“Tax avoidance” is different from “tax evasion,” which refers to a situation where a company attempts to reduce tax liability by falsely suppressing income or inflating expenses, recording fictitious transactions, etc. Tax evasion is inherently illegal. In order to better understand the ethics involved, it would be instructive to assess the differences between tax evasion and tax avoidance. Some companies treat taxes as a question or obligation in their code of ethics (or similar guidelines). The majority are only committed to preventing illegal tax evasion and complying with the legal requirements of the countries in which they operate. Two examples are L`Oréal and Old Mutual. Vodafone (which has been accused of tax evasion in the media in the past) has its own “tax code” which sets out its obligation to pay the legal amount required “in accordance with rules set by governments” and that it is the government`s decision to decide what is a “fair” amount of tax. However, some, such as Rolls Royce, go even further by explicitly emphasizing respect for the “intent” as well as the “letter” of the law. In the UK, the introduction of a General Anti-Abuse Rule (GAAR) is proposed to prevent tax regimes that the government considers “abusive” and that David Cameron has described as “morally wrong”. However, some argue that the new law should be a more comprehensive anti-tax avoidance rule, although this raises challenges as to what constitutes “appropriate” behaviour, is subjective and difficult to define, and creates too much uncertainty for businesses.
In the UK, the proposed introduction of a General Anti-Tax Avoidance Regulation (GAER) aims to clarify what tax avoidance is, what is acceptable and what is not. It aims to prevent tax models that the government considers abusive and that David Cameron has described as “morally reprehensible”. But legislation that focuses on notions of what constitutes “reasonable” conduct is still too subjective and difficult to define. What companies expect most from a tax system is security – they want to know what their tax bills will be so they can plan their strategy and investments accordingly. 1 The tax gap covers a number of factors, such as tax evasion, mistakes, the informal economy, legal interpretation and tax evasion. Tax evasion is illegal. It involves intentionally violating or circumventing relevant tax laws in order to minimize tax liability. Tax evasion generally involves intentional under-reporting or non-reporting of receipts, misrepresentation of deductions, or both. From a legal point of view, this behaviour is easy to spot: the taxpayer has violated a relevant law, which amounts to criminal fraud. While tax avoidance is legitimate, it can be considered aggressive if it involves the use of financial instruments and arrangements that are not planned or contemplated by governments as vehicles for tax benefits. For example, the use of tax havens abroad.
Avoiding taxes and circumventing the rules of the tax system is not illegal, unlike tax evasion; It acts in accordance with the letter, but perhaps not in the spirit of the law. While there is a general public consensus on the illegality of tax evasion – the act of intentional non-payment of taxes due – there are many other differences in how the public evaluates and examines tax avoidance strategies by public officials aimed at minimizing the amount an individual pays through loopholes. A poll conducted just before the 2016 election found that nearly half of Americans agreed with Trump that it was “smart” not to pay taxes. But two-thirds said he was “selfish” and 61 percent said he was “unpatriotic.” As a researcher working on business ethics, I see these differences in how individuals perceive tax avoidance as dependent on an individual`s ethical foundations. Ethical foundations are the principles, norms and values that guide individual or collective beliefs and behaviours. They can shape what people think is important—such as fairness, caring for themselves or others, loyalty, and freedom—and guide judgments about what is right or ethical and what is wrong or unethical. In its latest estimate, HMRC estimated the tax gap, the difference between the amount of corporation tax actually levied and the amount that would be levied if all businesses comply with the spirit of the law, at £4.1 billion. Some activists estimate the real figure could be £12 billion or more. According to a 2011 ActionAid report, 98 FTSE100 companies use tax havens to reduce their corporate tax burden.
But it could be argued that companies are grafting themselves into the middle here. When companies see it as their fiduciary duty to maximize profits for shareholders, institutional investors (which include our pension funds and savings accounts) benefit. Isn`t this a victory for society? The results of this survey may indicate that the government needs to pay more attention to explaining its position on this issue and its interpretation of the law in order to provide greater certainty for businesses. Companies themselves need greater internal involvement in the decisions and circumstances underlying their tax situation. This must then be communicated to the outside world and tell the story behind the business decisions that led to where and how much tax was paid. Such transparency would help restore public confidence. Article summary: Allegations that British multinational FTSE 100 Associated British Foods (ABF) avoided paying millions of pounds in taxes in the impoverished African state of Zambia were made by Action Aid in February 2013. Zambia Sugar, a subsidiary of ABF, generated a pre-tax profit of $123 million between 2007 and 2012, but paid less than 0.5% corporate tax to Zambia during the same period. Zambia`s public services have lost about $27 million – enough to get 48,000 children into school, it is claimed. Instead of hiding behind the business case for tax evasion, businesses need to make their tax planning transparent. Businesses and government need to be more careful about communicating their position on this issue and their interpretation of the law – and most importantly dealing with it openly. This would restore public confidence and bring greater certainty to the economy.
Some of the wealthiest people in the U.S. would pay only a tiny fraction of the billions of dollars added to their wealth each year in federal income taxes — sometimes without paying anything at all. We can all conclude from this information that tax avoidance is not illegal. However, we can question whether the deductions generated by the losses are real or not. This then begs the question: are these actions ethical? The public expects the rich to pay their fair share of taxes. This is the socially responsible thing that needs to be done. The reality, however, is that the burden of paying taxes falls unfairly on low- and middle-income taxpayers who play by the rules and pay their fair share. It demonstrates justice and virtue on the part of these taxpayers, contrary to the “immoral” and unethical practices of some that undermine the integrity of our tax legislation.