Vincent Huck finds the arguments on compliance v ethics are full of holes
Cheese: you love it or you hate it.
This comment piece was originally commissioned by the Chartered Institute of Taxation (CIoT) with the following brief: “It would reflect on your five years’ experience at The Accountant & International Accounting Bulletin, with a focus on a matter/s that would interest our members and people working in the tax profession. It could be about the challenges of reporting on tax or on a tax technical matter or even a wider topic such as Paradise/Panama Papers.”
A week of silence followed the submission of the comment piece, and after two follow ups, we were told: “The person who needs to give final approval is away for two weeks and did not get the opportunity to review it beforehand.” – so we publish it here.
As winter makes way for spring and the snow melts, letting nature come back to life, the flanks of the Aravis mountain range in the French Alps will trade its skiers for a few cows. The cows will produce milk, as cows do, and part of it will be transformed into cheese, specifically the local Reblochon, which has an AOC (appellation d'origine contrôlée) designation.
Next winter, skiers and tourists will return for the snow holidays, and some might be tempted to try tartiflette – Reblochon melted in the oven on top of potatoes and bacon. A few accountants and tax advisers may indulge, but may be blissfully unaware that Reblochon came about as a tax-dodging scheme?
The name Reblochon comes from the Savoyard dialect “reblocher” which means to “milk a second time”. It came about in the 14th century, when landowners, generally the church, would tax farmers according to the amount of milk produced. Tax would be levied in kind, with the landowner taking part of the production.
Farmers therefore only carried out a partial milking during the day when quantities were checked. At night, they would do a second milking or “rebloche”. Although less milk was obtained from the second milking, it was richer in cream and therefore in quality, making for a good cheese.
And this is how Reblochon – today a source of regional and national pride and a lucrative industry, was born out of a tax evasion/avoidance scheme.
What this little episode in history reminds us is that wanting to pay as little tax as possible is not new – it is probably as old as tax itself. But, with the end of nobility and the abolition of birth rights, tax schemes became far less romantic.
Although we might agree or disagree on whether the 14th century dairy farmer was right to dodge the milk tax, there is some romanticism in that story whereby a hard-working farmer refused to share the fruit of his labour with people or institutions that enriched themselves on the back of working masses, while taking no part in the production process because of the privileges of being born of a higher rank or having “pledged one’s life to god”.
But today tax dodging is the privilege of an elite, a way to maintain its wealth or boost a company’s profits, crippling governments in dire need of this resource. It has been reported, for example, that more money goes out of Africa illegally than all the aid it receives. Tax dodging cripples local economies, with family-run SMEs and very small enterprises struggling to compete with giant multinationals that can exploit tax rules.
A shadowy but legal world
A practitioner from a provincial town in southern France once told me: “When I started decades ago, a lot of my clients were bookshops; I had about 20 of them as clients. Today, all but one or two have closed, and it is directly linked to the rise of Amazon. It is unfair competition if the multinational giants have more resources and, on top of that, manages to avoid the administrative burden of taxes.”
As a result our high streets are all standardised with the same brands and multinational retailers… even the local pub is not so local anymore and part of a bigger chain. And, from one neighbourhood to the next, from one town to the next, high streets look alike.
Tax schemes have evolved as well, going far beyond the simple “rebloche” to the complex structure of offshore accounts, a shadowy, intricate world that can be navigated only with the help of experts. Whether we like it or not, those experts are professionals, including accountants, tax advisers and lawyers.
And yes, most of the time these experts are not doing anything illegal. They are only fulfilling their duty to their clients and working across the lines of syntax (no pun intended): evasion, avoidance, tax planning …
It’s all a blurry world, I concede. Tax advisers are not charity workers and, as long as they are not doing anything illegal, why should we care if their advice to clients is ethical? Ethics is, after all, is in the eyes of the beholder.
Maybe it’s time I got my bias out of the way. Five years ago, in my first month working for sister publications The Accountant and International Accounting Bulletin, I had the chance to interview the late Abraham Briloff.
When I asked Briloff about his thoughts on the conflict faced by tax advisers between their duty to their clients and the ethical question of tax in a societal context, he dismissed the existence of such dilemma. Among many things, Briloff once was Harry Belafonte’s accountant. I no longer have the notes of this interview so the details might be sketchy but, from memory, Briloff said Belafonte once asked him to use a scheme used by other performers to pay less tax.
Briloff replied that it was technically possible, but meant bending the rules and therefore raising ethical concerns. Belafonte said he hadlearned about the trick from other Hollywood stars who were using it so, if others were doing it and if it wasn’t illegal, why shouldn’t he do it? Briloff argued that sooner or later it would be made public and, while not illegal, Belafonte’s reputation and that of his costars would be dented. Furthermore, because of Belafonte’s involvement in the civil rights movement, it would have been a reckless move that would give the authorities a chance to create trouble.
I remember Briloff’s hoarse voice on the phone – he was 96 at the time – and him saying in a laugh that of course years later some Hollywood stars had to manage a reputation crisis when the tax-dodging scheme reached the public eye…. Belafonte had done well to listen to him. And, when Briloff died, a few months after our interview, I’ve been told Belafonte sang at the funeral.
