Tax avoidance might be legal but it’s time we seriously questioned its ethics
Our take | Looking at the huge scale of global tax avoidance uncovered by leaks like the Paradise Papers, this article reminds us of the fact that tax avoidance is unethical because it harms societies by increasing inequality around the world, and highlights the role of the professional advisors who make this all possible.
Remember, remember, the 5th of November. Not, this time, for gunpowder, treason and plot. But for the news break by the International Consortium of Investigative Journalists (ICIJ) of the so-called “Paradise Papers”, a leak of 13.4m files detailing the financial behaviour of individual and corporate elites, many of whom use offshore financial centres to avoid paying tax in their home countries.
This is a major leak that not only questions the opportunities available to the wealthy in arranging their taxes, but also the extent to which governments facilitate such enduring arrangements for the benefit of an elite minority.
Tax takes many forms: income tax, corporate tax, land tax, capital gains tax, death tax, inheritance tax, sales tax, customs and excise tax, and value-added tax are all available to governments. Plus many more. Paying our taxes to fund public policy initiatives and investments is a central necessity of most societies – and most of us do meet these expectations.
But while there are those who seek to criminally evade their tax liabilities, or fraudulently deceive the government, we also see varying levels of non-compliance by others in society, raising questions about the ethics of minimising how much tax you pay.
For instance, there are entirely legal and approved ways of “avoiding” tax liabilities for both individuals and businesses. Reducing your tax bill through effective planning is legal, ethical – and in some forms encouraged by government-authorised schemes. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning. The key point is that here we see tax relief obtained in the ways that the government intended.
The ethics of reducing tax liabilities becomes problematic when it is aggressively avoided through creative schemes that are not intended or authorised by the state – but which do abide by the letter of the law. It is here we see what is referred to as “tax avoidance”. This is formally legal but highly questionable, seriously harmful and often unethical.
The Paradise Papers have again brought tax avoidance and the underlying ethics of this to mainstream public attention. As with previous scandals, such as the Panama Papers in 2016 and the Swiss/HSBC leaks in 2015, they reveal the ease with which corporations and high net worth individuals are able to organise their wealth and income transnationally, through the established global financial system, using offshore financial centres and a range of legal business structures to enable this.
We see corporations playing tax games by shifting profits between jurisdictions to exploit gaps and mismatches in their tax rules. We see them artificially trade with shell companies that form part of the same corporate groups, effectively doing business with themselves, to make profits disappear. This can result in little or no overall corporate tax being paid.
Notable individuals such as Lewis Hamilton, the Queen, Bono and others have been criticised in recent days for avoiding their tax liabilities through such schemes. Their levels of culpability will vary – whether fully aware, wilfully blind or just plain ignorant to how these arrangements function for their benefit.
But we must also scrutinise how leading banks, accountancy and financial firms which seek to creatively make use of unintended legal loopholes, facilitate these tax arrangements. And the fact that many – including Appleby (Bermuda) and Estera (Cayman Islands) – are based in British Overseas Territories.
A further common feature of the control of these schemes is also the assistance of third-party institutions known as trust and company service providers. These firms, such as Appleby and Estera – the source of the Paradise Papers leaks – set up and maintain corporate vehicles to structure artificial or contrived financial arrangements. We must question their role.
While it is legal to organise finances in this way, we must question the ethics of a system that makes the ultra-rich richer and leads to growing inequality around the world. This goes to the fundamental nature of how we believe society should function.
If we focus on the harm of tax avoidance to society, rather than how it is legally defined, then we can see that it contributes to growing inequality, increases tax burdens on resident taxpayers and undermines state legitimacy. Furthermore, the government’s accommodation of those structures that facilitate tax avoidance can also be misused by those looking to conceal criminal monies. For example, the UK has seen large investment from companies based in offshore tax havens into its property market, with suspicious wealth being used to buy high-end properties in London especially.
Tax avoidance not only shifts funds away from the public purse – which is even more pertinent in times of budgetary austerity and economic uncertainty (think Brexit) – but also undermines perceived social fairness. There is an improper transfer of money away from public goods.
Yet despite some political rhetoric outlining its deleterious effect, it is not being addressed with sufficient rigour. The UK – which has sovereignty over a number of the offshore states – has made a number of pledges to tackle tax avoidance – but this has not been followed by punitive, enforcement action.
A unitary tax regime – which treats a multinational business as a single entity in tax terms – may be one solution. But until there is a legal requirement for all avoidance schemes to be formally approved by the state before their use (rather than closed down after they are discovered), there will remain scope for tax entrepreneurs to avoid their liabilities.
Our verdict | We agree that tax avoidance is unethical, and that the government needs to take further steps to close loopholes, both domestically and internationally. However, we would also go further and argue that tax avoidance is in fact unlawful, as our friends at TaxWatch have argued, even if they are not always illegal. Tax avoidance schemes are unlawful because they are bending the rules to gain an advantage that parliament never intended, and are therefore "ineffectual in law because they involve acts which, although not illegal, i.e., positively forbidden, are disapproved of by the law, and are therefore not recognized as the ground of legal rights, either because they are immoral or because they are against public policy.” See also tax avoidance vs tax evasion.