Background on Panama Papers
Question:
Discuss about the A Companion On Rational And Moral Action.
In 2015, the world saw the documents covering the personal financial information of wealthy public officials and individuals, which had been private till that time. Panama Papers involved the leak of 11.5 million documents which covered the details of over 2 million offshore entities, regarding their attorney client details and financial information (Harding, 2016). Some documents even dated back to the 1970s. These were taken from Mossack Fonseca, the corporate service provider, and the Panamanian law firm. Even though offshore business entities have the legality to exists, some of the reporters highlighted that some of shell corporations of Mossack Fonseca were being used for unlawful reasons, which included invasion of international sanctions, fray and tax evasion. With Panama Papers, tax havens were in the news again (Obermayer and Obermaier, 2016). They highlighted how the secretive companies were having hidden beneficial owners, which included famous personalities. With this leak, a question was raised on whether the tax minimisation schemes adopted by the multinational companies (MCSs) were ethical, or were the activities involving tax havens an unethical task. Resulting from these questions is the issue of government taking actions into such tax havens or tax minimisation schemes, as being a legitimate conduct or a morally incorrect one. This discussion aims to highlight that the tax minimisation is not an unethical task per se; it is the tax haven creation which is the unethical aspect.
When it comes to the concepts like good governance, corporate social responsibility, accountability and the like, it is expected from the companies that they would work towards the needs of different stakeholders, instead of being focused on the shareholders only. This is particularly stated in the stakeholder theory. In the attempts of good governance, the companies attempt to minimize the tax liabilities which they have through the use of tax planning (Back, 2013). This is done by using the mechanisms and the tools which are available, where the particular focus is on exemptions, rebates, deductions, allowances, and the like. Tax planning has to be seemed as a tax compliant behaviour. However, the issue is raised when the matters reach the grey area which is between tax planning and tax avoidance. Even though tax avoidance is legitimate, it is seen as an aggressive tool where it includes using the financial arrangements or instruments which are not anticipated or intended by the regulatory department as being a mode of taking the taxation benefit. An example of this is the tax havens where the tax is avoided by bending the rules and regulations under the taxation system, particularly which is not unlawful, as against tax evasion. It operates within the words of the law, but definitely not based on the spirit of it (McGee, 2011).
Tax is seen as a social responsibility. This is what raises a question against the tax avoidance schemes. A particular point raised in this regarding is the impact of government spending having a negative impact over the daily lives of people. When such happens, how can the avoidance in paying the fair share of taxes, of MNCs, taken to be a fair thing? This is just the systematic avoidance of the tax by the rich people and the companies. This is a significant ethical issue as avoiding payment of tax is basically avoiding the social obligation. However, when such arguments are made, a key aspect which is forgotten is that the law permits the individuals and companies to manage their tax, by investing or by using the lawful means. This is done to allow the individuals to not be burdened by excessive taxation and to allow for flexibility. This is just like a person managing their finances, in place of spending every hard earned penny. It is the responsibility of the company directors to maximize the value for the shareholders and included in this is minimizing the tax costs for the purpose of the increasing the value for shareholders, and this is done in the realms of legality. There are a number of taxes which the company pays to contribute towards the economy, and by these payments, the contribution of businesses is made. But this does not require them to not attempt to minimize the costs, be it in form of tax minimization (McDonald, 2014).
Tax Minimisation as Not an Unethical Task
To establish this viewpoint, the utilitarian view proves to be of help. This theory requires that for an action to be ethical, it has to maximize the utility of such action. In other words, such actions which result in the maximization of the benefit for the majority, that action would be ethical. Where the companies chalk out their tax plans and strategize to minimize it, the utility for the different stakeholders of the company is maximized, and this makes it an ethical task (Jonge, 2012). The problem is raised when the focus is shifted from the maximization of utility for the public to the maximization of utility for self. This is something which is coupled with virtues like greed and self-centredness and to blame it upon tax minimization is wrong (Melé, 2009). The next point which is often raised against tax minimization being ethical is that the MNCs do not pay a fair share when they indulge in minimizing tax. This is due to the notion that paying little or no corporate tax, the companies do not contribute to the economy. This notion is out rightly wrong as the companies anyway contribute towards the stakeholders. Again when the utilitarian view is applied here, the company undertakes its activities for maximizing the utility of the different stakeholder groups. Here, the stakeholder theory is also met. Thus, this point raised against the tax minimisation is proved wrong (McGee, 2011).
There are not many individuals who do not make an attempt to minimize their corporate or personal taxes (Zgheib, 2014). The problem is raised when the push is made in the ethical line between avoidance and minimisation of tax. The key here is that the minimisation of tax is done based on law, and so is the tax avoidance. However, the former follows both the letter and spirit of law, whilst the latter follows only the letter of law. Another important point which has to be noticed here is that the fair share of tax cannot be defined. What the opponents define unethical in tax minimization cannot be quantified. Different individuals have different viewpoints and some may deem even the full payment of tax as not being the fair share of tax. The individuals and businesses have to meet the legal obligations which define what the fair share of tax is. Beyond it, the perceptions of individuals cannot be imposed on businesses to make something ethical. Stating something as fair share of taxation is very subjective, inconsistent, unpredictable and uncertain with regards to the law being fair. The individuals and businesses cannot be expected to work on what is the fair share of taxation, as they have to put focus on other important matters, having an impact on its stakeholders (McGee, 2011).
