Companies that seek out tax havens violate principles of social and civic responsibility, writes Tiina-Liisa Sexton.
Dilemma: The managing director has approached you regarding the transfer of some of your company's business activities offshore to a known tax haven. He has had discussions with some colleagues who have advised that their companies have undertaken similar transfers of assets and business, which have resulted in substantial tax benefits.
You have been asked to advise on the likely ethical consequences of such a plan.
Answer: First, it is necessary to clearly understand what is meant by 'tax haven' in this instance. The OECD identifies countries as tax havens if they exhibit the following three characteristics:
no or only nominal taxes
lack of transparency
lack of effective information exchange
Accordingly, having no or nominal taxes is not sufficient to characterise a jurisdiction as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether or not to impose direct taxes and, if so, to determine the appropriate tax rate.
It is not uncommon for countries to encourage investment in exchange for preferential tax treatment. Therefore a country that offers special tax incentives to industries or to companies that invest in particular regions of that country is not generally seen as a tax haven, as these arrangements are not necessarily considered to be unethical.
However, countries that have secretive tax or financial systems accompanied by minimal or low taxes for non-residents may be seen as unethical and subject to abuse.
Certain principles, such as the 'know your customer' rule may not be followed, allowing individuals and companies to operate under fictitious names.
In such instances, companies that are required to pay tax are seeking to hide their taxation obligations, leaving others to bear a greater tax burden. Overly aggressive tax avoidance violates principles of ethics and social responsibility. Aggressive tax avoidance, or the failure to pay one's fair share of taxes, violates principles of social or civic responsibility.
A broad stakeholder view suggests that businesses have a social responsibility beyond making a profit, that ethical and socially responsible business behaviour is critical to long-term business success and survival, and that social responsibility is compatible with profitability.
Arrangements that have the express purpose of avoiding or evading tax obligations are considered to be abusive in nature and, if left unchecked, undermine community confidence in systems of taxation as well as the integrity of any tax system.
Clearly these arrangements are not in the public interest. Therefore before transferring assets overseas it is necessary to establish whether the tax laws in the 'tax haven' country are applied openly and consistently with total transparency; there should be no secret rulings or secretly negotiated tax rates. In addition, there should be no secrecy laws that allow assets and income that are subject to tax in your home country to be concealed.
There should be agreements between the two countries for the exchange of information to ensure that the company is subject to the appropriate level of taxation.
Furthermore, transferring your business activity and assets into a potential abusive tax haven arrangement introduces some specific risks for your company:
your company could lose its assets through theft by a promoter or lack of consumer protections under the tax haven's financial regulatory and legal systems
your company could be subject to a significant tax bill, including interest and substantial penalties, on any undeclared income or denied deductions
your company could be prosecuted for tax evasion, fraud or money-laundering offences
if any of your company's assets are tainted by criminality, they could be confiscated
any association with unreasonable taxation avoidance or evasion may significantly impact upon your company's reputation
Therefore, the risks are significant and need to be carefully considered.
In terms of complying with ethical standards, APES 220: Taxation services provides some guidance. It requires that members not 'promote, or assist in the promotion of, or otherwise encourage any tax schemes or arrange-ments where the dominant purpose is to derive a tax benefit and it is not reasonably arguable that the tax benefit is available under Taxation Law. Accordingly, a Member shall not provide advice on such a scheme or arrangement to a client or employer other than to advise that in the member's opinion it is not effective at law.'
Answered by Tiina-Liisa Sexton, CPA Australia's ethical adviser.
