By Michael Young, TEP, Chairman, STEP
Global Efforts to Tackle Tax Evasion
Over the past decade tax authorities around the world have been working on tackling the issue of the hiding of funds from tax authorities to facilitate tax evasion. There have been a series of both multilateral initiatives, such as the work of the OECD Global Forum, and unilateral initiatives, such as the US FATCA legislation. 
The work on tax evasion continues, but in a range of major jurisdictions the issue of tackling abusive tax avoidance is now taking centre stage. A fair tax system must include effective measures to counteract abuse, but the issue has being given additional urgency by questions about fairness in the sharing of national tax burdens amid concerns over the funding of budget deficits.
Trends in Top Tax Rates Globally
Over the past 30 years, the OECD average top tax rate has dropped sharply, from 65.7% in 1980 to 41.7% in 2010. There are strong economic arguments in favour of this trend, but many wealthy individuals pay effective tax rates well below the current headline rates prompting accusations, however misinformed, of abusive tax avoidance.
Defining Tax Evasion Versus Avoidance
In law, the rule for tax advisors is clear. Tax evasion – hiding taxable income from the tax authorities – is criminal. Tax avoidance – planning your affairs to minimise your tax bill – is legal. But if the principle is clear, the distinction between tax avoidance schemes that achieve their intended tax result and those that do not depends on decisions of the courts. In many jurisdictions, judges now adopt a purposive view of tax legislation to ensure that artificial schemes designed to defeat the purposes of the legislation do not succeed. Advisors who promote such schemes may reasonably be accused of mis-selling.
General Anti-Avoidance Rules Worldwide
Many countries also have ‘general anti-avoidance rules’ to combat artificial schemes. Canada and Australia are prominent examples and the UK and India are considering similar legislation. Such legislation needs to be drafted extremely carefully to avoid introducing damaging levels of uncertainty into national tax systems. The potential revenue gains from anti-avoidance measures need to be balanced against the impact that bad drafting has on confidence, economic growth and, ultimately, tax revenues.
Challenges in Identifying Abusive Tax Schemes
The judicial and legislative approach to abusive schemes raises significant challenges for advisors and their clients. The most pressing is the lack of precise definitions of what constitutes abusive schemes. The response is often that any experienced tax professional can recognise such tax schemes when they see one. Legislation often attempts to capture this sentiment via some form of ‘reasonableness test’, but what can appear ‘reasonable’ in one context – perhaps a parent keen to avoid funds falling into the hands of a spendthrift child – can appear quite unreasonable in another.
The lack of solid definitions of abuse is a particular problem for those, such as STEP members, who help draw-up long-term plans for families. It seems that just one bad headline can now move a particular form of tax planning – however poorly understood by the public – from the ‘acceptable’ to the ‘abusive’. Thus without warning large charitable donations recently moved from being socially praiseworthy to being an abusive tax dodge in the view of the UK government before common sense prevailed.
Another danger is that what counts as normal tax planning in one jurisdiction might be seen in a different light in another. Alongside the growing number of jurisdictions taking action unilaterally against abusive tax planning, we are also seeing multilateral initiatives. The EU Commission, for example, is planning work on ‘harmful tax competition and revenue loss and unfair competition deriving from aggressive tax planning’. Mutually agreed consistent definitions and language are essential in such multilateral initiatives.
As we noted earlier, a fair tax system must include effective measures to counteract abuse. Equally, there must also be a clear balance between taxpayer obligations and taxpayer rights. STEP is therefore proposing a five-point programme that it believes could help in the fight against abusive tax avoidance while preserving tax payer rights. The main elements of this programme are:
- Governments and tax professionals alike should refocus on working towards simpler tax laws. Abusive tax schemes usually exploit gaps and inconsistencies in the tax system. Such gaps and inconsistencies normally reflect complexity, but in many jurisdictions the drive for tax simplification has run out of steam, or even gone into reverse.
- Governments should engage in effective and open consultation before legislating. Too often tax legislation is introduced that tax professionals quickly identify as adding to the risk of abuse. Equally, anti-abuse legislation is often introduced that either adds disproportionately to compliance costs or fails to tackle the real problems. Both these problems can be avoided by better prior consultation.
- Governments need to ensure that anti-avoidance measures fit in with the core principles of good taxation. Introducing tax measures that create uncertainty, penalise international capital flows or impose high compliance costs can potentially create huge inefficiencies and costs on economies. Onerous anti-avoidance measures should not be seen as a substitute for well-designed tax systems.
- Tax advisors should give their clients clear warnings of the risks of engaging in schemes that might be considered abusive. Clients engaging in such schemes will be challenged by the tax authorities and receive little sympathy in court. They may also be vulnerable to widespread adverse publicity – as recent high profile examples in a string of major jurisdictions have demonstrated.
- Professional bodies such as STEP have a key role in promoting an informed debate about abusive tax conduct and, in particular, helping to develop a consistent approach internationally to what is a complex topic. A level playing field should be an important goal of the various multilateral initiatives on tax avoidance that are starting to take shape. The professional bodies played a key role in helping develop a co-operative rather combative multilateral approach to improving information gathering. To ensure a similar co-operative approach in respect of abusive tax avoidance, professional advisors need to fully engage in the developing debate on tackling abuse at both a national and international level.
