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Using relevant authority, critically evaluate the ethical debate surrounding tax evasion and the legal measures (UK and international) taken to tackle tax evasion.

A contemporary debate surrounds the issue of taxation, whether taxation can be seen as a modern organisation in the context of globalised production under a multi-national supply chain with an international competition of capital. Or whether tax is actually a key credited system, trusted by the general public, under the obligation which is expected to be met by organisations benefiting from the social structures in society. The rationale of tax focuses on income redistribution, welfare economics, market failures and paternalism. Tax avoidance minimises the amount of tax paid in a legal way, evasion on the other hand is illegal, deliberately misrepresenting the true state of affairs and dishonestly reporting tax[1]. Considering whether it is immoral to avoid tax, a few factors need to be considered, firstly the corporate social responsibility owed to the community, whether a fair amount of tax is being paid, whether banking secrecy violates human rights and finally the public attitude. A temporary recruitment agency is legal, but the question is, whether it is ethical as a form of aggressive tax avoidance.

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Considering the legislation in place to tackle tax offences in the UK and Europe, in 2017 the newest corporate offence preventing the facilitation of tax evasion came into force to, bringing with it significant implications for businesses across the UK. This legislation introduced law, were any business can be prosecuted if its employees, agents and contractors evade taxation. While this new law has major consequences for businesses that contravene it, many businesses have not taken action.[2] This could be because, where capacity and resource are constrained, legislation has simply passed by. Which may raise the question of who is actually conducting these actions and whether they ae committing other illegal acts, if they are ethically content carrying out tax evasion. It is also possible that those aware of the legislation and are sitting back, awaiting the first major prosecution, before deciding to take action to protect themselves, reaffirming the previous statement of morals. By failing to act these businesses are putting themselves at risk to punishments such as unlimited fine’s and potential criminal sanctions. As if this wasn’t enough, experienced purchasers of companies are increasingly looking for comfort that target companies are compliant with their obligations in this area.[3]

This issue has gained particular momentum and prominence since the 2008 financial crisis, causing an additional blow to the legitimacy of the globalised financial regime, with people who have experienced austerity, have a different kind of interest in the decisions that are taken about taxation and spending[4]. This crisis created an unprecedented momentum to regulate the offshore world, which resulted in the banning of offshore financial centres (OFC) for ‘shadow banking’. As these ‘light touch’ regulation of tax havens provided an important channel through which complex and often opaque derivative instruments, which were at the source of the global financial turmoil, could be wrapped and distributed all over the global financial system[5]. When American and European banks had to be saved from bankruptcy by the use of the taxpayer’s money, the battle against tax havens and OFCs gained traction[6]. With both American and European politicians raising objections about bailing out banks with public money at a time when many of these banks were in the business of helping companies and individuals to avoid and evade taxes. Even through their own branches in tax havens. Putting further pressure on western governments, in finding new sources of tax revenues, with bank bailouts and countercyclical fiscal stabilisation policies in the aftermath of the crisis generated a huge increase  in public  deficits  and  debt  levels[7]. To bring these deficits back to  ‘normal’  levels,  governments adopted  harsh  austerity  measures  that  largely  affected  the  lower  and  middle  classes. Following the financial crisis, there has been a period of declining wage growth[8] and public spending austerity measures, aimed at eliminating the deficit[9]. With this subsequent effect on living standards, alongside a reduction in the scope of public services, contribution or lack thereof by organisations opting for, tax avoidance has attracted attention.

Causing public debates have intensify on the issue of international tax evasion, and the abuse of ‘unfair’ opportunities for international tax arbitrage by wealthy  individuals  and  multinational  corporations. This alongside the need to spread the burden of fiscal consolidation more evenly across society. The fight against international tax evasion and avoidance is, therefore, especially important in the EU, whose stringent fiscal rules have resulted in governments to deploy senselessly tough austerity measures. The EU, especially focusing on France and Germany in particular, have been at the forefront of the global battle against tax havens and bank secrecy.