This is all low league stuff, and doesn’t compare with mass tax avoidance strategies devised by large accounting firms, such as Deloitte’s “Investing in Africa through Mauritius” scheme. But the Belafonte story still demonstrates that a tax adviser can take the moral high ground and serve their clients while taking ethics into consideration – and that some do.
Honesty vs hypocrisy
In my five years on the accountancy titles, what has baffled me the most is the inability of professionals to address the ethical issues.
Last year, at our annual event, a panel with representatives of three of the Big Four firms were asked: “What do you think the firms can do to maintain their ethical standing within society at large, as well as with their clients?”
Nine seconds of silence was the answer before laughter engulfed the room and Deloitte director of audit innovation Katie Canell took the bullet for the rest of the panel and – it must be admitted – answered expertly : “We can get better as a profession about articulating exactly what we do, exactly what’s within the boundaries of what we’re doing, and what we’re not doing. That’s the foundation that has to be addressed that solves some of these trust and transparency issues.”
More recently, I interviewed a tax adviser who used the phrase “help companies pay less tax”. Later, he asked me if I could change the quote to “reduce our clients’ tax burden” – a fantastic PR twist that transform a negative into a positive and something sounding slightly unethical into a favour to the hard-working corporate out there.
These are only two recent examples in a long series of interactions with professionals. At the heart of it all lies a simple choice: either stop talking about public interest, transparency and all these beautiful empty words and admit you’re in it for the money – which is fine, if one is honest about it; or start walking the walk.
Directive puts onus on intermediaries
In March this year, the Council of the European Union reached an agreement on a draft directive requiring intermediaries such as tax advisers, accountants and lawyers that design and/or promote tax planning schemes to report those that are considered potentially aggressive according to a set of hallmarks.
Member states will be required to automatically exchange the information they receive through a central database. They will also be obliged to impose penalties on intermediaries that do not comply with the transparency measures.
Although the directive is still going through the legislative process, it is expected that member states will have until 31 December 2019 to transpose it into national laws and regulations and that the new reporting requirements will apply from 1 July 2020.
Some, mostly politicians, have welcomed the move as a new era of transparency. For others, mostly practitioners, it reflects a misconception of international tax planning and is likely to involve a lot of extra work but unlikely to generate very much extra tax revenue.
Although it is too early to gauge the effect this new measure will have, for sceptics like me the draft directive raises a few questions: will it capture all potentially harmful practices and curb the cat and mouse game between tax authorities and loophole opportunists?
Indeed, the draft directive reads: “Aggressive tax planning arrangements have evolved over the years to become increasingly more complex and are always subject to constant modifications and adjustments as a reaction to defensive counter-measures by tax authorities.”
So who is to tell if some smart accountant, tax adviser or lawyer won’t find a way to get around the hallmarks that will make a tax planning scheme reportable? In 2004, the UK under Gordon Brown’s government introduced a similar measure – the disclosure of tax avoidance schemes (DOTAS) – which bore little fruit.
Furthermore, although the EU directive mandates the use of penalties for those failing to comply, it leaves the rules around those penalties and their enforcement at the discretion of each member state, while asking for the penalties to be “effective, proportionate and dissuasive”.
Which is pretty vague and likely to create disparities in penalties among the 27 member states rather than creating a level playing field.
But at least the directive, which was first announced in June of last year, puts the onus on the tax advisers and shows the willingness of government to act. The EU would do well to make the database public so civil society can access it and publicly ask the questions that the professionals have been coy to answer in closed circles. Similarly, the EU could apply some pressure for companies to disclose openly their tax affairs and the advice received by third parties in that area.
This is unlikely to happen though as a EU official told me: “The reasons why the database isn't made public are the same as for why tax authorities don't publish information related to all taxpayers. These are essentially related to the right to privacy, which in the member states is a constitutional right. I might add that reporting a tax planning scheme and placing it on the database will not necessarily imply that the scheme is harmful or incriminating, but merely that the tax authorities of other member states may wish to scrutinize it.”
A few years, ago a tax practitioner told me that tax intermediaries and their work were misunderstood by politicians and the general public, and that tax professionals were usually wary of facing the media for fear of further feeding the misconceptions.
But that – to me at least – is only an excuse: tax is a technical area in which very few journalists will ever have expertise, and “thou who has the expertise controls the conversation”. So tax experts shouldn’t fear public exposure; on the contrary, they should participate in shaping the public narrative around tax. By avoiding public debate, they look as if they have something to hide.
After five years of interaction with professionals involved in tax work, I do feel for them and sometimes understand their point of view but I still believe that they should take the moral high ground. They should advise their clients and honour their duty to them, but that does not mean excluding ethical issues. If, instead, they decide that this is not their game and they’d rather focus on profits, then they should be fined every time they use the words “transparency” and “public interest”.
One cannot have the cheese and eat it!
This might be seen as a rather naïve view, or even cheesy. But who doesn’t like a good French cheese? Even it if it originated from a tax dodging scheme ….