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Friday
Nov172017

Martin Kenney: Lawful tax avoidance is neither immoral nor unlawful

Debate is good. Balanced arguments are woven into the foundation of democracy. They enable those with conflicting perspectives to argue rationally. So I was delighted when Alison Taylor described my post as being provocative before taking me to task on a number of the issues I raised.

First, and having stressed this in my original post, we are in fact debating two distinctly different  issues. Ms. Taylor is arguing on behalf of those who wish to see a change in the social mores and expectations of the 99% versus the 1%. Conversely, I focused (I thought) upon the hardcore, cross-border illegal activity of those who would evade their tax obligations or commit other crimes by means of offshore corporate structures.

It should be remembered that at the time of writing, the media's approach to reporting on the Paradise Papers has been almost entirely focused upon those who apparently avoided paying taxes legally. It is arguably a non-story until such time as criminality is disclosed. Ms. Taylor disagrees.

For example, she states that …..ordinary people in the vast majority of countries should have to pay their assessed taxes while Big Business is exempt.” I did not suggest that Big Business is exempt from paying taxes. This must be a personal belief of Ms. Taylor.

Apple is the largest tax payer in the world, having handed over $35 billion in the last three years -- what part of that is an exemption? I readily accepted there may well be an ethical argument for Apple to pay more given their success and profitability. But if so, then onshore states need to change their laws. There is an obvious reticence to do so. People should not attack Apple or other corporations for conducting their business and paying taxes in keeping with the prevailing law.

If Ms. Taylor and those like-minded wish to see these laws amended, then it is their democratic right to engage the political process and canvass for change. They and those who believe Big Business is wrong to limit their tax obligations need to cast their vote for a government that will bring tougher tax laws to the statute book. If they do and they are successful, then Apple will have to pay the increased taxes accordingly. But it is no one's right to sling mud and insinuate a wrongdoing, in instances where everything is lawful.

Despite the best intentions of some commentators, there is no chance of a unified, all-encompassing world tax law, covering all companies in all countries. That is what would be required to make Ms. Taylor's suggestions viable. She describes my support of job-creation by the productive use of capital in the hands of Big Business as being doubtful, referring to automation and AI among other things.

Are we suggesting that we can now chase Big Business from country to country with higher taxes without fear of job losses, as advances in technology mean that many people are going to lose their jobs anyway?

Owning and operating an offshore company is a lawful activity. It is also a legitimate means of minimizing your tax liabilities. Ms. Taylor conjectures that my perspective indicates that as operating offshore companies is perfectly legitimate, it thereby requires no intervention. Reading between the lines this infers that I do not support regulation. This is incorrect.

Strong regulation is essential to frustrate those who would administer offshore companies for a criminal purpose. What I do not agree with is her rationale for a public UBO register for the reasons I outlined. Ms. Taylor then likens my viewpoint to the NRA gun control argument. This is a slightly disturbing non sequitur in that one is linked to a debate about social responsibility and taxation, while the other to murderous rampages.

Further, I do not “falsely equate” the disclosure of beneficial ownership information with privacy. Privacy is closely linked to human dignity. It is a fundamental human right. We do not want the State to be in our bedrooms or bank accounts without good reason.  There should be an expectation of privacy for all, unless you are suspected of wrongdoing. If so, the means to address the lifting of this "veil of privacy" under the rule of law is already in place.

As for a public Ultimate Beneficial Owner (UBO) register making ownership investigation easier as Ms. Taylor suggests, my experience of 30+ years of investigating international fraud and corruption suggests that the contrary is true.

As I explained, regulated offshore company administrators are required to collect and hold UBO identification documents. This represents an incredibly valuable pool of investigative material. Judges offshore regularly compel the disclosure of this material on an ex parte basis and under ancillary sealing and gagging orders. This is done where there exists a demonstrated risk of asset flight or of destruction of evidence.

Based on my experience in pursuing complex cross-border fraud and money laundering inquiries, I hold firmly to the conviction that we will drive criminals further underground and complicate investigations if we expose all this valuable UBO investigative material (e.g. there are about two million offshore companies in the world today) into the open.

The cost of being able to regularly "out" the likes of Apple for lawfully using offshore tax planning structures by means of public UBO registers, is to visit harm on the facility to investigate global economic crime effectively.

Ms. Taylor concludes with a quote which may provide some insight into her views (emphasis added):  “…….the cat is already out of the bag. Attempts to maintain the current structures of corporate confidentiality and legal protection are under sustained attack from professional, well-funded activists who are driven by ethical-transparency goals.

