Tax morality – is the tide turning?

There has been a trend among politicians and the so-called “man on the street” over the past decade to pontificate about “tax morality”. This refers to the notion that it is improper and indeed ethically or morally wrong for individuals or corporates to engage in tax planning which could reduce their tax charges, even where it is perfectly legal to do so.

We all remember 2012 when CFO’s of large multinationals were publicly grilled by various parliamentary committees, notably in the UK, on their global tax structures, resulting in the great line by the UK Parliamentary Committee Chair, Margaret Hodge to a Google executive: “We’re not accusing you of being illegal, we’re accusing you of being immoral.”

Around the same time, UK prime minister David Cameron openly criticised comedian Jimmy Carr for being part of the legal and HMRC-disclosed K2 tax scheme which he called both “morally wrong” and “completely wrong” (although this was of course used against Cameron when his own family’s tax affairs were disclosed in the 2016 Panama Papers leak). Subsequently, various church leaders joined the debate, including the British Archbishop of Canterbury who published a paper which called for a tax regime which promotes “prosperity and justice at the same time”, as well as Irish Cardinal Brady petitioning the G8 to counter tax avoidance while saying that  “paying a fair share of taxes” is a “moral obligation”.  While arguably these gents could be seen as experts on morality, they certainly could be not be regarded as experts on fiscal policy.

As this is our first newsletter to quote from religious leaders, perhaps it would also be apt to paraphrase Prince Charles’ “whatever love means” quote to ask what on earth “a fair share of tax” or a morally calculated tax charge could mean?  Clearly nobody knows, and we submit that while most people would be in favour of a tax system which is “fair” and which “promotes both prosperity and justice”, the real issue is who decides what is moral or fair and how this can be formalised in a world that relies on laws to regulate what is right or wrong.

Interestingly, we are now seeing a new development in the idea of tax morality – where, in contrast to taxpayers being lambasted for paying insufficient tax, certain taxpayers are now questioning their moral duties in paying taxes to a government that is demonstrably corrupt.  And nowhere is this more prevalent than in South Africa.

One unnamed CEO at a prominent South African group has recently suggested that the mere act of paying over any South African tax could constitute a violation of the US Foreign Corrupt Practices Act, given the widespread and publicised misuse of public funds in the country.

Irrespective of whether this interpretation of the US law is accurate, there is no question that South Africa has seen unprecedented levels of tax resistance lately, in tandem with the increase in corruption charges. The total collapse of the e-toll system in Gauteng, South Africa’s most populous province, (whereby drivers were ordered to pay for new motorways by toll) was due purely to motorists’ refusal to comply with a unilateral opaque law they did not agree with and where questions had been raised about the expenditure. Furthermore, there is growing anecdotal evidence from financial advisors that many of their clients have expressed increased willingness to restructure more aggressively to reduce tax liabilities as a quiet form of political protest.

Of course, the most prevalent and probably most effective manifestation of tax revolt in South Africa is emigration. Upon one ceasing to be South African tax resident, the South African Revenue Service (SARS) is no longer entitled to a portion of one’s worldwide income and capital gains. Many SA emigrants have said that a key factor in their decision to leave the country related to a moral concern that forking out up to 45% of their hard-earned income to a compromised government is tantamount to a condonation of, or even complicity with, government corruption.

Recently, so many high-income earners have been emigrating that SARS’ panic is becoming self-evident through its frantic attempts to amend tax legislation. The long-standing tax exemption for income earned by expatriates offshore, for example, has been all but obliterated in a recent change.  Additionally, a controversial proposal was tabled last month to prevent former South Africans from accessing their retirement funds until at least three years have passed from the date of their emigration. More such measures are no doubt on the way.

In a divided society like that of South Africa, a full-scale tax rebellion wherein taxpayers in solidarity resolve to withhold tax revenue is unlikely. However South African authorities should consider these developments and the increasing number of concerned individuals making significant decisions impacting their personal and corporate tax contributions. These are, after all, the taxpayers whom the impoverished country can least afford to lose.  Only increased accountability and cleaner administration may stem the growing tide.

Tax morality - is the tide turning?

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How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.