Tax planning & ethical dimensions
The final week of the “Rethinking International Tax Law” course goes beyond the technical aspects of tax planning previously discussed, exploring those practices from an ethical perspective. To achieve that goal, the lecture videos consist of interviews, made in March and April 2015, with stakeholders in the tax planning debate, where they present their positions and what they perceive as key ethical issues.
The OECD perspective
Pascal Saint-Amans
The first interviewee is Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD. Saint-Amans starts by pointing out that international taxation issues have received greater political attention since the 2007–8 economic crisis. Closing loopholes that allow tax avoidance through base erosion and profit shifting is now seen as bipartisan issue, but the means for dealing with those practices may be a sensitive political issue. The BEPS initiative must, therefore, be seen in that political context.
The proposals made in the BEPS Action Plan, according to Saint-Amans, are based on three pillars. First, it aims to broaden the tax base of States by eliminating or neutralising harmful tax practices and fixing international tax instruments such as the tax treaties. A second pillar would be the set of best practices that the BEPS Actions provide, indicating the best practices for government action and disclosure of information to governments. Last but not least, the final pillar consists in increasing the transparency of international tax practices.
Through measures based on those three pillars, the BEPS initiative aims to realign the location of the activities with the location of profits. In doing so, the goal is not to increase the overall corporate tax — even if that does happen to companies that were exploiting double non-taxation schemes — but to split taxable profits between countries in a way that is compatible with the actual participation of each country. International coordination on tax issues targets double taxation and double non-taxation, trying to establish a level playing field between tax administrations and making things clear for businesses. The establishment of international standards prevents countries from acting unilaterally, which would lead to a scenario where businesses can game the system or, in the other extreme, fail to avoid double taxation. Both scenarios are harmful to countries and businesses, and the BEPS actions are what OECD proposes to address those issues in a way that changes national tax laws, but is ultimately based on international coordinated action.
Marlies de Ruiter
Marlies de Ruiter, the second interviewee, is Head of the Tax Treaty, Transfer Pricing and Financial Transactions Division at the Centre for Tax Policy and Administration of the OECD. Her interview starts by discussing the heated public debate over international tax planning, as the opacity of the tax schemes employed by multinationals and their ultimate success in reducing due taxes has led to public uproar, which in turn led to greater political pressure towards coordinated approaches to tax planning issues. BEPS appears as a way to address the gaps and mismatches that exist between national tax systems and are exploited by businesses.
A country’s acceptance of the BEPS action plan can be said to lead to some loss of sovereignty, as the internal tax systems must be adapted to match international standards. De Ruiter, however, points out that accepting those treaties allow countries to avoid harmful effects from tax competition, establishing norms for fair international competition between businesses and, as a consequence, improving the investment climate of a country. The treaties still leave some room for tax competition, but only for advantages granted based on actual activities on countries, not just through paperwork.
De Ruiter also establishes some interesting connections between taxation and corporate social responsibility, by pointing out the shift in tax debates that the increased public participation caused. Before the latest public outcry, discussions were usually centered on technical issues, but nowadays tax compliance and avoidance are seen as crucial questions of corporate social responsibility. While tax law should be seen as the major determinant of what is a responsible tax behaviour, that does not mean that tax systems should stay impervious to what is perceived as correct taxation, and laws should be interpreted based on the purposes and intentions that inspire their creation.
Business perspectives
Paul Morton
Paul Morton, current Tax Director of the British Office for Tax Simplification, was interviewed while on his former role of Head of Group Tax at RELX, a group that includes Elsevier and Lexis Nexis, well-known publishers. In 2015, that company had less than 30% of their revenues from sources in paper form, with digital and face-to-face sources accounting to 70% and growing.
Morton points out that the greater scrutiny of tax issues after the economic downturn can be related to the impact given to other social causes over the last 15 to 20 years. This increased concern was picked up by politicians in many countries, such as the UK, and it does not give any signs of fading away from public interest in the near future, even if most of the public usually finds it difficult to understand tax discussions.
For Morton, the debate over taxation and corporate social responsibility goes beyond the mere need of clear compliance with tax laws. He points out that public expectations of companies, whether under the name of corporate social responsibility or any other term, nowadays go beyond issues of technical interpretation of legal statutes, and should include compliance to social standards or to the spirit of the tax laws.
Morton holds that companies have a responsibility to a wide set of stakeholders other than their shareholders, and fulfilling responsibilities to those stakeholders is the best way to serve the long-term interests of shareholders. Therefore, unlike Prof. Kees van Raad, he sustains that companies should not necessarily strive to use all the possibilities opened by mismatches to reduce their tax burden. Forgoing tax planning opportunities would allow for stable and sustainable growth of a company’s activities, benefiting all stakeholders in the long run.
Antonio Russo
Antonio Russo is a Partner at Baker & McKenzie Amsterdam N.V., specialized in Transfer Pricing design. His interview sustains that there is a need to refresh and revisit some of the rules that govern international taxation today. He points out base erosion and profit shifting issues, and also the domination that Western companies hold over global access to resources. In his view, the recent growth of so-called emerging countries has shifted somewhat the terms on which international taxation is based, as the non-Western countries take a different role in international commerce.
For Russo, the international debate is marked both by the conflict of interests between countries and the moral dimension of tax planning, with significant entangling between those questions. If taxation is seen as a form of contribution for the use that taxpayers make of the State-funded systems, such as the legal system and infrastructure, extreme cases of tax planning could damage the system put in place for the citizens of a country.
