Tax Avoidance V. Ethics and the Boards Role

“Tax Avoidance v. Ethics and the Boards Role”

Introduction

“The role played by professionals is an important one that often gives rise to ethical dilemmas” (Higgs-Kleyn and Kapelianis, 1999, p. 370). Avoidance is an ethical dilemma tax practitioners are frequently faced with. Tax accountants have dual responsibility; to clients to help maximise profits and to Government to pay tax in full, aiding the provision of public goods. This conflict of interest will be discussed along with the institute’s influence on decision-making and public perception, in determining how effective principles-based and rules-based approaches are.

Evasion, Avoidance and Planning

Three terms often confused by the general public are tax evasion, avoidance and planning.

“Evasion is the illegal manipulation of one’s affairs” (James and Nobes, 2012, p. 16), achieved in distinctly unethical ways – suppressing information or providing deliberately false information to tax authorities. Being illegal it is punishable by a variety of means, the harshest being lengthy prison terms (ICAEW, 2014).

Tax planning is structuring one’s financial matters to utilise eligible tax efficiencies such as exemptions, while simultaneously achieving business goals (Surana, 2011).Whereas tax avoidance is defined as “the arrangement of one’s financial affairs to minimise tax liability within the law” (Oxford English Dictionary, 2015).

(Sandford, 1973) cited in (James and Nobes, 2012, p.100) suggests avoidance is used to achieve results contrary to those expected by the spirit of the law. Avoidance is often regarded as unethical and abusive, as it exploits loopholes in law to gain tax advantages unintended by Parliament (ICAEW, 2014). Conversely, planning is seen to be good corporate governance which shows the business have shareholder’s best interest at the heart of their decision-making (Back, 2013).

In reaction to unforeseen ‘rule-bending’, Conservative Government have introduced the ‘General Anti-Abuse Rule’ (GAAR). This preventative rather than detective measure gives HMRC powers to challenge abusive avoidance arrangements before materialisation (HMRC, 2015), and close things such as overseas tax havens used for “no good reason” (ICAEW, 2015, p. 21). The GAAR is intended to act as a deterrent to high-net-worth individuals considering avoidance schemes, and discourage individuals recommending avoidance schemes (HMRC, 2015).

A noteworthy difference between the aforementioned three, is that evasion gives Government no opportunity to raise revenues due to its inherently secretive nature. Although treated differently by law enforcement, the outcome of all is Government revenue is below where it otherwise could be, thus to the beneficiaries of taxation they are all equal.

CSR

Perception of what is and isn’t acceptable changes over time and varies between businesses and individuals. General consensus suggests paying the ‘fair’ amount of tax is the responsible and ethical thing to do (Sky News Business, 2015). Austerity measures imposed by Conservative Government have helped fuel public anger over firms “avoiding a social obligation” (Back, 2013).