Why interest in tax morality is rising among companies and ordinary citizens

After coming under heavy scrutiny in recent years from other countries, especially the United States, Panama has cleaned up its act somewhat, enough to get off an international "blacklist" of suspected money-laundering states. PHOTO | AFP 

By FRANCIS MUSYOKA, fmusyoka@kpmg.co.ke.

In Summary

• The ultimate goal is to ensure that businesses align their structures, operations and tax payments to reflect the economic activity in each tax jurisdiction.
• Tax morality is a call for organisations to look at their business activities and tax payments, and ask whether the public from whom they generate profits would be satisfied with the level of taxes they pay given the revenues and profits they generate from them.

The uproar that has greeted the recent publication of the Panama Papers — in themselves the largest volume of whistle-blower materials in history — reflects the changing perceptions of tax planning globally.

In the ongoing debate, the question is not whether a transactions was 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 revenue collector, government, the management and shareholders.

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

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

Companies and individuals across the world 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 globe.

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 between related parties in different tax jurisdictions also come under scrutiny.

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.

Transfer pricing

The Organisation for Economic Co-operation and Development (OECD), an organisation that provides a platform for member countries to discuss and obtain solutions to problems that hinder productivity and the free flow of trade and investments, has most recently focused 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 that 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.