Besides the moral dimension of the tax planning practice itself, thare are ethical involving players such as tax advisors, taxpayers, and tax authorities. Those may relate to personal values, values upheld by a firm, and professional ethical standards such as those established by a professional board. As Russo says, a tax advisor must distinguish their individual values from the professional and business values that should guide their advice.
Academic Perspectives
Tanja Bender
Tanja Bender, current Professor of International Tax Law at Universiteit Leiden — and, at the time of the interview, Tax Partner at PwC in Amsterdam —, was also interviewed by the course staff for this week. As she points out, the public opinion does not seem to agree with the perspective that the tax behaviour of multinationals should only concern itself with compliance to the law. Considering that, she raises the question of when tax planning is acceptable from a moral perspective.
In an article that she wrote with Broekhuijsen (2015), Bender explores the relationship between corporate social responsibility and taxation. They defend that both concepts are here to stay and have to somehow work together, while tax laws should be changed to reflect the social demands over companies. The exact definition of a “fair share” is imprecise and seems to vary from country to country — as Bender points, there is much more resistance in the USA against the idea of paying more tax than what is strictly demanded —, but their paper aims to establish a dialogue between the corporate social responsibility and tax planning literatures in order to achieve a balance between the “fair” payment of taxes and the attendance of shareholder interests.
Kees van Raad
For Kees van Raad, incorporating ethical standards into the validity evaluation of tax behaviour may lead to greater uncertainty, as the application of the relevant ethical values might be even more confusing than the interpretation of the legal requirements of taxation. That does not mean that moral standards should not be considered on taxation affairs, but rather that those moral conditions that a society finds to be relevant should be incorporated into tax law. Professor van Raad sustains that it is the responsibility of countries to change their rules to reflect the relevant moral standards, instead of leaving the moral enforcement to companies.
In his view, ethical tax issues fall mostly into the scope of countries, which should not only positively act to change their tax codes to reflect changes in business and technology, but also stop trying to increase their tax bases at the expense of other countries.
Frank Engelen
In the advanced track video, Professor Engelen discusses some of the issues involving the relationship between the BEPS initiative and developing countries. While the BEPS framework has been developed keeping in mind mostly the tax structures of multinationals in developed countries, the OECD has recognised from the beginning that developing nations should also be involved; in fact, countries such as Brazil have been invited to the discussions. That inclusion brings into play all relevant stakeholders for tax planning discussions, and allows OECD to provide specific support that might be necessary to the application of the BEPS actions in the context of those countries, a goal furthered by a special report made by the OECD under a G20 mandate on the effects of BEPS on developing countries.
The lack of tax revenue leads to critical underfunding of public investment, and that may hamper development initiatives. However, the implementation of tax base preservation measures may face some obstacles:
- lack of information;
- lack of capability for implementing complex tax rules;
- lack of effective legislation against aggressive tax planning;
- capability gaps;
- peer pressure in the form of tax competition from other developing countries;
To address those issues, the OECD and other international organizations such as the IMF have assisted developing countries on their specific tax issues, but, as Engelen points out, there is still much work to be done in order to ensure that developing countries fully benefit from the BEPS measures.
National perspectives
Robert Stack
Robert Stack — now a Managing Director at Deloitte Tax, LLP — was interviewed on his previous role as Deputy Assistant Secretary for International Tax Affairs at the US Department of the Treasury. One of his first considerations relates to how the original international tax system initiatives, now more than a century old, probably never imagined that tax havens would play such a significant role in global economy. That is one of the core issues that US international tax policies aim to solve, especially because of some gaps identified in money flows around the EU, which may allow companies to benefit from 0 withholding tax instead of the 30% taxes that the US establishes to dividends, royalties, and interests from countries that lack a specific tax treaty with the US. The proposal discussed by the US to that issue is exempting from the relevant US taxes only the operations that happen on jurisdictions with at least a 19% tax rate; dividends, royalties, and interests paid on low- or no-tax jurisdictions would be immediately subject to US tax.
A second prong of the US tax reform consists in interest stripping techniques that aims to prevent companies from capitalising interest expenses in multiple jurisdictions at once. Stack points out that this measure has faced resistence not from companies, but from countries that want to position themselves as favourable places for investments. The difficulties of tax policy coordination between the US and other OECD member countries are one of the key points of Stack’s interview.
A third pillar of the US tax reform is denying reduced rates to what Stack calls “special tax reviews”, which include regimes such as IP boxes and other favourable treatments given to royalty payments. The objective of this denial is to prevent companies from benefiting from such benefits while they don’t actually perform any research and development at the country that established the patent box.
Third sector perspectives
Giuseppe van der Helm
Giuseppe van der Helm is a former executive director of The Dutch Association of Investors for Sustainable Development (VBDO) and president of Tax Justice Netherlands. He discusses the rule that tax policies and planning can play on sustainability and long-term corporate interests. Paying taxes is seen as a core element of corporate sustainabilty, as van der Helm sees it, as the social return of economic activities is what gives a company its licence to operate.
A sustainable company needs not only to pay its taxes, but to base their tax calculations not on the strict letter of the law, but in a thorough interpretation of the spirit of the tax laws. A responsible company would not benefit from legal loopholes to avoid taxes, and it needs to involve its stakeholders on active discussions on how to best serve its corporate purpose and how to understand the tax laws in a fair way.
Sustainable tax behaviour also require that States take adequate actions. Part of van der Helm’s activity on Tax Justice Netherlands has been directed to motivate countries to change their tax legislations to create a level playing field and prevent unsustainable tax planning from companies, in particular by reinforcing their openness and transparency requirements.
