IFC Economic Report – Summer 2013

The Big Debate: Can and should Morality be applied to corporate tax planning?

Those who seek to allude to morality as a basis for revenue collection fail to comprehend that by definition, insofar as it exists, morality is not a universal standard but accords to any one or more of a particular philosophy, religion, or culture, sometimes all three.

Some observers, notably Celia Green, make other distinctions between tribal and territorial morality. Territorial morality is permissive, allowing the individual whatever behavior does not interfere with the territory of another and seeks to apply rules which are universal and absolute, Kant and Geisler would agree. Green relates the development of territorial morality to the rise of the concept of private property and the ascendency of contract over status. Tribal morality on the other hand is prescriptive, imposing the norms of the collective on the individual. These norms will be arbitrary, culturally independent and entirely subjective. So which sort of morality are we talking about? And therein lies the entire basis for the rebuttal. One man’s tax avoidance is another man’s tax legitimacy but are we really to run a civilized society on the basis of tribal behavior?

The confusion that results if we do is evident.

Mr Miliband thought that Mr Livingstone’s use of a corporate service company to reduce his personal tax liability in a highly artificial manner was ‘correct and proper’. So do numerous employees of the BBC. Mr Clegg thought Mr Romney’s perfectly correct tax payments, calculated at 15 per cent on long term capital gains and dividend income as prescribed by the IRS Code, were in some, unspecified way, wrong, apparently simply because the investment was made in a Cayman Islands entity. So too President Obama is of the view that companies operating lawfully in the Cayman Islands subject to the complete tax transparency afforded to the IRS under the 2001 Tax Information Exchange Agreement are a ‘tax scam’ although the basis for the allegation is not specified. Nor does the IRS seem motivated to enquire. On the other hand, Mr Cook contends that Apple was at all times complying with applicable law and asks the Senate Subcommittee, in effect, what other test he is supposed to apply to assess the amount of tax payable.

Sir Roger Carr of the CBI says the same thing succinctly: “Mr Cameron should avoid the moral debate. Tax avoidance cannot be about morality. Tax should not be viewed as a down payment on social acceptability. Tax should be calculated in keeping with the law of the land.”

And there we have it. Tax or indeed, any form of transfer of property compulsory or otherwise can only be dealt with by the law of the land. That is the cornerstone of the rule of law which underlies the concept of a civilized society and distinguishes us from the tribal behavior to which the extreme left wing and the NGOs that speak on its behalf would have us descend.

If morality is based in philosophy, religion or culture, it cannot provide sufficient certainty and certainly not a mechanism for assessing quantum. The term ‘fairness’ does not provide a satisfactory basis. Fair to whom and why?

The confusion that is inherent in the suggestion that morality is a basis of revenue collection is amplified by weak politicians who necessarily seek to appeal to the greatest number of voters. Thus the issue of ‘morality’, as determined, from time to time, by the consensus view of the3 inevitable focus groups may indeed determine the content of a political manifesto but at no time does it constitute a basis for corporate conduct where duties are owed by management to the company.

It is only when moral position is held by sufficient majority of legislators and enactment results that we have sufficient certainty for assessment and enforcement. Assessment and enforcement are simply a function of the law of the land.

Somewhat regrettably with the introduction of the GAAR, the position may not be as clear now as it was at the time of the admirable statement of Lord Tomlin in IRC v Duke of Westminster: “Every man is entitled,” he said, “if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure his result, then, however unappreciative the Commissioners of the Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

‘Furniss v Dawson and Ramsay did not alter that fundamental proposition save to say that where a transaction had prearranged artificial steps, which served no commercial purpose other than to save tax then the proper approach was to tax the effect of the transaction as a whole. In time, we will know whether the GAAR will change that approach. The expressed intention – that it will negate an expressed course of action that aims to achieve a favourable result that Parliament did not ‘anticipate’ and which cannot be regarded as reasonable – hardly improves on grounds of certainty. Nevertheless it will be for the Courts to decide on any outcome. Thus does the law deal with aggressive tax avoidance?

And thus nowhere in the law do we find any support for the comments of Mr Cameron and Mr Osborne, who seem strangely at ease in aligning their opinions with radical left wing groups such as the Tax Justice Network, regarding morality being a satisfactory test for the assessment of tax revenue.

If the law does not meet with the intention of the legislators they must change it. It is only when they fail or are incapable of doing so that we find the minority braying about unspecific notions of ‘morality’.

Anthony Travers
Senior Partner
Travers Thorp Alberga, Cayman Islands