Paying tax is everyone's moral obligation

The uproar that has greeted the publication of the Panama Papers reflects the changing perceptions to tax planning globally.

In the ongoing debate, the question is not whether the transactions in question were legal or not, but whether the persons who procured the services of Mossack Fonseca to create shell companies in various tax havens acted in a morally acceptable way.

Gone are the days when tax was a topic of interest only to the tax authority, Government, management and shareholders.

Today’s consumer wants to know whether the organisations and brands they support pay tax, and not only that, but also how the tax paid compares to their sales volumes.

The explanation that by paying low or no tax, the organisations are not violating any law is no longer enough, especially when other less endowed persons do not have the opportunity to arrange their affairs to take advantage of loopholes in tax legislation.

Companies and individuals invest millions of dollars to structure their operations in a tax-efficient manner by harnessing arbitrage opportunities arising from differences in tax legislations in different parts of the world.

Apart from ensuring that operating structures are legal, taxpayers now have to consider the public reaction if their tax planning vehicles become public.

In the aftermath of the Panama Papers, tax morality has joined transfer pricing as key considerations for taxpayers operating across borders.

Transfer pricing deals with pricing between related parties in different tax jurisdictions.

Where some of the related parties are based in low tax jurisdictions, but the substance of the transaction is carried out elsewhere, tax morality comes into play.

The Organisation for Economic Co-operation and Development (OECD) has focussed attention on transfer pricing with the aim of ensuring that member countries receive their fair share of tax revenues.

One of the issues that OECD member countries have grappled with for many years is the shifting of profits from high to low tax jurisdictions.

This is the basis for the OECD Base Erosion and Profit Shifting (BEPS) initiative, whose goal is to provide Governments with adequate documentation on the operations of multinationals so that they can make informed decisions on the tax that they should collect in their jurisdictions.

The focus of BEPS is to ensure businesses pay a fair share of tax based on the economic activities they carry out in a jurisdiction.

The ultimate goal is to ensure that businesses align their structures, operations and tax payments to reflect the economic activity in each tax jurisdiction.

Organisations that have structured their affairs to transfer revenues from high tax jurisdictions where a majority of their operations occur to low tax jurisdiction with limited operations need to reconsider their operating structures since BEPS will expose their global operations to the tax authorities. Tax morality is a call for organisations to look at their business activities and tax payments vis-a-vis profits. Taxation is a social contract between governments and taxpayers.

Paying tax is therefore a moral obligation.

On the other hand, governments need to fulfil their social obligation to taxpayers through provision of security, infrastructure, and a stable microeconomic environment, among others.

If all things were held constant, the social contract should be at balance, where both taxpayers and government are content.

The reality is different given the reported instances of mis-allocation of public funds and tax non-compliance by taxpayers.

Therefore, tax morality is an issue that both the taxpayers and governments need to address.