one of the main drivers of growth, and bad for consumers. However it will also be bad for governments who may see the cost of raising tax rise due to increased disputes and will be exposed to retaliatory tax amendments which may reduce their overall tax take. In short, fragmentation and conflict will benefit no one.
Could you explain how KPMG’s Global Principles for a Responsible Tax Practice can provide added value to our society? Any change in particular to our profession both client and KPMG side way of doing business?
If you ask has there been a massive change in the way KPMG does business since the updating of the Global Principles at the end of 2016, I would say no. Society’s attitudes to tax has been changing over the last 15 to 20 years - for many reasons - and so has the way in which we, our clients, and indeed most advisers operate. The Principles to a certain extent therefore codify or make best practice on a global basis what many of our Member Firms were already doing.
What the Global Principles do is to provide a statement to our clients, our people, regulators, and the public at large of our approach to tax. I believe that, by being clear on where we stand - for example that we do not propose or implement structures designed to circumvent clear law or which do not have the necessary substance and commercial purpose - we are able to enter into the tax debate with confidence and credibility. This enables us to offer our expertise to help develop solutions for the common good. It is of benefit to our clients as it shows that we can help them navigate changing social norms and develop tax strategies and principles that they will be able to defend. And it benefits governments and tax authorities as we are committed to developing open and trusted relationships which should help reduce disputes or solve them quickly where they arise.
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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...