The ethical aspect of this issue becomes apparent when viewing the discretion, a business has, with the ability, within certain parameters, to legitimately manage the amount of tax paid, empowering an organisation with a choice of how much they actually contribute financially to government.  And although tax evasion is not illegal, it is considered by some ‘morally dubious’, with 61% of the public expressing that it is never acceptable to use a tax avoidance scheme[10], with corporate tax avoidance being listed ahead of all others as one of the issues companies most need to address[11]. For example, the Panama Paper Scandal in 2016. A leak off files revealed a large amount of powerful and rich individuals utilising tax havens, laundering money to avoid taxes and sanctions. All former clients of Mossack Fonseca. Although tax havens can be legitimate, the issue in this case was the activities hiding the true owners of the money, the origin and avoidance paying tax.[12]

There is a few ways companies can avoid tax, one way is the creation of a shell company, not doing anything but manage money and hiding its owner. Offshore financial centre havens are also an option, with a high banking secrecy and little to none taxation on transactions, most of these are legal. The secrecy of this option is very attractive to criminals.  Using bearer shares and bonds are also a considerable option, facilitating money laundering by allowing movement of fast sums of money whilst denying ownership[13]. Under this dirty money can be paid into a fox haven, converting it to bearer shares owned by the shell company.

Banks within EU countries collect tax held by accounts held by citizens of other EU countries, this is known as the European saving directives, this makes it more difficult to hide money within the EU.  In the Papers Paradise Scandal 2017, millions of pounds from the queen’s estate was invested into a Cayman islands fund, some of these funds went to Bright House, when they’ve been accused of exploiting vulnerable individuals and poor families. Off this transaction, Prince Charles made a considerable profit on his friends stake offshore firm. Noting that the offshore jurisdiction is considerably more complex than you imagine[14]. Is it fair and is it moral to allow tax avoidance by this scheme, and if individuals in this position are using it, contemplating if tax avoidance gone too far.

After 2021, there will be a UK public register of beneficial ownership of oversea companies. Any overseas company which owns UK property or bids on government procurement contract would be required to give details of beneficial ownership on this register. Meaning overseas companies won’t be able to buy, sell, charge or grant a long lease of property in the UK, unless they give their details and further information about their beneficial ownership on the new register. Needing to register every two years. Considering these corporate offences, since 2017, relevant bodies will be held liable for the actions of their employees alongside any other associated people, which have facilitated the tax evasion. Under this strict liability, knowledge and intention are not required. Failure to prevent facilitation of UK tax evasion (Part 3 of the Criminal Finances Act 2017) and Failure to prevent facilitation of foreign tax evasion (Part 3 of the Criminal Act 2017) are key.

In IRC and Duke of Westminster[15], the duke stopped paying a wage to his gardener, and instead paid him the same amount under a covenant agreement, from this the Duke received a tax benefit, due to the law at the time resulting in reduction of liability to surtax. Lord Tarmlin stated that “every man is entitled if he can arrange his affairs so the tax under the Acts is less than it otherwise would be”, but it still leaves the question of whether it is fair and whether it is moral to gain benefit from money which should be paid as tax. The gardener was aware of these actions, and surely new why they were being paid in such a way or surely could have harassed a guess. Under the previous statuette mentioned, knowledge and intention are not required.

There are specific offences regarding ‘fraudulent evasion of income tax’, under the Taxes and Management Act 1970[16], and there is a possibility of prosecution under the Theft Act 1968[17] or the Fraud Act 2006[18] for false accusing. However, most tax evasions are brought forward by the common law offence of ‘cheating the public revenue’.  Seriousness and aggravating factors include the planning of an offence, the continuation of fraud after HMRC warnings, offenders operating in groups, attempts to hide the evidence, abuse of a position of trust, causing financial loss to innocent traders and clients. Mitigating factors on the other hand prompt a plea of guilty, mental illness or disability of the defendant, financial pressure, youth or age which could affect the responsibility of the defendant. There I no maximum penalty for a common law offence, with punishment spanning from a fine to a life imprisonment.

Following the conviction of conspiracy to cheat revenue out of £400,000 in R v Sivyer [1989][19], by failing to deduct tax from former employees, and therefore failing to declare earnings, the defendant was sentenced to four years, this is considered appropriate when the defendant pleads not guilty. Noting that the defendant attempted to cover their tracks using a complex series of transactions. Deference is considered a necessary part of the sentence in regard to fraud in the construction industry.  In comparison with the non-payment of VAT, R v Aziz[20], the defendant voided paying tax on products they sold, due to all sales being disguised as children’s footwear and no tax being collected on the sale of children’s clothing, these sales would have raked in over £40,000 in VAT, and resulted in a sentence of four and a half years, which was seen as not manifestly excessive.

