Ethical Aspect of Taxation

It is a common knowledge that every country in this world has a different system in political, law, economic and even tax aspect. Many MNEs are exploring this different tax system in cross border situation. They are searching for a tax jurisdiction that has attractive tax regime, offering the MNEs with a particular benefit such as 'financial secrecy', 'low tax rates', 'credit mechanism' and 'deduction'. Then, MNEs will create a 'shell' or 'letterbox' company in this off-shore 'tax haven' jurisdiction to get the advantage from the regime. This 'shell' company is used to hide the profit, benefit and assets that are taxable in their home country.
The next question, is this method legal?
Tax haven planning regime can be legal if there is a real activity and sufficient economic substance that is maintained in the 'off-shore' entity thus the profit is attributable to the 'off-shore' entity based on the real-operation activities that maintained in that jurisdiction, justifying their tax residency. In such manner, the off-shore entity is real and exist for benefiting the local community, not just exist in the paper only taking advantage from the tax regime in the form of 'shell' fabricated entity. Despite that, some of the individuals or legal entities using 'Tax Haven' illegally, in the intention of hiding their asset, income and profits to evade tax from their home country jurisdiction and achieving the more significant benefit.

Legal VS Unethical

Is it wrong if the MNEs taking advantage of the loopholes of the tax regulation to create a tax planning that gives them benefit?
To answer this rhetorical question, we must examine the last tax key player, the government perspective. Government revenues are collected from a tax that paid by the taxpayer and that revenues will be used for the welfare of society. However, the MNEs/taxpayer scheme to minimising the tax using the loopholes disproportionately impacting the government revenue that essential for public funding.
Consequently, deficiency of revenues is not merely MNEs fault for using tax avoidance or the available loopholes. MNEs using the loopholes because they have opportunities, and these loopholes are created because there is a gap in tax regulation that not yet adjusted to the globalisation of economy and modernisation that modify our business activities. The government directly or indirectly interfere, making the avoidance conceivable by the MNEs, thus making it as a responsibility of both government and MNEs.
Tax avoidance might be legal but widely considered as unethical by the government. MNEs approach might be legal based on the tax regulation of country but unethical if we considered the MNEs obligation to contribute to the society that comes up in line with the profit that achieved based on resources that take from society. Government and authority must come up with the systematic solution in their domestic and international tax regime, in order to protect the tax base and prevent the enterprise to shifting the profit to 'tax haven' jurisdiction. Nowadays, internationally the Organisation for Economic Co-operation and Development (OECD) already come up with 15 (fifteen) Action Plan in order to tackle the tax avoidance. Some of the countries even establish an anti-avoidance measure, such as General Anti-Avoidance Rule (GAAR) act to constrain the aggressive tax planning of MNEs.

In conclusion, 'fiscal ethics' is not just solely about 'who is right or who is wrong' or 'who is the winner or who is the loser' between countries and MNEs but more of 'how to achieve' the primary goal of taxation by collaboration action of the critical player based on their function. A taxpayer must comply and paid their obligation based on their income and profit. On the other hand, the tax authority of a government should supervise if the MNEs is already paid their fair share of tax or not, then decide the appropriate amount of tax that should be paid by the enterprise based on the law. The fair shares that the taxpayer already paid for the government revenues must be allocated directly to social welfare in any essential sector of life, then distribute to benefiting the community. To create taxpayer trust in government in the future and maintain the balance. 

Maria Yohana K.