Australia: Ethical taxpaying: how does a company ascertain the "right amount of tax"?

Business ethics and anti-corruption world

Tax has been much in the news recently. This is not the first time that tax has risen to the top of the political agenda but now public mood has shifted towards the idea that people should be paying more tax. Historically, tax has caused all manner of protests, uprisings and even wars but there has also previously been sustained public outcry that people just aren't paying as much tax as they ought.

This developing perception of tax as a moral or ethical obligation creates difficulty with which existing corporate processes are not always well-equipped to cope. Historically, the only real tax issue for a board to grapple with has been ensuring that the financial risk taken in relation to tax planning activity (to include the additional cost of implementation and compliance as well as the risk of obtaining the expected tax treatment) has merited the reduction in tax paid. This function has largely been delegated to finance directors and tax managers as something of a numbers exercise. Now, whilst it remains just as important to assess the financial implications of tax arrangements, the potential reputational impact of tax arrangements must also be considered. This is particularly the case where arrangements that may not only be legal, but which have previously been considered perfectly acceptable planning arrangements, may cause significant reputational harm. This must be balanced against the competitive disadvantage that would arise from a decision not to engage in tax mitigation behaviour that competitors may be undertaking.

This article summarises the historic attitudes to taxation and the current unprecedented changes in attitude to tax avoidance. It then examines the factors that a board of directors should be considering when forming a tax policy for the future.

The moral basis for paying tax

In modern society the principal justification for all tax is that it forms part of a social contract under which taxes are due in return for the protection and services provided by the state to its citizens.

Historically, tax has been regarded as an imposition by the state that is only payable to the extent due in law. Thus, there is an element of compulsion inherent in all taxes and this would be reflected in any substantive definition of tax.

The courts have, traditionally, been careful to articulate the philosophy that a taxpayer should be entitled to arrange their affairs within the law so as to reduce the tax payable, even where there are other reasons found to deny the tax treatment sought.

Tax as a protest issue

There are a number of examples in history of tax protests where citizens have rallied against the state for unfair taxation policies. They fall broadly into three categories:

  • protests against the extent of the tax burden;
  • protests against the validity of the body imposing the tax; and
  • protests using non-payment of tax as a means to highlight an undesired element of Government spending.

Where, in the past, protests have been against the government side of the tax equation, recently, tax protests have involved one set of taxpayers arguing that another set of taxpayers should be paying more tax.

Ethical viewpoint

This shift in public perception and awareness of corporate taxes could be a temporary shift which will revert to the norm. However, it seems likely that this represents a permanent change in the way corporate taxpayers will be judged by both the general public and tax authorities.

This means that, where tax affairs of companies become public, they are being judged by the standard of the soundbite where complex arrangements to-understand phrases. This is partly a result of the fact that tax legislation across the world is increasingly complex, but more because of a change towards a consequentialist view of tax arrangements; that is to say that companies are now being judged by the outcome of the tax arrangement, and not the lawfulness of the methods used to get there.

Companies will need to develop strategies to deal with this new view of taxation, not just in order to deal with tax authorities but also to demonstrate to their customers and shareholders that they are taking these responsibilities seriously.

Board concerns

Having regard to the developments in tax philosophy described above, a board will need to consider additional risks stemming from their tax practice. Some of these risks are:

Reputational risk
No business wishes to lose customers for whatever reason. If the loss of reputation causes business to be lost which may outweighs the tax saving, the tax policy needs to be managed as part of the overall reputation management of the business.

Corporate social responsibility (CSR)
An aggressive tax policy may be judged as being disconnected with company CSR policy.

Long-term effects
We are currently seeing the reputational fallout from transactions that may have been put in place as long ago as the early 2000s. The long-term effects of tax planning need to be taken into account in any policy.

Effective tax rates
There is increasing focus on the effective tax rate of a business, particularly on a country-by-country basis as this is the easiest measure for a non-tax-specialist to understand the overall tax burden on a business. This needs to be managed as much as the overall tax bill over time.

Regulatory and compliance impact
The increase of national and international tax regulation means that compliance is increasing in any event. Businesses need to have regard to the management time and expense that can be incurred in defending an aggressive tax position, in addition to the increased time already being demanded by additional reporting requirements.

Relationship with tax authorities
As can be seen under "long-term effects", an aggressive tax policy can lead to an antagonistic relationship with a tax authority. In times where tax authorities are asking for "realtime working", relationships with tax authorities are more important to manage than ever.

What can be done about this?

A corporate board needs to be clear as to what it is doing about tax, both internally and externally. Those without a tax policy need to develop one, whilst those with existing policies need to revisit them. Particular factors that will need to be taken into account include:

Type of tax arrangements to be entered into. This needs to focus on the factors that are increasingly being taken into account by tax authorities and the press, such as looking at differences between the tax result and the economic result (and the reasons for that).

Responsibility for tax arrangements.
A clear chain of authority needs to be shown as to who polices the policy and what approvals are required in what circumstances.

Dealing with tax authorities. A policy needs to set out best practice for dealing with tax authorities to ensure reputation is maintained with the tax authorities as much as other stakeholders.

Dispute resolution.
Where tax issues cannot be resolved without dispute it is important to have a clear idea of the taxpayer's own litigation and settlement strategy in relation to tax matters, particularly where publicity becomes unavoidable once litigation is commenced.

The policy needs to be communicated internally and externally (albeit potentially in different forms). It is important to impress upon deal-doers the importance of managing tax risk so that they do not prioritise short-term tax gain in contravention of the policy.

Can ethical taxpaying work?

It will never be possible to attain a level playing field if taxpayers are simply asked to pay tax by reference to their conscience – tax will always need an element of compulsion. However, the shift in public opinion in relation to tax avoidance means that businesses are becoming aware that additional factors, particularly reputational, mean that it makes business sense to form a clear position in relation to tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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