DILEMMA BETWEEN MORAL OBLIGATION AND RIGHT TO GET BENEFIT FROM TAX PLANNING
You cannot tax business. Business doesn't pay taxes. It collects taxes. - Ronald Reagan
As far as we know, tax is a compulsory contribution of finance that imposed upon an individual or legal entity (taxpayer) by a state authority in order to fund government expense and support public facilities such as infrastructure, healthcare, education and security to give benefit back to the society. However, there is a particular dilemma in the implementation of tax from the three significant points of view of the tax key player. The critical player is the taxpayer, the government, and country-by-country relation that each has their perspectives. This problem arises following the hot topic that we called "fiscal ethics".
What is Fiscal Ethics?
On the basis, Fiscal Ethics born from the Moral Ethics or Ethics itself. Moral Ethics is a moral principle which controls people's behaviour or activity that they conduct. This 'Moral Ethics' is a branch of philosophy that systematically created the determination of 'right or wrong' behaviour in our society. In spite of that, the concept of Fiscal Ethics is not identical with the concept of ethics even if it innate from the Moral Ethics.
Fiscal ethics is not just as simple as 'right or wrong behaviour' or 'good or bad attitude'. It is more a consolidation of moral principle and philosophy, the psychology of economic behaviour and system of laws. It is complicated as well as hardly 'black or white', yet more of 'grey' a colour that acts as an intermediate between 'right and wrong', and even can be considered to be a neutral or achromatic shade, without a clear, definite answer. The answer to 'fiscal ethics' question is very complicated, always depends on the temporal period, situation and circumstances.
Profit VS Social Obligation?
In this article, we will focus more on 'fiscal ethic' from the three main viewpoints. First, we approach the 'fiscal ethics' concept from the Multinational Enterprise (MNEs) in the act of taxpayer point of view. One of the main objectives of a business or an enterprise is to earn profits, an additional income over enterprise expenses. This profit is essential for developing and expanding the business activity of MNEs. On the other hand, the enterprise must comply with tax and responsible for contributing to the community. MNEs influence three-dimensional aspect to the society where they belong, affecting the social, economic and environmental.
Many believe that company and society have a mutual concession, 'give and take' relationship. MNEs take resources from society, earns income and profit from selling goods and services through people. In the way around, MNEs have responsibility for serving the community, benefiting society by providing goods and service, generates employment and paying their fair share of tax. Nonetheless, there is still an ongoing debate about how to define 'fair share' of tax. From my point of view, when deciding the 'fair share of tax' we must determine the 'proportion' first. Is the tax that MNEs paid already proportional with the profit that achieved from the business activity? And whether that amount of tax can contribute to developing the society in the future.
As we all aware, MNEs need to gain profit to survive and to grow the business, this is what we called 'profitability and growth' the critical aspect that crucial to the long-term existence of the company. However, the income and the profit of the company will be tax as a compulsory obligation to country revenue levied by the government. The MNEs want to obtain an income and profit and at the same time, comply with the tax obligation to society. Enterprise is then exploring possibilities from government tax regulation. Analysing the economic and financial situation, and then plan for tax efficiency by reducing the tax liability, usually by claim all available deduction, use an exemption and all of the tax incentive provided by the government---this method called tax planning. Otherwise, MNEs can search for the 'loopholes' that made the company gain more profits but paid less tax (profit maximisation).
Planning the 'Loopholes'
The tax 'loopholes' in the countries regulation can be exploited in two different manners, the legal and illegal way. The extreme way to avoid to pay the tax liability is 'tax evasion'. Tax evasion is the unlawful or illegal method that minimises or even remove the tax burden of a taxpayer using fraudulent techniques such as conceal the income or profit, make a false financial statement, and even not paid the tax amount that owed. This method is detrimental for the government that maximise revenue from tax obligation, thus can be considered as a crime.
One of the infamous 'tax evasion' case is the one that involves Al Capone, the 'Scarface'. He is an American gangster and crime boss, born from Italian immigrants parents, that performs much illegal crime such as murder, smuggling illegal alcohol (Bootlegging), drugs and prostitution. He is jailed not because of the various crime he commits but because of 'Tax Evasion', he never paid his income tax. The newest case of 'Tax Evasion' was the 'Panama Paper' and 'Luxembourg Leaks' which contains the list of people and corporation that created 'Shell-company' and 'Letterbox Company' in the Tax Haven country such as Panama, Bermuda, British Virgin Island, Navi and many more, to shifting their profit or hide their asset in that low tax jurisdiction.
However, assuming that the loopholes legitimately reduce the tax. Without violating the law, minimising the tax burden in a legitimate way. Then we called this method 'tax avoidance'. Although it is legal, tax avoidance drew a controversy. Many think even if it legal, it is not ethical and morally wrong. Legality and morality have a different standard, and the legal standard is set out by the law as a legal basis. Despite morality or ethical standard do not have any legal basis, they depend on the human principle of consciences that provide for 'right or wrong' answer. As we point out earlier in the introduction of this paper, we conclude that in 'fiscal ethics' there is a grey area that can be exploited following the situation and circumstances. In tax avoidance, usually the taxpayer use strategies that misuse gaps in international tax structure aggressively planning a scheme that can minimise their burden. This method related to our second fundamental player approach, the countries by countries (CbC) 'fiscal ethics'.