The Ethics of Tax Avoidance

and Tax Evasion

Kenneth S. Hall

Introduction
More than ever, the worlds technology is bringing individuals and
information together almost instantly. Any mistake a company or
individual makes is publicly communicated all over news sources and
social media outlets almost as soon as it occurs. Due to this, it is more
important than ever that companies ensure that their employees are
working in a manner that the outside world would view as both ethical
and within the law.
The topic of ethical behavior has grown increasingly important
in business in recent years. Individuals are evaluated thoroughly on the
bases of skills, experiences, and ethical record by a company before they
are offered a job, with even one occurrence of unacceptable behavior
capable of being the deciding factor of employment.
It is also important for individuals to maintain a strong moral
compass once on the job. It is collective ethics of individuals that will
create the ethical environment of the company. A behavior on the part of
individuals that is viewed as unethical or immoral, could permanently
damage the reputation of the company. One particular area that requires
ethical decision making is that of tax practices, especially those related
to differentiating between tax avoidance and tax evasion. This paper will
examine such practices, and evaluate the severity of the ethical issues
that surround them.

Examples of Tax Practices Requiring Scrutiny

In a recent Wall Street Journal article, author Strasburg examined the
strategy of dividend arbitrage. Dividend arbitrage is explained as a
strategy that is, run largely from London, where the banks temporarily
transfer ownership of a clients shares to a lower-tax jurisdiction around
the time when the client expects to collect a dividend on those shares
(Strasburg, 2014).
The savings from this maneuver are then split between the bank
and the clientele. This strategy may allow clients to reduce their taxes on
dividends from 30 percent down to 10 percent (Strasburg, 2014). In some
cases, companies may end up avoiding tax liability altogether.
This strategy is very popular. Certainly, while some may
question the legitimacy of this tactic, these transactions have been
found legal- at least for now. In recent months, Bank of America has
been questioned by federal regulators about their involvement in such
practices. This questioning suggests a foreshadowing of upcoming
legal and reputational risks, that may develop from using this strategy
(Strasburg, 2014).
Banks dealing with hedge funders and broker-dealers
(Strasburg) will certainly be examined in a similar fashion in coming
months. One manager of a financial firm noted that from a financial
point of view, it is a beautiful strategy, from a public point of view; no
one wants to draw down the ire of a government (Strasburg, 2014).
The grey area that arises from an action like this is whether or
not this dividend arbitrage strategy should be seen as tax avoidance
(taking extraordinary and complex measures to avoid tax payments), or
tax evasion. Understanding this difference must be part of a companys
tax planning. Tax planning is defined as the strategy of logical analysis
of a financial situation or plan from a tax perspective, to align financial
goals with tax efficiency planning. The purpose of tax planning is to
discover how to accomplish all of the other elements of a financial plan
in the most tax-efficient manner possible (Investopedia, n.d.).
The line between planning and evasion is a fine one- and one
rarely agreed upon in recent history. According to Back, it is proposed
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that tax avoidance, while legitimate, can be seen as aggressive when it

involves using financial instruments and arrangements not intended as,
or anticipated by, governments as a vehicle for tax advantage (2013).
This point of view clearly opens up the debate to whether or
not dividend arbitrage can be seen as ethical. Although it is legal as
currently defined, it is obvious that companies and banks are using
financial instruments and arrangements that were not intended to be
used for such purposes; what is legal may not be ethical (Back, 2013).
Ethics of Tax Practices
Since the majority of these transactions take place in London, it is
relevant to get the publics perception regarding such actions. In a
2012 Institute of Business Ethics survey carried out by Ipsos MORI,
tax avoidance was the second most important ethics issue that the
British public thought business needed to address (Back, 2013). Many
individuals pointed out that the practice of tax avoidance, although
within legal guidelines, can be perceived as evidence of greed.
Such a perception can hurt a companys public image and,
consequently, end up harming the companys overall success. The debate
in the eyes of the public centers on the question of what a companys
responsibilities are. Many feel that a company has a social responsibility
to contribute to society as indicated through tax law. To the contrary,
management may argue that it has a responsibility to return the highest
possible amount of value to their shareholders, a responsibility to which
such tax strategies contribute.
Although an adequate return to shareholders is a responsibility
for publicly held firms, there are other stakeholders, including society
as a whole. A company that loses the publics trust regarding its ethics
may well suffer permanent damage- even fatal damage- to its ability to
operate. Thus, there is an operational argument, grounded in ethics, for
paying ones fair share of taxes.
Back offered advice to companies that participate in such
actions with, rather than hiding behind the business case for tax
avoidance, businesses need to be transparent about their tax practices
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(2013). Both companies and government must pay more attention to

