Excerpt
Contents
Executive Summary
Introduction
Analysis of the Ethical Issues Surrounding Tax Avoidance and Tax Evasion
Evaluation of the Actions and Measures That HMRC Apply for Tax Compliance
Conclusion
Recommendations
References
Executive Summary
Multinational corporations (MNCs) are able to review the world's tax legislation and take advantage of the loopholes and anomalies in the tax legislation of the various nations, thus avoiding the payment of billions of dollars in taxes. Based on the case of IKEA Group, both tax evasion and tax avoidance are unethical when elements such as social inequality, undermining of tax compliance, unfairness in competition between different firms, violation of social contracts between corporations and host communities, and erosion of tax revenues for society are present.IKEA's practises are unethical from a consequentialist ethical standpoint due to the negative effects of their practises on society, as well as from a deontological standpoint due to their failure to respect not only the letter and spirit of the law, but also the rights of communities, competitors, nations, individual tax payers, and other stakeholders.Tax evasion and avoidance significantly contribute to the undermining of the compliance culture as they undermine the tax system’s integrity, thus leading to weaker compliance. The evaluation of the actions and measures that HMRC apply for tax compliance in light of the ethical issues of tax avoidance and evasion indicates that the approaches would lead to great successes in the reduction of tax avoidance and evasion.
Introduction
Centuries ago, tax avoidance was widely not considered to be a moral or ethical issue. For instance, a ruling by the Duke of Westminster, which focused on individual tax avoidance practises, was stated that every person was entitled to order his affairs if he could so that the tax which is attached under the appropriate acts is lower than it would be. Even though the ruling focused on tax avoidance by individuals, current debate at the international level has focused more on the practises used by corporations for tax avoidance. The globalisation of the economies of many countries has led to a situation where tax avoidance and tax evasion by multinational corporations have received greater scrutiny by international institutions and tax authorities. The global financial crisis of 2008 resulted in a greater emphasis on corporate tax avoidance and evasion. Government pressure to cut spending has resulted in a greater consideration of the ethical aspects of tax avoidance rather than just the legal aspects. Recent investigations by the Committee of Public Accounts in the UK have brought to light the various tax avoidance strategies that have been adopted by different firms. Multinational corporations (MNCs) are able to review the world's tax legislation and take advantage of the loopholes and anomalies in the tax legislation of the various nations, thus avoiding the payment of billions of dollars in taxes.
In the case study of IKEA, the IKEA group subsidiaries and franchises reduce their profitability by making a 3% royalty fee payment to the Netherlands, thus making the amounts that are taxed lower by 64% in France and 35% in Belgium. The royalties paid to entities in the Netherlands are not taxed, as there are no withholding taxes in the Netherlands. In Europe, IKEA is estimated to have saved approximately € 1 billion through its complex undertakings between 2009 and 2014.Since the case study focuses on the tax avoidance by IKEA through the complex and convoluted corporate structure of the company, the essay considers the various ethical issues that surround the tax avoidance and tax evasion by IKEA. Based on the case of IKEA Group, both tax evasion and tax avoidance are unethical when elements such as social inequality, undermining of tax compliance, unfairness in competition between different firms, violation of social contracts between corporations and host communities, and erosion of tax revenues for society are present.
Analysis of the Ethical Issues Surrounding Tax Avoidance and Tax Evasion
While the ethical issues surrounding tax evasion and tax avoidance have recently entered the academic debate (Prebble and Prebble, 2010; Hasseldine and Morris, 2013), there has been a general lack of critical analysis of the ethical issues associated with tax avoidance and tax evasion, as well as limited recognition that diverse tax avoidance practises can lead to diverse ethical issues. The study by Prebble and Prebble (2010) examined the ethics of tax avoidance by considering various elements such as tax avoidance, evasion, and mitigation. Their central argument was that acceptable tax mitigation measures such as giving to charity are ethical and that tax evasion is unethical, and that tax avoidance sits at the intersection of tax evasion and tax mitigation. According to this argument, the practise of IKEA, for instance, is that the IKEA INGKA Foundation only reported €104 million in charitable donations out of €3.3 billion in profits by the IKEA group. Considering the argument by Prebble and Prebble (2010), the tax However, Prebble and Prebble (2010) fail to take into consideration the framework that can lead to the drawing of the line between what is ethical and what is unethical. Their argument seems to be based on the view that a legal perspective shows a clear difference between tax avoidance and tax evasion, but from an ethical perspective, the distinction is not as clear; therefore, they seem to suggest that tax avoidance is always unethical by indicating that "from the perspective of morality we should look at the two phenomena [tax avoidance and tax evasion] as being just one phenomenon" (Prebble and Prebble, 2010, p. 744). By using a deontological perspective of ethics, they reach the conclusion that tax avoidance does not have any ethical justification. A similar conclusion was reached by Doyle et al. (2009), who argued that all tax avoidance is by nature unethical.
