The thin line between tax avoidance and evasion by Ian Hayes

by Heather Dandridge  19-Oct-2016 at 10:54

The thin line between tax avoidance and evasion by Ian Hayes

"As a businessperson I have legally used the tax laws to the benefit of my company, my investors, my employees and my family," ... "It's my job always to minimise the overall tax burden to the greatest extent possible which allows me to invest in neighborhood workers, building amazing structures all over the place and it fuels tremendous growth in various communities throughout the United States." - Donald Trump, 2016.

Whatever your views of Donald Trump and his candidacy for US President, his comment above is indicative of how most Corporate Boards have viewed tax policy and where they should position their company.

In reading it though, in 2016, with intense heat generated by revelation of major avoidance schemes used by global corporations to mitigate and eliminate tax liabilities and by the willing compliance of some Countries allowing the creation of specific structures which assist in planning, Trump's words seem to lack a sense of corporate social responsibility.

Do you think that is fair comment?

Historically, Trump is right and his view will be supported by many business persons. It reflects the way the corporate world is structured because the role of a company designed to make profits is to do just that, and then ensure that the maximum amount of those profits become available for distribution to shareholders. There is nothing at present which says that "x%" of profits must be made available for specific purposes or that, if the total tax bill is less than the corporate rate on disclosed profits, further tax will be due.

In Trump's case his social responsibility is met by his further local investment, where local for him is the US. This concept of generating profits in the hands of investors allowing for further investment and profit has been with us since at least the 19th Century and in the absence of an alternative will continue.

The OECD is well advanced with its BEPS programme which may herald a new regime in that it is trying to put transparency and local accountability at the heart of global trade. Realistically, though, there is a long way to go. Rules will be tightened and Corporate Boards will need to ensure they adopt, adapt and comply with the new systems. But, there is no change to the essential corporate dictum that says that profits should be made and post tax profits maximised. Investment will still be made by shareholders or by Corporate groups extending their business interests, and that investment will be made in the most tax efficient manner.

Boards of Directors have very specific roles. They are stewards of the company and are charged with running it according to its statutory rules and regulations. Clearly tax evasion is criminal, but extreme avoidance currently is not (unless it can be construed as conspiracy to defraud).

Having as low a tax bill as possible is what all Boards want. Where difference comes is in the extent to which they will go in order to achieve it. The more aggressive the policy the greater the risk of challenge and the possibility of public censure. This could affect profitability not only in the costs associated with handling the challenges that may come but also from diminution of turnover as a result of public opprobrium, itself a major disincentive for companies whose good name is intrinsic to its sales or whose fortunes are tied up with large government contracts.

In the UK, in addition to the specific rules of Company Law there are Codes of Conduct and guidelines for Directors, and it is to be expected that all Boards operate with a clear ethical understanding of what role their company has and its relations with its stakeholders. That ethical stance will not be the same in every company and, without clear unequivocal legal requirement, the tax policy of a company will be set by the Board and that policy may be wholly set either for or against avoidance or somewhere in between.

Much has been said about tax avoidance as part of corporate social responsibility but the truth is that, without legislation, reliance on guidelines to achieve what many consider a highly desirable objective will not be possible. The ethical position remains with the Board.

So, going back to Trump's statement, it is still a valid position and will be understood and accepted by many US voters who think tax should be kept to an absolute minimum. Whether there will be a contra view taken by voters supportive of an idea that companies should pay a "fair share" (howsoever that can be defined) remains to be seen but, particularly if Trump wins, there seems to be no major change likely in the near future.

Find out more with Ian's new course, Ethics in Tax.
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