communicating their positions on tax planning techniques and the law,
and operate with transparency. Such transparency could help restore
public trust and bring more certainty to business planning (Back, 2013).
To better understand the ethical side of this argument, a 1997
publication in the European Review highlighted the topic in The Ethics
of Tax Planning. In defining tax planning, the authors write that when
taxation and its planning are discussed the immediate interpretation of
their meaning is that they relate to a degree of evasion or avoidance. By
definition, evasion is illegal and hence unethical. In the main, avoidance
is acceptable, as it reduces tax liability by whatever legal means possible
and therefore is basically perceived as ethical (Stainer et al., 1997).
This gives a definition of the ethics of tax planning but
illustrates the fine line between avoidance and evasion. Regardless,
however, the authors admit that the ultimate effect of such planning is
the inevitable loss of revenue to the tax authorities and consequently to
society at large (Stainer et al., 1997). The conclusion of this writing is
that if loopholes leading to tax avoidance practice are available, they will
be taken advantage of and so it is the duty of legislators to remove them.
In a 1996 publication An Introduction to Business Ethics, the author
draws the same conclusion that, if there are legal loopholes overlooked
by the legislators, it is their job to remove them and that there is no need
for honest business people to feel any obligation to call attention to these
loopholes (Jackson, 1996).
One of the causes of avid seeking of loopholes and consequent
tax avoidance behavior may be high tax rates. There are many reasons
why tax avoidance and tax evasion take place, including high tax rates,
imprecise laws and lack of deterrents. With higher tax rates, organizations
or individuals may find it worthwhile to spend more time and money on
advice, perform more complex maneuvers and take greater risks, in order
to avoid or evade tax liabilities (Stainer et al., 1997).
Although lowering tax rates could have some effect on tax
practices, it is not likely to prevent all tax avoidance behavior as
new loopholes are always being discovered and there is likely to be
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motivation to reduce liability for any tax rate higher than zero. It seems
to be a behavior that could be minimized, but not eradicated. This raises
the question of whether eradication would be of benefit to society.
Several legal cases have examined this over the years. Although
older cases, they set the precedents for the legal view of tax practices.
One example was the 1936 case of IRC vs. The Duke of Westminster, the
court stated that every man is entitled, if he can, to order his affairs so as
that the tax attaching under the appropriate acts is less than it otherwise
would be. If he succeeds in ordering them so as to secure this result,
then, however unappreciative the Commissioners of Inland Revenue or
his fellow taxpayers may be of his ingenuity, he cannot be compelled to
pay an increased tax (Likhovski, n.d.).
In more recent cases, companies like Google and Facebook
have drawn negative attention for diverting their profits to tax havens.
This practice enables them to move their revenues to areas that will
allow them to pay less tax. There is a tactic called the double Irish.
The double Irish involves forming a pair of Irish companies to turn
payments on intellectual property into tax-deductible royalty payments.
The U.S. parent company forms a subsidiary in Ireland. The parent signs
a contract giving European rights to its intangible property to the new
company. In return, the new subsidiary agrees to market or promote
the products in Europe. Thus, all the European incomethat previously
would have been taxed in the U.S.is taxed in Ireland instead.Then the
Irish company changes its headquarters to Bermuda. No Irish tax, no
Bermuda tax, and no U.S. tax (Wood, 2014).
A source of disgust and annoyance in the United States, this
tactic is also disliked in the United Kingdom (UK). George Osborne, a
British Conservative Political Party leader, was quoted as stating that,
while we offer some of the lowest business taxes in the world, we expect
those taxes to be paid - not avoided. He went on to explain how such
actions could lead to distrust of the British people for the companies
involved, a consequence discussed earlier in this review.
These actions by Facebook and Google have been recently
stopped. The BBC noted a source saying that profits made in Britain
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would be taxed in Britain (Ahmed, 2014). This marks one of the better
known recent examples of tax avoidance. Although this particular
case has been settled, many others are likely to arise. Tax competition
between countries and the search for the lowest tax liability is likely to
continue to attract businesses attention.
Another recent example of tax avoidance maneuvers is the case of
Apple in Ireland. Apple, which owns many companies in Ireland, had also
been moving their UK revenue to Ireland, where they have been paying
a tax rate of less than two percent. This behavior has saved them billions
of dollars and has been going on since at least 1991 (at which point they
were getting away with paying zero dollars in taxes). Many question how
major corporations are able to achieve such deals and pay such low tax
rates. In Apples case, in exchange for the lower tax rates, Ireland received
intellectual property rights and other intangibles (Wood, 2014).
Although the European Union has been aggressively looking
into whether or not these deals should be considered state aid, Apples
Chief Financial Officer was quoted as saying, theres never been any
special deal, and theres never been anything that would be construed
as state aid(Ahmed, 2014). If evidence can be found to the contrary, the
European Union could collect billions of dollars of lost taxes from Apple.
Obviously, the problems that the Union is having in Europe related to
tax practices is a pressing issue. Across the globe, more action is needed
to clearly define acceptable and unacceptable tax practices. In the United
States, clear inversion rules were recently released in wake of the Burger
King and Tim Hortons scandal (Strasburg, 2014).
Effects on Government
So how do governments go about collecting the taxes they expect?
Also, who should they be focusing their attention on when it comes
to tax issues? As was pointed out earlier, tax evasion is illegal, but tax
avoidance is not. So far examples of questionable behavior have been
presented but in order to answer questions about government choices,
a more analytic approach to tax avoidance and evasion incidence is
necessary to determine the relative incidence and cost of each category.
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Richard Murphy is a tax expert who was named the seventh