As has been stated from the very beginning of this discussion, tax minimization is not ethical. It is the ethics of reducing the tax liabilities becoming problematic when these are adopted in an aggressive manner for avoiding tax, by making use of the creative schemes, which the state did not intend or authorize, where only the letter of law is abided. The Panama Papers have thoroughly highlighted the tax avoidance and the ethics which underline this, in the mainstream media. Panama Papers was not the sole thing highlighting the menace of tax avoidance and the same had been done previously in Swiss/ HSBC leaks undertaken in 2015, and the more recent ones, with Paradise Papers (Lord, 2018). All these have highlighted the ease with which the high net worth individuals and companies recognize their income and wealth transnationally by using the established global financial system by use of legal business structures and offshore financial centres. The society has to bear the brunt of tax avoidance due to the tax avoidance resulting in increasing tax burdens on resident taxpayers, growing inequality, and the undermining of state of legitimacy (McGee, 2011).
Tax Minimisation vs Tax Avoidance
By focusing on tax minimisation, the stakeholders can be benefited, as the money saved by carefully planning the tax, can be used to further the business and operations of the company, which in turn results in the growth of the stakeholders. But when tax avoidance is undertaken, it shifts the funds away from the public purse, which becomes difficult in the backdrop of phenomenon with economic uncertainties and budgetary austerity, and also results in the social fairness being undermined (McGee, 2011).
When the philosophical and historical view is taken, it is shown that tax evasion is ethical at times, and other times, it is unethical. The view of tax evasion being ethical or ethical had been detailed by Crowe (1944). Angelus of Clavisio (1494) highlighted that there was no ethical obligation for paying the taxes where the government does not make use of the revenues collected from the individuals, for a common good. Berardi (1898) denied the moral duty of paying taxes where perjury or lying was involved. Genicot (1927) accepted that there were justified grounds to not pay the full amount of tax as the full payment would become unfair on the taxpayer. This was stemmed from the fact that the wicked men paid lesser tax in comparison to the conscientious men. Crolly (1877) supported the stance that the payment of taxation is not required till such time where the evasion would end in violence. Lehmkuhl (1902) supported the position that evading tax was unethical where the non-evaders had to pay a higher tax due to these reasons. So the moral duty of the taxpayer was towards others, in place of the government. Davis (1938) contrasted this view by stating that where the honest taxpayer was required to take up the slack and to pay high tax for evasion of others, it would be unfair. The literature is thus, scattered on this issue (McGee, 2006).
To bring clarity to this matter, there is a need to consider this situation: what if the person lies in high tax bracket and this allows the government to take over 90% of the marginal income of such person; whilst the government takes a lesser percent from the low income earning groups. This scenario has the individuals being treated as a resource and as being the means to an end, which would be a breach of Kantian ethics. So, where the individuals of such taxation groups undertake the activities to bring down their tax percentage, it would be unethical. It would be unethical only when the same breaches the morals and principles, and hurts the sentiments of individuals (McGee, 2006).
Thus, from the discussion carried on in the previous sections, it can be concluded that tax minimization is an ethical thing to do, where the individuals and MNCs are right in carefully planning out their finances to give the best to the different stakeholders. It is ethical particularly from the perspectives of using the best strategies to maximize the benefits. The problems, as highlighted, are raised when tax evasion or tax avoidance is undertaken. This is when the stakeholders have to bear the consequences and the Panama Paper leaks happening. The Panama Papers highlighted the involvement of a number of prominent personalities in tax avoidance. The main problem in this matter is that the tax evasion follows both the letter and spirit of law, whilst the tax avoidance is focused only on letter of law and the spirit of law is blatantly ignored. Thus, the aim of this discussion has been attained, through proving the points against tax minimization being wrong.
References
Angelus of Clavisio. (1494) Summa Angelica, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Back, F. (2013) Avoiding tax may be legal, but can it ever be ethical? [Online] The Guardian. Available from: https://www.theguardian.com/sustainable-business/avoiding-tax-legal-but-ever-ethical [Accessed 20/02/18]
Berardi, A. (1898) Praxis Confessariorum II, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Crolly, G. (1877) Disputationes Theologicae de Justitia et Jure III at pp. 1001ff, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Crowe, M.T. (1944) The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Davis, H. (1938) Moral and Pastoral Theology, pp. 339, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Genicot, E.S. (1927) Institutiones Theologiae Moralis I, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Harding, L. (2016) What are the Panama Papers? A guide to history’s biggest data leak. The Guardian, 5.
Jonge, J. (2012) Rethinking Rational Choice Theory: A Companion on Rational and Moral Action. Basingstoke: Palgrave Macmillan.
Lehmkuhl, A. (1902) Theologia Moralis I, as cited in Crowe, M.T., The Moral Obligation of Paying Just Taxes. Washington, D.C: The Catholic University of America Studies in Sacred Theology.
Lord, N. (2018) Tax avoidance might be legal, but it’s time we seriously questioned its ethics. Tax Breaks Newsletter, 2018(385), 1-2.
McDonald, G. (2014) Business ethics: a contemporary approach. Cambridge: Cambridge University Press.
McGee, R. W. (2006) Three views on the ethics of tax evasion. Journal of Business Ethics, 67(1), pp. 15-35.
McGee, R. W. (2011) The ethics of tax evasion: Perspectives in theory and practice. New York: Springer Science & Business Media.
Melé, D. (2009) Business ethics in action: Seeking human excellence in organizations. Basingstoke: Palgrave Macmillan.
Obermayer, B., and Obermaier, F. (2016) The Panama papers: breaking the story of how the rich and powerful hide their money. London: Oneworld Publications.
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