Ethical Aspect of Taxation

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'.

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.