most influential person in global tax in 2013 and is an adviser to the
British registered, Tax Justice Network. In response to a revelation that,
of the targeted 1,165 people, only 795 were prosecuted for tax behavior
in the UK, in the most recent year, Murphy has called for prosecution
for the major players in these activities. He states, now I am not,
for one minute, arguing that there is not a problem with small traders
evading tax: there undoubtedly is. Nor am I arguing that they should not
be prosecuted: there is a good case for them being so.What is notable,
however, is the absence of substantial prosecutions, many relating to
offshore, where we are well aware that there are more significant funds
involved in many of the cases addressed but which do not, however,
seem to end in court action. There is a very good question to be
answered as to why that is the case (Murphy, 2014).
Murphy points out that tax avoidance is responsible for a loss
of some 20 billion a year in the UK; tax evasion is responsible for some
80 billion a year (Murphy, 2014). With such numbers, most experts feel
that the efforts and resources of the government should be focused on
addressing the 80 billion of losses; that 80 billion is made up of tax
evasion specifically and taxes that are not paid for illegal activities such
as the drug trade (Murphy, 2014).
As the example in the UK makes clear, this tax behavior costs
nations tremendously. If a country is losing the equivalent of billions
of dollars per year due to tax evasion/ tax avoidance activities there is
no doubt that other government expenditures, such as those for social
programs and important government investment spending, cannot be
receiving the funding that they otherwise would.
Utilitarian Ethics in Business
According to philosopher John Stuart Mill, utilitarianism is a very clear
cut moral philosophy. Actions are right in proportion as they tend
to promote happiness, wrong as they tend to produce the reverse of
happiness, according to this philosophy (Bio, 2014). Tax avoidance by
definition, would go against this philosophy. Taxes are intended to help
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redistribute earnings in a country by taking a portion of profits and