The Paradise Papers have also brought tax avoidance and the underlying ethics of this to mainstream public attention. As with previously discussed  scandals, such as the Panama Papers in 2016 and the Swiss/HSBC leaks in 2015.  Revealing the ease with which corporations and high net worth individuals organise their wealth and income transnationally, through this established global financial system, through the use of offshore financial centres and a range of legal business structures.

Looking into the HSBC evasion scandal, which routinely allowed clients to withdraw large sums of money, which was often in foreign currencies, under schemes aggressive marketed enabling clients to avoid European tax laws. These clients were able to take out pockets of untraceable banknotes, when asked for large sums of money. Colluding with clients to conceal undeclared “black accounts” from domestic tax authorities. These provided accounts were open to international criminals, corrupted business men an even high-risk individuals If these options are open and taken by these individuals, who commit various other schemes of money laundering tax evasion and other crimes, surely these aren’t ethical ways of saving money.

Another example is Ricci, from Nina Ricci perfume, who managed an equivalent of £15 million in swiss accounts, HSBC provided the defendant with ten pockets of £7,500, totalling at £60,000. She denied all liability. Considering large withdrawals of cash.

HSBC found a loophole in European Savings Directive 2013 (ESD), allowing clients to hide billions in anonymous swiss accounts with swiss banks only collecting a small some of tax. This method of ‘withholding tax’ on income, initially at 15%, is handed in bulk to Britain alongside other EU states to compensate for losses caused by dodging tax. The ESD only applies to individual saving accounts and not companies, hence why HSBC transferred these client’s money into corporate accounts. This is known as a ‘tax vehicle’.  As previous mentioned the clients of HSBC benefiting from these illegal actions were criminals, some were even facing allegations of corruption and running drugs.  Arturo del Tempo Marque, a property developer in the Dominican republic, a considered valued customer of HSBC, who controlled around nineteen accounts, with an estimated value of £2.5 million, had containers traveling from the Dominican republic to Spain containing ‘building supplies’, these containers held a tonne of cocaine hidden behind a false panel. From this the defendant is serving a seven-year prison sentence.

Another case, similar to Arturo del Tempo Marque, is Tancured Tabone, an ex-head of state all company, was charged with corruption, two HSBC accounts were named in the allegations. HSBC also handed over £20 million in accounts, controlled by Jeffery Tesler, a lawyer fronted by an ex-Nigerian president, alongside other politicians who were all involved with a corrupted gas plant deal.

The HSBC tax evasion scandal was discovered by a ‘whistle-blower, who hacked into customer files, following this action Herve Flaciani fled to France in attempts to flea swiss banking laws. Herve Flaciani received a five-year prison sentence.

Evaluating the role of corporate governance and whistle-blowers in exposing tax evasion scandals, It needs to be considered whether this is fair treatment, and whether whistle-blowers should receive more protection. In this case the only wrong doing the defendant participated in was hacking into customer files, which breaks customer protection and privacy, points which are considered vital in swiss banking law. Surely breaking this to expose extensive illegal activities by a large authority such as HSBC, a whistle-blower should be protected.  In 2010, HMRC received a list of over 1,000 tax evaders, enabling a quiet recovery of £135 million. Only one client was prosecuted, and no legal action was brought against HSBC.

Considering the function of whistle-blower protection in corporate governance and the general role of whistle-blowers, the Public Interest Disclosure Act 1998[21] provides protection for whistle-blowers from detrimental treatment by their employer. Whistleblowing Employees play a critical role disclosing corporate misbehaviour, the act was influenced by various financial scandals and accidents, along with the report of the Committee on Standards in Public Life, the bill was introduced to parliament on the condition that it become an amendment to the Employment Rights Act 1996[22].  This act is meant to protect employees who disclose certain types of information, whether evidence of illegal activity, damage to the environment, and then protecting the employee from dismissal or being passed over for promotion. In cases where such retribution takes place, the employee may bring a case before an employment tribunal, which will normally award compensation.  A result of the Act is many more employers instituting internal whistleblowing procedures to protect their employees, although only 38 percent of individuals surveyed worked for a company with such procedures in place[23]. The Act has been criticised for failing to force employers to institute such a policy to protect whistle-blowers, as well failing to prevent “blacklisting” of employees who make such disclosures, and failing to protect the employee from libel proceedings, if their allegation turn out to be false. Under the Act, a non-disclosure agreement (NDA) between an employer and employee, has the condition of compensation for loss of employment, and it does not remove a worker’s right to make a protected disclosure.

