The practice of legal tax planning has come under attack, with the tax affairs of multinationals such as Google, Amazon, and Starbucks coming under intense scrutiny and criticism.

The practice of legal tax planning has come under attack, with the tax affairs of multinationals such as Google, Amazon, and Starbucks coming under intense scrutiny and criticism.  At a personal tax planning level, with the progress of FATCA and other similar automatic information exchange agreements, the subject of tax avoidance and offshore tax planning is high up the agenda at summits such as the G8.

Whilst discussion so far has tended to focus on public policy and the actions of specific companies and jurisdictions, there is a question as to what this means for the tax planning industry itself. In other sectors, crises have historically prompted the development of new standards, new ethics – so does today’s tax planning industry need an ethical revolution?

There can be no doubt that we are entering a new era.  As tax avoidance has steadily risen up the public policy and media agenda in recent months, much ink has been spilt on the debate over the line between legitimate tax planning and ‘immoral’ avoidance, or whether the only line that matters is the line of law.

The ideological gulf between the two camps is wide, and the academic debate will likely continue for some time. However the tax planning industry has a more urgent, practical need to seek out common ground in the debate, to see where the tax planning industry can learn immediate lessons from events. This article explores a few issues and seeks to provide some practical guidance.

The world has become a global village. Interconnected transactions, global supply chains, and intellectual property developed all over the world mean that traditional boundaries have become fluid. Thus for example, a corporate giant like Google is able to establish a structure which employs thousands of people in the UK; makes billions of sterling in revenue in the UK, but permits Google to pay a fraction of 1 per cent of that revenue in tax to the UK because its transactions are formally executed in Ireland where it has a more tenuous connection.

Where a country introduces punitive taxation on high incomes, as France has done, people choose to renounce their citizenship and move elsewhere, the most notable example being actor Gerard Depardieu. 

Some would argue that this is wrong and irresponsible, that Google is shirking its corporate responsibility; that there is a moral imperative for corporates and individuals to pay a fair contribution to society. Privacy, a morally defensible personable right, does the tax planners’ profession no credit when privacy is abused. The defensible concept of moral and ethical tax planning is blurred by association with immoral, unethical and illegal tax evasion.

The tax planner’s response

Tax planners regard the right to freedom of establishment as part of the free international market. In an effort to encourage growth, countries grant tax incentives which permit accelerated deductions in respect of capital projects against current income, in the interests of all. There is a strong case that tax and regulatory competition, like other forms of competition, restrains governments from excess and creates a stronger international society, not a weaker one.

As a vigorous proponent of the rule of law the tax planner believes that every citizen is entitled to know his legal position and is morally and legally obliged to obey the law. Freedom of the individual extends to the freedom of the collective entities which they establish. This includes the freedom of movement of capital and of establishment in different environments. The freedom to move away from a country which imposes excessive taxes or which is administratively inefficient or corrupt is an important freedom which will lead to efficient states which provide maximum benefit at minimum cost for the citizen.

Specialists in tax planning must understand the world’s tax systems, and as responsible advisers they are under a duty to help clients to comply efficiently.  Such actions are legal, support individual freedom, preserve wealth and assist in its application for those who should benefit. 

Responsible citizens support the rule of law to impose order on society, nationally and internationally. Balance is achieved through legislative action or international agreement. It is the duty of the tax planner to observe the rules that are imposed and to guide others to prosperity, taking advantage of the freedoms open to them. People do complicated things, the rules are complicated, and it is this complexity upon which the profession is based.

The right to privacy is not a right to commit crimes behind a veil of secrecy. The survival of tax planning as a profession is that - regardless of jurisdiction - structures and transactions should exist for economic reasons other than the avoidance of taxes.

International regulation of the financial industry to prevent instability of financial systems or abusive behaviour to clients throughout the world is to be promoted and supported. But over-regulation, over-insistence on compliance and unnecessary box ticking, is to be decried. Over-compliance is not a force which reduces crime, or increases financial stability or protects consumers of financial services worldwide; it is instead grit in the system which imposes a substantial effective drag on the economy.

It is not the tax planner’s place to impose his personal moral code upon his clients, yet it can be appropriate to draw moral issues to the attention of clients.  This is partly because as a result of the infringement of the moral code, the planner and client could incur reputational and financial costs. It is also so that the client can himself make informed judgements taking into account of the moral as well as the legal dimension.

Whether the individual practitioner believes that ethical concerns should play a role in tax planning or not, there are basic ‘ethical’ principles that any good tax planner should adhere to, whether for reasons of ethics or simply prudence. The following three rules of responsible tax planning can act as a guide.

The scrutiny test

The planner should ask whether the plan will withstand scrutiny. If it relies upon non-disclosure, then the plan is unlikely to meet even the legality test, let alone be morally defensible. If the plan is legal, but if revealed would be judged harshly in the Sunday papers, then the plan may be of questionable morality.

The substance test

A plan without substance will be subject to criticism. The “substance over form” tests utilised by the court to cut down on tax avoidance often go to the question whether the transactions described had commercial substance. To establish a plan which is not aligned with the underlying commercial reality is to take a commercial risk, whether or not it is immoral.

The hypocrisy test

Planning should not be manifestly hypocritical. A plan which claims the benefits accorded to citizens who make charitable donations, when as a matter of commercial reality there is no underlying charitable donation is likely to be regarded as a particularly ugly theft. The legislature has granted incentives to encourage morally admirable actions. Abuse will invoke censure from others which will carry with it its own consequences, both social and financial. It is appropriate and proper in all areas of life to expect individuals to take into account moral as well as legal considerations. This obligation does not stop at the practitioner’s office door when a client is willing to pay a fee.

The authors debated the topic at the Ethics conference of the International Tax Planning Association in Monte Carlo in June 2013. This publication is grateful for the article submitted and invites readers to respond with comments.