using them to establish necessary programs that cater to the common
good. When an individual or company takes away from this ability to
redistribute due to their tax practices, they are acting unethically when
examined through a Utilitarian lens.
The Rights Approach
From the perspective of the rights approach, the ethical ramifications
of tax avoidance get a bit blurry. According to the rights approach,
what makes human beings different from mere things is that people
have dignity based on their ability to choose freely what they will do
with their lives, and they have a fundamental moral right to have these
choices respected (Velasquez et al., 2014).
If an individual decides to partake in tax avoidance in a legal
way, is it right to judge their actions in a negative light? If the actions
being taken are not harmful to other individuals, then under the rights
approach, such actions would not be deemed unethical. However, when
individuals tax plans, as mentioned before, are taking away from the
governments ability to provide services to people it is harmful to others.
Is this effect of tax practices enough to deem tax avoidance unethical
through a rights approach lens as well?
An Ideological Approach
It depends on how an individual looks at taxes. According to Tom
Cardamone, the director of Global Financial Integrity, people see tax
as a cost. Its not; its an investmentIt goes into government coffers to
improve infrastructure, healthcare, etc. This is the fundamental problem
in how people view tax (Law Review, 2012). His approach to taxes alters
interpretation of the ethics of tax avoidance, in addition to tax evasion.
If individuals viewed tax as an investment, it is possible that tax
avoidance is ethical- so long as it occurs within the confines of the law.
While legal, however, it may be socially irresponsible since it takes funds
away from investment for society- though those funds may be privately
invested rather than publicly.

Catholic Social Teaching

An ethical analysis of tax related behavior benefits tremendously from
the conclusions arising from Catholic social teaching. It is possible to
incorporate these teachings with the philosophical approaches of the
Utilitarian and Rights approach; it seems appropriate to integrate and
compare Catholic social teaching to these two philosophies when it
comes to ethical tax behavior.
In 2013, Pope Francis gave a speech focused on the state of our
worldwide economy. The Pope remarked that, while the income of a
minority is increasing exponentially, that of the majority is crumbling.
This imbalance results from ideologies which uphold the absolute
autonomy of markets and financial speculation, and thus deny the
right of control to States, which are themselves charged with providing
for the common good. A new, invisible and at times virtual tyranny is
established, one which unilaterally and irremediably imposes its own
laws and rules (Winters, 2013).
The Popes words resemble a Utilitarian approach to the
economic environment. If the resources are available for everyone to be
able to maintain a suitable life, the resources should be spread around to
a far greater extent. John Carr, an expert on Catholic social teaching at
Georgetown University commented that the popes message on the need
for ethics in economic life is not conservative or liberal, but Catholic. It is
not socialist or capitalist, but Christian (Winters, 2013).
The Popes speech strongly urged that actions in business that
are not aimed toward the greater good should be analyzed and fixed.
Naturally, one subset of these business practices are tax practices; what
should be examined and fixed are tax practices that are not aimed
towards benefiting the common good, but rather benefit individual
interests. Clearly, the Pope indicated strong feelings about redistribution
of resources to the poor to create a more equal and stable society for
all. His words showed strong disappointment in the current state of our
worldwide economy and the kind of behavior that has resulted in such a
state (Winters, 2013).

Further Ethical Concerns

Mike Lebowitz, a lawyer interviewed for the International Tax Review
was quoted as saying that tax is a cost to a multinational. There is
a balance that you need to come to. Whats the right tax rate for a
multinational that balances the legislative needs of government with
the desire of a multinational to maximize profit for its investors, not just
shareholders but employees too? If Im an employee of a company that I
know has more money to invest in more people, thats an investment in
my future (Blurring lines in tax planning, 2010).
Lebowitzs comments represent a different twist on the
redistribution on funds. While the money that is being saved because of
tax avoidance behavior by a company is not being redistributed through
government, it is being redistributed to individuals who have interest
in that company. Whether this money is used for beneficial purposes is
unknown, however, the argument does comply with the rights approach
in terms of stockholders, shareholders, and even stakeholders being
given their rightful portion of the pie.
Stakeholders may constitute a wider range of individuals than
obvious. Stakeholders are any individuals who have either a direct
or indirect affiliation with an organization, and can be affected by the
actions being taken by that organization. If a company is able to save
money because of its tax avoidance maneuvers, it is possible that the
money that was saved could go towards things that benefit communities
in which the company is located, for example. If a company places value
on corporate social responsibility, it may use its saved resources for the
general good. This relates to corporate culture, values, and mission.
All this makes clear that tax avoidance cannot be definitely
determined to be unethical, when motives are unclear, the use of savings
unknown, and compliance with law apparent. Also clear is that there
needs to be a set of rules with which everyone feels comfortable. Such
rules would have to be based on an acceptable balance between an
individuals right to benefit from their work and the utilitarian concept
of sharing some of the wealth. This kind of common ground could also
appeal to those who view taxes as social investment and saved taxes as
potential employee investment.
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Combating Unethical Tax Avoidance