To clearly undertake an analysis of the ethical issues associated with tax evasion and tax avoidance, it is important to gain an understanding of the terms. Kellough (1995) defined tax evasion as a corporation's willful and deliberate failure to pay legally owed taxes or the willful and deliberate structuring of an organization's affairs in violation of existing tax laws.Other scholars have noted that for a taxation practise to be considered tax evasion, two conditions must be met: the first is that the corporation intends to engage in deceit, fraud, or corruption, and the second is that the firm does not pay its tax liability (Hasseldine and Morris, 2013).Based on the conditions indicated by Hasseldine and Morris (2013), the main difference between tax avoidance and tax evasion is that the latter entails a deliberate intention to deceive the tax authorities, thus the firm does not make the legally required tax payments. Based on the definition, a company that engages in unsuccessful practises of tax avoidance cannot be considered to have engaged in tax evasion, as tax avoidance entails steps aimed at avoiding tax liability without engaging in any illegal acts. However, based on the definitions, the line between tax evasion and tax avoidance is vague. Based on the lack of clear separation of the two concepts in ethical terms, with the definition mostly indicating the difference in terms of the legality of the concepts, Tax evasion and tax avoidance are both unethical for a variety of reasons, as illustrated by the IKEA case study. IKEA's practises are unethical from a consequentialist ethical standpoint due to the negative effects of their practises on society, as well as from a deontological standpoint due to their failure to respect not only the letter and spirit of the law, but also the rights of communities, competitors, nations, individual tax payers, and other stakeholders (Killian, 2006).First, tax evasion and tax avoidance can lead to an increase in social inequality as they benefit the wealthiest in society—both the highly profitable MNCs such as IKEA Group and the high-net-worth individuals such as the Kamprad family and their associates. The inequalities occur because the majority of the members of society who are salary and wage earners as well as the other tax payers cannot afford to hire the expensive accountants and lawyers who devise the genius plans to find the tax loopholes in the legislation (Templeman, 2001). Therefore, tax avoidance and, by extension, tax evasion contribute to societal inequalities as the rich become richer. According to Wolff (2012), the top 1% of society's average wealth increased by approximately 71% between 1983 and 2010.The view here is that various schemes by wealthy corporations, such as IKEA's complex tax arrangement, significantly contribute to societal inequality. Stiglitz (2012) supported the argument for societal inequality by stating that the argument that when the rich people in society gain more wealth, it is good for economic growth has many flaws, the most important of which is that growing inequality between the rich and the poor frequently threatens the society's democracy and can even lead to the destruction of the society through social unrests.
Secondly, tax evasion and avoidance significantly contribute to the undermining of the compliance culture as they undermine the tax system’s integrity, leading to weaker compliance. The aggressive tax planning undertaken by IKEA has led to the company avoiding tax payments of approximately €1 billion in the EU for a period of 5 years (2009–2014). Such a practice, according to the OECD (2011, p. 255), leads to threats to the tax yields of the countries, thus leading to perceptions of unfairness in the tax system. If such practises are left unchecked, especially in the current economic climate of depressed taxes due to the impacts of COVID-19, such perceived unfairness can significantly reduce the general level of tax compliance by corporations and individuals. The above scenario of lower tax compliance is based on the psychological concept of perception of distributive fairness, which states that when other individuals or corporations face higher tax burdens, they will be less likely to comply with existing tax laws (Verboon and Goslinga, 2009).
Thirdly, tax avoidance also leads to unfair competition between corporations as it gives them an advantage over domestic firms that cannot afford to set up the complex web of taxation. By avoiding significant taxes, such as in the case of IKEA, which ships profits to tax havens and other shadowy organisations that make no tax payments, the profits that are not taxed can be reinvested by the organizations, while the domestic-based firms would face tight cash flows as they are taxed more, thus reducing their ability to reinvest as compared to the MNCs. Christensen and Murphy (2004) noted that the unleveled playing field hurts the ability of the indigenous firms to compete with the MNCs. A company that operates in the UK in the same sector will not pay a greater amount in taxes as compared to IKEA, as the latter would reduce its profits in the UK by shifting the profits to the Netherlands and Luxemburg, where they have preferential tax arrangements.
Apart from the above, tax evasion and tax avoidance also lead to the erosion of the tax base of the originating country. The profits earned by IKEA in various EU, Asian, and other countries are shifted to Belgium, Luxembourg, and the Netherlands, thus IKEA does not contribute to the common good. Because taxes are used to benefit society, there would be a decline in societal welfare without them. IKEA reduces tax revenues in the countries where it operates by shifting profits to its home country, where taxation is domiciled. The result is that a higher tax burden is passed on to other taxpayers. Further, it also hurts and violates the social contract that the organisation has with the host community. Corporate social responsibility literature indicates that MNCs must contribute their fair share of taxes to the countries and societies where they have their operations (Sikka, 2010). The governments set up the legal, social, and economic infrastructure that the MNEs use; without a well-functioning society, the MNEs would not be able to succeed. Taking the case of the UK, the UK government educates the labour force and creates the other infrastructure as well as the legal systems that are funded with tax dollars. IKEA uses such tax-funded resources and infrastructure but then does not accept to pay the taxes within the jurisdiction of the country, thus making the practises unethical.
On the other hand, others have indicated that tax avoidance is ethical, with the majority of the arguments in the literature defending tax avoidance primarily focused on the individual rather than corporate tax practices. It is important to note that such a limitation weakens the strength of such arguments when they are applied to MNCs. One argument that has been advanced by those who consider tax avoidance to be ethical is that taxation is not a moral issue, for instance. Haughton (1979, p. 100) noted that taxation is not based on any morals and that the payments of taxes cannot be viewed as being fair as the taxation laws are based on what the tax acts state, and in the event that there are doubts, such doubts can only be cleared by the courts. The argument is that the corporation or individual is not responsible for loopholes like those exploited by IKEA, but rather that the problem arises during the drafting of tax legislation. The argument deflects from the responsibility of the organisations as part of their CSR. Freedman, another proponent of the above view, indicated that leaving the tax payment obligation in the hands of corporations is an abdication of the responsibility of the government as the laws are not clear about the spirit of the law and the ethics (Freedman, 2007). However, such an argument fails to be convincing as there are a number of elements in society where firms act in ethical ways without looking to the government to incorporate such elements in the spirit of the law.
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