I said that we should not confuse ethical arguments with legal conclusions. The intersection between law and morality is traditionally reserved for the most heinous of crimes. Lawful tax avoidance is neither immoral nor unlawful. It does not come close to that intersection. In Duke of Westminster v Commissioners of Inland Revenue [1936] AC 1 (House of Lords), Lord Tomlin held that:

Every man is entitled if he can to order his affairs so 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 tax-payers may be  of his ingenuity, he cannot be compelled to pay an increased tax.

_____

Martin Kenney, pictured above, is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors. He was selected as one of the Top 40 Thought Leaders of the Legal Profession in 2017 by Who's Who Legal International and selected as the number one offshore lawyer for asset recovery.

Reader Comments (7)

Very insightful article and response. The sad part of the current debate about lowering the corporate tax rate to stimulate economic activity in the U.S. is there is more to it than that. Cheap labor overseas will continue to argue for offshore operations. Less regulation overseas will do the same. Ditto for larger and more diverse markets. I doubt US companies will move back to the US -- at least not in large numbers. Yes, some may repatriate a portion of their "profits" for targeted economic development in the US. More likely, new economic activity will be the main benefactor of the lowering of the corporate rate and existing economic activity overseas will remain just that. Call it tax avoidance/tax evasion or whatever you want. It's a tax planning strategy and US corporations should not be criticized for doing the same thing that millions of Americans have done for years -- shielding their net income from taxation. BTW, the tax plan does nothing to address the transfer taxing problem which adds to the shielding effect. That will continue unabated.
November 17, 2017 | Unregistered CommenterSteven Mintz
Good insight. I notice that many "journalists" and media commentators do not know the difference between tax avoidance, which is legal, and tax evasion. This needs to be brought to the public's attention more and the media needs to learn about the industry before making accusations and creating fake news.
November 17, 2017 | Unregistered CommenterATomsevics
Thank you, Martin. I couldn’t have said it better myself (literally).
November 17, 2017 | Unregistered CommenterSean Timings
This article does little to argue that tax avoidance is in fact ethical, especially when we're talking about individual people (particularly our leaders and policy makers) and not transnational corporations. I do not agree that it's impossible to chase corporations from one country to the next in an attempt to collect revenue (so why bother?). Even simple policy changes among nations in the first world, taken together, would make a very meaningful difference. The original arguments behind opening the door to transferring or sheltering taxes don't bare much similarity to the situation we're in today.
November 18, 2017 | Unregistered CommenterCarpe
Of course lawful tax evasion is not unlawful: that is what we call a tautology. The losses from lawful tax avoidance may be far greater than those from tax evasion, and so long as countries cannot work out a 'reasonable' share of the tax take from MNCs, Martin is right that it is a distraction for enforcement. All enforcement is a compromise between seriousness and the effort it takes (and the political allocation of resources to investigation).
November 18, 2017 | Unregistered CommenterMichael Levi
"...there is no chance of a unified, all-encompassing world tax law, covering all companies in all countries."

But Martin, this is surely not required.

All we need is for the tax department, in a country where value is created, to force the company to recognize the profits there, and ignore the company's effort to divert profits to a low tax country. And dividends paid to an investment vehicle in a low tax country should be subject to a different (and higher) withholding tax than an investment vehicle based in an average tax country.

There are a range of theoretical solutions that do not require a "world tax law".
November 20, 2017 | Unregistered CommenterTjdig
"Apple is the largest tax payer in the world, having handed over $35 billion in the last three years -- what part of that is an exemption?" It's natural that Apple should be the largest tax payer as they are the most profitable company in the Fortune 500. But their global tax bill masks critically important regional variations and exemptions. In Europe, their tax contribution is 3.7%, which effectively makes them a (lawful) freerider, benefiting from the fruits of public investment in education, physical infrastructure etc whilst contributing minimally. The fact that they don't escape such contributions in the US is of cold comfort.

"I said that we should not confuse ethical arguments with legal conclusions. The intersection between law and morality is traditionally reserved for the most heinous of crimes. Lawful tax avoidance is neither immoral nor unlawful." I find this to be a bizarre statement based on an entirely arbitrary premise. While law and morality are not the same, they are very often inter-related. The recognition of immorality is often what causes and precedes the passage of legislation (such as was the case with tax-deductable bribes and facilitation payments in the OECD as recently as the late 90s). What is the basis for recognizing the intersection between law and morality for the most heinous of crimes and not other areas of law? At a time when governments in Europe and many other regions are fiscally stretched and struggling with persistent income inequality, having some of the wealthiest companies in the world adopting the most aggressive tax minimization strategies available to them, is inescapably seen as immoral by a great many people, including some right of center politicians, business leaders and UHNWIs. Companies purporting purporting to be responsible corporate citizens have frequently found out the hard way that they need to take a more principled approach than de minimis legal compliance. Tax is no different.
November 22, 2017 | Unregistered CommenterMoralityVsLegality
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