While the discussion of the ethics of tax avoidance is uncertain and
dependent on many variables including philosophy, use of savings,
and others, tax behaviors that lay outside the law are clearly unethical.
Measures are being taken globally to put an end to these behaviors- or
at least limit them.
In the European Union several groups have been established
to discuss and monitor some of the practices previously detailed in this
paper. An example is The Code of Conduct on Business Taxation group
in which UN countries assess each others tax regimes to identify
harmful tax measures. This group enforces the commitment of Member
States to abolish existing harmful measures and refrain from introducing
new ones (A huge problem, n.d.).
Also designed to combat tax problems is The Tax Policy Group,
where personal representatives of EU finance ministers discuss issues
such as double taxation and tax avoidance (A huge problem, n.d.). With
such groups in place, it is obvious that measures are being taken to
resolve the problems.
However, with the number of dollars of lost tax revenue that has
been described (80 billion a year in the UK alone), it does not seem that
the policies in place currently have been effective. Although governments
are at the forefront of addressing these issues, it is also important to
educate individuals in business about illegal and unethical behaviors
related to tax practices.
If employees are sufficiently educated about the ethical issues
of tax behaviors, those employees may behave in more responsible
ways. This educational task is the responsibility of management. This
means that individuals at the management level must receive proper
training, and must be held accountable for their behavior and that of
their employees.
How Big a Problem is Tax Evasion?
There are large figures given out as estimated losses due to tax evasion.
According to the International Tax Review, however, corporate tax,
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in developed economies, amounts to just eight percent to ten percent

of total tax receipts. It could be argued this percentage is becoming
increasingly disproportionate (Blurring lines in tax planning, 2010).
Relative to the use of resources, this number seems relatively low.
The government usually has the upper hand in situations that
relate to tax avoidance practices. It is government that has the ability to
set or revise tax law; it is government that has the ability to audit any
company felt not to be complying. One government cannot force other
governments to come to agreement, however.
Theo Keijzer, chairman of the Taxation Commission of the
International Chamber of Commerce, has stated that it is my belief
that change has to come. If not, in 10 years time, the corporate tax
system could come to a grinding halt. Society is spending so much effort
on corporate tax, both authorities and companies, you really ought to
question whether the global welfare would not improve by redirecting
this effort to something more advantageous for the world at large
(Blurring lines in tax planning, 2010). Regardless of the stand one takes
on corporate taxation, it seems that this problem of defining, managing,
and enforcing corporate tax compliance could remain a never ending
battle until guidelines are put in place that are ethical and consistent for
all players- domestically and worldwide.
Conclusion
Legally, it has been understood that most tax avoidance practices are
indeed legal, unlike tax evasion. However, it is important when
examining tax practices, to take a step back and analyze all of the issues
related to tax planning and management- both legal and ethical. The
reasons behind corporate decisions and the impact of such decisions
on all of their stakeholders must be considered.
Simpler is the distinction between tax avoidance and tax
evasion; where tax evasion certainly crosses the line into illegal
behavior. From a management perspective, the safest tactic when
managing tax policy is not to test the limits of the law. From a larger,
social perspective, the ongoing fight against unlawful and unethical
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practices will be won when the costs to corporations for behaving in

such ways are greater than the benefits of such practices. Guidelines
must be clear, universal, and the cost of noncompliance must be great.
Until this happens, tax avoidance and tax evasion will continue to be a
hot topic for business.

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