Is it more important to change tax laws or behaviours? What role do we all have to play?

The third in the series of global Roundtables took place in Amsterdam on September 25 2017, with sixteen senior representatives from the worlds of politics & policy, media, NGOs, academia, corporations and (tax) advisory.

The key conclusion – with broad consensus – was that the creation of a truly global Tax organization would help drive better understanding, policy and behaviour change and bring much-needed clarity to the avoidance/ evasion debate.

Framing the debate: Evasion vs Avoidance

The topic discussed in Amsterdam is an issue raised frequently in recent roundtables. Conflating tax evasion and avoidance is problematic because it is harder to get to what the solutions to evasion and avoidance are if language around the two is muddled. These are two different issues that require two different solutions.

On evasion, there is global consensus that evasion is illegal and needs to be stopped. However further work is required to identify all the “bad actors” as well as improve the laws around disclosures to get to this.

On avoidance, it is much harder to reach agreement. There is no single definition of “avoidance” or even what is fair or unfair tax competition. If we do want such a definition, how do we factor in societal needs? Who will draw up the rules? How do we agree on the distinctions between “aggressive avoidance”and “acceptable planning”?

To those gatherered in Amsterdam for the Responsible Tax roundtable, it was clear that evasion must be stopped; but on avoidance, it is up to legislators, business and civil society to draw the line (or even decide if a line is needed).

An article calling for such clarity was shared with the group, ahead of the event and is now available here.

Provocation

Based on the Chair’s introductory remarks, the context of the global responsible Tax project, and covering some of the issues raised in the initial paper, the following provocation initiated the discussion.

Conceptual clarity is required. This debate is about getting global governance right. There are many similarities between the direction of travel on tax debate and, historically, how the anti-corruption and anti-money laundering rules were introduced.

One contributor shared the background to previous moves against bribery and corruption, whereby there was an initial hesitation for countries to move on this issue until the following happened:

  1. Realization by civil society of the impact such actions had on development in countries – both developed and developing.
  2. Companies’ willingness to change behavior in light of global events e.g. Watergate.
  3. The OECD being able to pull together a common policy response.

To get to the right global governance model on avoidance/ evasion, not only is government action required but corporate action also. Along with KPMG’s Global Responsible Tax project, there are a number of other groups working in a similar direction.

Initial reactions and responses

The following (immediate) responses were captured from participants in the discussion:

  1. There is not a level playing field in many countries. MNC’s face different realities on the ground with tax authorities. Some tax authorities are stil plagued with corruption and local companies may be willing to pay while MNEs are not. To solve this non-level playing field, is legislation required at a global level?
  2. On transparency, are we not entering a world where authorities, and maybe even the public, will get all the data they need (and want)? However, there was also a view that this is far off. It is still difficult to track the beneficial ownership of certain companies and, as such, we are not in a position where we have even “basic” transparency.
  3. Generally the attendees at the roundtable live in countries where they are lucky to benefit from stable economic and political conditions. Tax authorities in other countries have many other realities that mean they are not able to automatically adopt global standards implemented by the larger and most developed countries.
  4. This is the hardest time to work “in transparency”. There almost seems to be a transparency backlash or at least a recognition of its limits. There is a legitimate space for private conversations and confidentiality. Transparency is an anti-corruption tool more than an end in itself. Nevertheless, certain companies are willing to put their heads above the parapet as long as the transparency is requested for valid reasons.
  5. Transparency has different objectives. As regards evasion it’s to shine a light on the perpetrators; as regards avoidance it’s more to shine a light no the rules and policies.
  6. There are significant cultural differences that need to also be considered. In the US, as opposed to Northern Europe for example, there is an historic emphasis on less government involvement.
  7. Tax is behind other changes in societal norms. What makes tax so different to human rights developments - eg. labour rights, etc where, arguably, more progress has been made? Should tax be a human rights issue? One suggestion was that while tax has a direct financial cost to individuals and businesses, it only has an indirect impact on society. Failure to pay a living wage has a direct impact on a company's workers but the benefit of tax payments also depends upon how well a government uses the tax receipts. For some countries it is a key aspect of drawing the line between the rights of individuals and the rights of governments. As such, it is possibly a more controversial, even emotional, topic than others (smoking and seatbelts included) where concensus is more easily reached. This is, though, rapidly changing in parts of the world. For example, in certain countries there is a willingness from the poorest in society to pay tax, even when they can’t or shouldn’t pay, as that then gives them an increased sense of empowerment over government.

Four questions posed to the Roundtable

The conversation continued, clustered around four broad questions/ themes. Key points covered were as follows:

1. Definitions — Are avoidance and evasion different phenomena? What distinguishes the two?

  1. Avoidance and evasion are different phenomena. However, in the eyes of the public, these are conflated and this often happens purposefully. Avoidance is viewed just as negatively as evasion.
  2. An example was discussed of person who evades tax purely to put the money saved to socially useful purposes. It was agreed that was unacceptable. The motive is not the important issue. Such behaviour undermines the rule of law. One attendee suggested that, if the issue was clearly not one of evasion but of potentially aggressive tax planning, the motive may have some bearing on what was acceptable and what was not.
  3. The offshore financial centers understand the laws and what it means to evade tax. What is harder to understand, and this is an issue for all countries, is what avoidance is. Governments to date have not defined this.
  4. The majority of offshore financial centers have embraced transparency, often more so and faster than larger jurisdictions.
  5. A good test to determine what is acceptable and unacceptable in terms of tax planning is if a company would be confident and not ashamed to explain themselves on the front page of a newspaper.
  6. A possible approach is to define it in three buckets – illegal tax affairs (i.e. tax evasion), acceptable tax planning, and aggressive tax planning.
  7. Companies do worry significantly about the public perception of their tax affairs. What is unhelpful is when politicians and the media do not completely understand the issues they are speaking to or reporting on, further heightening confusion.
  8. Governments use tax legislation to change behaviour or promote certain policies. Sometimes business is attacked by the media and general public simply for utilizing enabling legislation in line with government policy.
  9. It was suggested in may be better policy to keep legislation simpler with fewer exemptions. For example, the US has a high headline rate but many exemptions bringing that rate down that make the system extremely complicated. (This is of course now seeking to be addressed as part of the proposed US Tax reform)
  10. A view was suggested that tax policy would be better if it was aimed at collecting revenues, rather than attempting to change behavior).
  11. Business values certainty above most things. As such, even controversial topics such as the Common Consolidated Corporate Tax Base in EU might be accepted by businesses if this was put in place by all member states and meant an end to short to medium term uncertainty.

2. The public debate — Should we keep evasion and avoidance separate within the public debate and if so how can we do it without appearing to downplay one or the other?

  1. Public opinion drives legislation. Is there a need to educate? What role does the media play in this?
  2. We have to have an informed debate to ensure the rightful democratic process is followed in defining and reforming tax rules.
  3. Any proposed approach cannot just be a PR exercise for companies and advisors. Solutions being put forward must be real and take the wider societal needs into consideration.

3. Who takes responsibility — Stopping evasion is often considered the role of the tax authorities and police; but what part should other stakeholders play – corporates, intermediaries like banks and advisers, media, the public? Do we need a public debate about evasion – eg. as proposed by the Australian tax authority?

  1. The Tax Professionals can find it difficult to provide a view as they are then seen as acting in their, or their clients, sole interests. However, by not allowing the tax profession to have a view, expert opinion is being missed.
  2. There is also a perception that the “foxes are running the henhouse”, i.e. businesses are too heavily linked into legislation. However, the consensus of the Group was that politicians, not corporates, are the real “foxes”.
  3. Finally, NGOs do have an important role to play – eg. by not making exaggerated claims and in educationing the public
  4. For any traction to be made in this debate, a cross-sectional, possibly unconventional, coming together of parties is required to make the change that everyone agrees should happen. Transparency and information for and between all relevant parties is the first step in building wider consensus. This needs to be a global movement.
  5. To bring together a coalition of the willing, everyone needs to be on the same page. It is very important that the corporates are in the room. When you come together, you find many commonalities (as evidenced by the Responsible Tax project). Additionally, corporates and advisors should be willing to speak up on uncomfortable positions that need to change.

4. Law vs behavioural change— To what extent can avoidance be overcome by greater clarity in the law and to what extent does this require a change of culture and behaviour?

  1. Behaviour change will only take us so far. Some large MNEs are moving ahead of legislation, but it was a common view in the room that legislation must move in sync. with behavioural change to ensure that there are no unfair competition advantages.
  2. Even within legislation, the “spirit” of the law is a concept that means different things in different countries. One contributor (not necessarily a uniform view) commented that the UK is more advanced on this thinking, putting the emphasis on taking a sensible position on the taxpayers. In other countries, a file and audit approach to tax compliance is more accepted.
  3. It is also important to take a step back to appreciate what the rules are trying to achieve. There has not been enough work to understand the pain points of each of the parties in this debate. Once that is done, then it can be clear on what the law vs cultural change is.

Roundtable recommendations/ agreement on Next Steps

There was considerable enthusiasm for a cross-sectoral, global coalition to address the avoidance/ evasion issue, broadly based on the Responsible Tax approach: a range of actors and voices convened across jurisdictions and drawn from academia, the NGO and activist communities, policy-makers and corporates plus experts and advisors.

Detailed recommendations included:

  1. More education and resource for less developed tax authorities to ensure a level playing field.
  2. Tax professionals to state their view publically on public country by country reporting.
  3. A set of Tax Principles should be developed and agreed between governments, tax authorities, supranational bodies, tax profession, NGOs and businesses.
  4. Any such principles should be easily understood and an appreciation that the perfect rule does not exist.
  5. There should be a joint statement by all parties to agree on a statement of objectives and common understanding.
  6. A “World Tax Organisation” is required to address the many issues on the table – not just on evasion v avoidance debate. While there are many world organisations with responsibility for taxation (and maybe this “World Tax Organisation” could come from one of them), they do not have sufficiently broad coverage to represent all stakeholders. They do not therefore have the real mandate to drive the change that is needed.
  7. Individual companies should engage more with the public on this matter and consider disclosing an appropriate degree of information on their tax affairs where appropriate.
  8. Corporates need assistance in this area and technology can play a key part in the transparency debate.

Where do we go next?

Closing thoughts included:

  1. A permanent group is required to push these changes forward. KPMG – through its Responsible Tax initiative – could be a driver for this.
  2. What does good transparency look like? This is a common question from all round tables.
  3. The tax system still has many challenges but do we need to go to square one? A sensible debate on the details of the system is required by all parties.

A number of participants voiced concerns that the public debate on responsible tax is highly politicised and that, too often, poor and misleading language confuses issues and is used to support particular political standpoints, rather than address the root problem. Some politicians - they argued – sometimes find it easier to demonise the corporate sector than to work in coalition with it. While this may be realpolitik, it is an issue that needs to be addressed in search of a consensus for better and good.

Please click here to listen to some participant views.