In 2019 a consultation was held on the basis of adding limitations on confidentiality clauses, following evidence of some employers using confidentiality clauses to intimidate victims of harassment or discrimination into silence. Whether this was the employer insinuating that the worker did not have the right to blow the whistle, take a matter to a tribunal, or even discuss with people such as the police. Producing the phrase ‘whistling in the dark’.  In principle, corporate whistle-blowers who share the knowledge of companies‟ irregularities can be categorized by three types: firstly, whistleblowing employees directly disclose corporate deceptive conduct to the public. Second, those who disclose information to traditional corporate monitors rather than to companies‟, and finally whistle-blowers do not turn to the public or traditional corporate monitors; and seek assistance from inside the company.

Looking into the problems that whistleblowing employee may encounter Corporate employees bear fiduciary duties to employers and to companies. With their primary duties of obedience, loyalty, and confidentiality. Among the duties of obedience and confidentiality, loyalty is the most important, requiring an employee “to act solely for the benefit of the principal in matters entrusted to him, … to take no unfair advantage of his position, … and not to act or speak disloyally in matters which are connected with his employment except in the protection of his own interests or those of others.”[24] When corporate employees decide to blow the whistle on companies misconduct, not only do they bear the risk of retaliation by employers, but they also bare a threat to their career.  Retaliation may be in the form of wrongful termination, demotion, co-worker harassment, the denial of advancement in the work ladder, or other manners of discrimination[25].

With employers attempting to rationalize adverse treatment on whistleblowing employees, due to wanting to sustain traditional values in the employment relationship. At times, employers even assert that expelling is an inevitable, meaning to keep employees loyal, avoid employees morale from collapsing, whilst maintaining a company‟ internal supervising systems must be in place, alongside procedures to work, and to reduce the likelihood that employers would be blamed by the public , due to whistle-blowers intentional defamation. Besides bearing the threat of being retaliated against, whistleblowing employees may also be alienated by colleagues, and feel a lonely existence in the workplace. Werhane comments, “The history of whistle-blowers, most of whom have been fired, blackballed from their industry or profession, and have suffered personal problems, from unaffordable legal expenses that employees spend against employers‟[26] retaliatory actions, those involve misfortunes of loss of homes and marriages. With the high possibility of being blacklisted in professional areas, whistleblowing employees may find it difficult to seek other occupations after being terminated since prospective employers might be afraid of hiring discharged employees.

Double taxation, the “levying of taxes on the same income (or capital) of the same taxpayer in the same period across two jurisdictions”.[27] can be seen as a genuine concern tax avoidance can overcome. Although modern tax legislation may include double-taxation agreements, these are not always in place or necessarily comprehensive; managing tax in a manner to prevent this issue is vital for an organisation’s finances. Finally, although tax resistance or as elsewise described “conscientious rejection”[28], there may be circumstances, such as during what may be considered an unjust war, in which corporations opt to express ethical values. Although avoidance as a mechanism for this appears the antitheses of moral behaviour, it remains an important outlet.[29]

Corporate tax avoidance occupies an increasingly prominent and important role in public debate. In the context of reducing public expenditure, greater scrutiny has given way to negative public perceptions, whether expressed via opinion polls, tax shaming or ethical consumption choices[30]. The adverse impact on public revenue is established, even if the extent of this is disputed. There are genuine reasons to minimise tax receipts[31]. Double taxation, although a declining issue, remains applicable and providing an advantage to competitors who legally avoid taxation themselves is a clear problem. Regardless of this, these concerns are minimal in comparison to the longer term impact avoidance will have on society and business; tax revenues from the fabric of governance required which provide services stakeholders benefit from. With this widening tax gap, the growth in public opposition, plus the potential for corruption not only diminishes these services; but democracy itself. Government can make better use of available policy levers by simplifying tax, as reducing complexion will remove loopholes and the potential for creative accounting. This alongside working multilaterally with other jurisdictions, as with double taxation, can lessen the scope of organisations to manoeuvre income solely for avoidance. Enforcing the already existing laws whilst taking decisive action against avoidance schemes will deter abuse of the system.

