Vanishing income in a time of shifting profits
As billions sail away, where does an ethical accountant stand?
The difference between tax avoidance and tax evasion is "the thickness of a prison wall" – former UK Chancellor of the Exchequer, Denis Healey
Call it tax dodging or aggressive minimisation – either way it's a hot issue, with headlines shaming companies such as James Hardie and Westfield Retail Trust for paying no Australian tax and Rupert Murdoch's 21st Century Fox for paying just 1%. It's been widely reported that multinationals Google, Apple and IKEA have paid only a fraction of their super profits in Australian tax.
The big accountancy firms advising these companies are also copping it, with the activist Tax Justice Network singling out Ernst & Young for encouraging its corporate clients to lobby governments to water down ongoing reform of the international tax system.
In its report, Who Pays for Our Common Wealth, the Tax Justice Network in collaboration with United Voice union found that nearly one-third of ASX 200 companies have an average effective tax rate of 10% or less, and 57% of ASX 200 companies disclose subsidiaries in secrecy jurisdictions (tax havens).
The report estimated that at least A$8 billion in Commonwealth revenues is being lost annually.
The public mood has turned against corporate tax minimisation but big business appears unmoved. Even Microsoft co-founder Bill Gates, who is otherwise a generous philanthropist, said that companies had a duty to shareholders not to pay more taxes than the law required, adding that they had no further ethical or moral obligation beyond that, when he was challenged by a Sydney high school student to "bring capital out of tax havens and back into the country to honestly pay your tax".
'Any attempt by an accountant to hide the truth of a client’s position is inconsistent with the accountant’s primary obligation'SIMON LONGSTAFF
Race to the bottom
So is Gates right – is there no ethical issue for an accountant advising a client on ways to legally reduce their tax? Or in representing them if the Australian Tax Office (ATO) takes exception to what has been done? The Tax Justice Network, which advocates taxpayers "paying their fair share", says the answer is yes.
Gordon Cooper, a leading accountant and visiting professorial fellow in the school of taxation and business law at UNSW Business School, disagrees. In his working paper, The Ethical Duties of an Accountant in Tax Advice and Representation, Cooper says it's up to governments to legislate to curb tax-planning activities of certain multinationals if they are considered reprehensible, and if they are not caught by transfer-pricing provisions, controlled foreign corporation regimes, or the ATO's General Anti-Avoidance Rules.
Yet, as an international tax expert, Cooper knows that legislating is easier said than done.
"This is [particularly] so because governments compete to provide attractive international tax regimes. A general example is the ongoing international race to the bottom for corporate tax rates. A specific example is the UK non-domiciled regime for rich individuals," Cooper says.
Tax advice and representation is an ethical minefield. Court cases have been cited to confirm there is a positive obligation on accountants to advise their clients on how best to minimise their tax liabilities. Unsurprisingly, this is not a view shared by the ATO.
Cooper says the days of accountants being asked on or around June 30 to advise on the latest mass-marketed scheme may be past. It is now likely to be the more general question: "What can I do to save tax?"
Where the answer may involve avoidance, the accountant may not be behaving appropriately if they do not provide an outline of all relevant possibilities to save tax – together with their possible consequences.
Then it will be a matter for the client, based upon their risk appetite (including the increasingly important issue of their reputation and that of their business) and moral compass.
"That is, it may be inappropriate for an accountant to make a moral judgment and, more particularly, have their own view cloud their advice," Cooper says.
In Australia the existence of Part IVA of the ATO's General Anti Avoidance Rules – penalising arrangements that have a primary tax purpose rather than an economic one – helps accountants to identify strategies that are not within the "spirit" of the legislation.
Cooper thinks it may be unethical for accountants to advise on arrangements that create such a disjunction between the tax and economic consequences.
Simon Longstaff, executive director of the St James Ethics Centre, says as members of a profession, accountants have a primary obligation to the community, a secondary duty to their clients, and personal interests are the least consideration.
Part of the duty they owe to the community is that they should seek to realise the defining good of their profession. For lawyers this defining good is justice. For doctors it's health and wellbeing. For accountants, the defining good is truth.
"So any attempt by an accountant to hide the truth of a client's position [in relation to their tax obligations] is inconsistent with the accountant's primary obligation," Longstaff says.
Avoidance or evasion?
Former High Court chief justice Murray Gleeson says that if the difference between tax avoidance and tax evasion is unclear, there is a practical test: If the parties to a scheme believe that its possibility of success is entirely dependent upon the revenue authorities never finding out the true facts, it is likely to be a scheme of tax evasion, not tax avoidance.
While no accountant should propose evading tax to a client, what happens if the client proposes it? Cooper suggests the accountant may limit any comment to a weasel-worded generality that what is contemplated "appears to be" or "might be held to be evasion".
Yet this can lead to further ethical issues. The client may then change their story or massage the circumstances into a sham, or substitute a falsehood for the offensive fact and thus render the evasion incapable of discovery.
This can lead to tricky implications because, unlike lawyers, accountants don't have legal professional privilege to cover their advice, written or verbal.
It can be trickier if an accountant is asked to advise after the evasion has been undertaken, and the client is confronted by a tax audit. Clients are entitled to be represented in discussions and negotiations with the ATO to reduce penalties. The accountant should make the best case but not gild the lily.
The simple answer is for the accountant to recommend that the client make a voluntary disclosure to the ATO. This should reduce penalties – but may have adverse implications for family, colleagues or shareholders. The duty of client confidentiality should prevent the accountant from informing the ATO of the evasion undertaken by the client. If the client asks "What are the chances that I will be caught by the ATO" an objective answer is required.
Cooper says that only if the client decides not to make a voluntary disclosure does the accountant face the ethical issue of whether or not to continue to act on their behalf.
An accountant is obliged to "take reasonable care in ascertaining that a client's state of affairs is relevant to a statement you are making". There may be circumstances where, due to knowledge that they possess, it may be in the best interest of the client for the accountant not to act.