Organisations could also play a role, by practicing and promoting acquiescent tax behaviour through corporate social responsibility. Corporate social responsibility gives weight to the concept of modern organisations having a greater role in society; through the application of five ethical policies side by side core economic activity. Therefore, benefiting stakeholders beyond a transactional relationship[32]. As if an organisation is truly eager to encourage ethical behaviour, tax compliance, which could be viewed as the ultimate form corporate social responsibility, paying tax is a good starting point. Yet it is up to individual organisations to decide their tax approach, and which is practiced within their companies’ walls, as there may be a distinction between avoidance, technically operating within the law, and compliant behaviour With whistle blowing being an essential element of the internal corporate governance. Finally, where there is no legal distinction, it is down to the government to remove areas of ambiguity surrounding tax decisions taken remain an ethical question for business.

Bibliography

  • &rarr; V, ‘What Do You Need To Know About Tax Evasion Legislation?’ (Business Matters, 2019) <https://www.bmmagazine.co.uk/finance/what-do-you-need-to-know-about-tax-evasion-legislation/> accessed 29 April 2019
  • Chohan U, ‘The Panama Papers And Tax Morality’ [2016] SSRN Electronic Journal
  • Gutkin SD Beck, Tax Avoidance Vs. Tax Evasion (Ronald Press Co 1958)
  • Kerr D, ‘TAX AVOIDANCE: THE ETHICAL QUESTION FOR BUSINESS’
  • ‘Lessons For The EU.’ [2019] Vermiren & Lips-Panama Papers
  • McGee R, The Ethics Of Tax Evasion (Springer 2012)
  • Ryder N, U TurksenS Hassler, Fighting Financial Crime In The Global Economic Crisis
  • ‘The Ethics Of Tax Evasion’ (Walterblock.com, 2019) <http://www.walterblock.com/publications/the-ethics-of-tax-evasion/> accessed 29 April 2019
  • White P, Tax Law (New York University Press 1995)

[1] Sydney A Gutkin and David Beck, Tax Avoidance Vs. Tax Evasion (Ronald Press Co 1958).

[2] David Kerr, ‘TAX AVOIDANCE: THE ETHICAL QUESTION FOR BUSINESS’.

[3] TAX AVOIDANCE: THE ETHICAL QUESTION FOR BUSINESS David Kerr

[4] Cobham, 2016 as cited in Financial Times, 2016

[5] ‘Lessons For The EU.’ [2019] Vermiren & Lips-Panama Papers.

[6] Nicholas Ryder, Umut Turksen and Sabine Hassler, Fighting Financial Crime In The Global Economic Crisis.

[7] View &rarr;, ‘What Do You Need To Know About Tax Evasion Legislation?’ (Business Matters, 2019) <https://www.bmmagazine.co.uk/finance/what-do-you-need-to-know-about-tax-evasion-legislation/> accessed 29 April 2019.

[8] (Machin, 2015)

[9] (Deloitte, 2016)

[10] (Shah, 2015),

[11] (IPSOS Mori, 2015)

[12] Usman W. Chohan, ‘The Panama Papers And Tax Morality’ [2016] SSRN Electronic Journal.

[13] Ibid 7

[14] Ibid 3

[15] [1936] A.C. 1; 19 TC 490.

[16] 1970 c 12

[17] 1968 c. 60

[18] 2006 c 35

[19] [1987] 9 Cr. App. R. (S) 428

[20] [1996] 1 Cr. App. R. (S.) 265

[21] 1998 (c.23)

[22] 1996 c 18

[23]  ”PUBLIC INTEREST DISCLOSURE BILL (Hansard, 12 December 1997)”.

[24] Robert W McGee, The Ethics Of Tax Evasion (Springer 2012).

[25] Ibid 2

[26] pers- 82 Lois A. Lofgren

[27]  (Baker, 2012

[28] (Brennan, 2012)

[29] Ibid 2

[30] Ibid

[31] Ibid 4

[32] (Gupta & Sharma, 2009)

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