The Panama Papers exposed the use of tax havens by many Multinational Corporations (MNCs). Is MNC Tax Minimisation unethical, an issue that governments should be taking action on, or legitimate conduct? Critically discuss.
Panama papers are considered as biggest leak of relevant information which includes more than 11 million documents and also 200,000 offshore business organizations. This leak is invented in Panama, and some documents related to this leak include the information since the year 1970s. Various wealthy individuals are involved in this scandal and this also includes top government officials from different countries. Release of information related to panama papers result in severe consequences such as resignations of officials and number of law suits. There is no scope of end in litigation, because different lawyers and government agencies from different countries continually take interest in this issue (Le, 2017).
However, there is nothing illegal in having offshore business entities, but the issue rose when business organizations use these offshore entities for the purpose of hiding assets, evading income tax, money laundering, and evades sanctions. The whistleblower who leaked the information is known as John Doe, and he provided this information to the Süddeutsche Zeitung, a German newspaper. He leaked the information related to panama papers because of his strong views against income inequality and injustice perpetrated by some of the entities and individuals (McGee, 2016).
The main objective of this paper is to discuss those ethical issues which are directly related to the assets hiding and income offshore. Essay mainly focuses on the ethics of hiding assets, tax minimization, bribery, and whistle blowers. This paper mainly answers the question “The Panama Papers exposed the use of tax havens by many Multinational Corporations (MNCs). Is MNC Tax Minimization unethical, an issue that governments should be taking action on, or legitimate conduct? Critically discuss.” Lastly, paper is concluded with brief conclusion.
In context of good governance practices, organizations will try to reduce their tax liability with the help of efficient tax planning and by using the maximum tools and mechanisms which the government makes available especially for this purpose such as allowances, deductions, rebates, exemptions, and etc. Planning related to tax is considered as tax compliance behavior but there is one grey area in tax planning that is tax minimization.
Before discussing the ethics, it is necessary to understand the difference between the tax evasion and tax minimization. The basic and most important difference between the two is legality. In other words, tax evasion includes artificial transactions.
Tax minimization is legal in nature, but it is unethical because it includes the use of financial instruments and arrangements which are provided by the government for the purpose of taking tax advantage. This can be understood through example; various offshore entities are used as tax havens. It must be noted that avoiding tax and modifying the rules of the tax system is not considered as illegal practice like the tax evasion, but it is considered as unethical practice. It must be noted that such practice operates within the law but not fall in the spirit of law. Therefore, it can be said that business organization complied with the law but there practices are not ethical (Stainer, Stainer & Segal,1997).
This paragraph answers the question “whether business is being ethical if they do not conduct any illegal action”?
Generally, there are number of transactions which are considered as legal but not ethical, and tax minimization is one of these transactions. Tax minimization is considered as second most important ethical issue and this issue is faced by various governments across the globe. Panama papers are considered as best and suitable example of tax minimization and tax evasion (Back, 2013). There are number of individuals who stated that practice of tax minimization are fall under the legal guidance, but is considered as strong evidence of greed. Such practices conducted by the organizations not only affect the reputation of company in adverse manner but also affects the overall success of the organization. This paragraph generally answers the responsibilities of the organization towards the public. There are number of theories and standards which highlight the social responsibility of the organizations, and further stated that this responsibility can be fulfilled through tax law (Simser, 2008; Slemrod, 2007).
To the contrary management of the business organizations argued that they also has responsibility to return the highest profit to their shareholders, and for fulfilling this responsibility they conduct such practices. However, profitable returns to the shareholders are considered as prime responsibility of the firm but there are some other stakeholders also such as society. Those business organizations which loose the trust of the public in context of ethics may suffer permanent and long term damage in the future. Therefore, this argument is considered as operational, and stated that business organizations must pay fair share of taxes. It is advisable for organizations; instead of hiding behind the corporate veil for tax evasion it is better to frame transparent tax policies. This paragraph answers the question “whether ethics applied in business”?.
As stated above, avoiding tax by using the rules of the tax system is not an illegal activity, but it is an unethical practice. Almost every country provides the clarification related to the applicability of taxes, and it is expected from business organizations and MNCs to pay their taxes as per the law. This issues fall under the category of monarchy of ethics because business organizations have choices about their approach to interpret the law and pay taxes as per those laws. While tax minimization is the business practice which remains legal where a business draws its ethical line regarding how to interpret the tax laws and arrange its affairs, is subject to a good deal of discretion (Business source premier, 2010; GFI, 2018).
This can extend to where it pays its taxes. Tax minimization has been branded by some as an ‘immoral’ and unethical practice that undermines the integrity of the tax system. Public expects from the business organizations to pay their fair share of tax which may not necessary be the same as what law requires or allows. Various government agencies stated that burden of tax must not fall on those who does not play with the rules and pay their fair share of tax. There is not accurate definition of fair tax. Experts stated that it is very difficult to define the fair taxation in such way as it satisfied the interest of all the parties (Strasburg, 2014).
There must be responsible and ethical approach to consider the tax payment, and it must be consider as a legitimate payment which creates wealth of the country and not as a cost which can be avoided. It is further stated that policies related to tax must be accompanied with the guiding ethical principles related to accountability, consistency, and transparency. Framework of tax policies does not contain any such provision because of which companies pay more tax but it is considered as contribution for ensuring fair return to the society in which business operates (IBE, 2013).
Utilitarianism theory is theory related to ethics teachings and this theory states that ethical action is the one which increase the maximum utility. In other words, an action is considered as ethical action which provides maximum benefit and reduces the sufferings of negatives. Scandal of panama papers provides maximum benefits to the organizations and individuals only that are included in this scandal (McGee & Vittadini, 2007). On the other side, tax evasion cause damages to the country and other stakeholders of the organizations such as society, because tax evaded by organizations are considered as profit loose by countries. Tax evasion only provides benefit to the organization and shareholders of the organization, but it result in different negative impacts on the government and other stakeholders of the organization such as society, employees, etc (IBE, 2013).
Amount loose by countries because of the tax minimization hurts the people of that country because tax minimization limit the amount which government can spend on the welfare of their citizens such as agriculture, social security, defense, etc. It can be said that tax minimization has more negative effects in context of society and country, in comparison of positive effects for organization and shareholders. Therefore, as per this theory tax minimization is an unethical action (Bonucci & Moulette, 2007; Boortz & Linder 2005).
Kantianism theory is considered as accurate example of deontological moral theory and as per this theory rightness and wrongness of any action does not depend on the result of that action but it clearly depends on the fact that whether person fulfills its duty or not. Tax minimization cases related to panama papers clearly shows that wealthy organizations and successful MNCs tried to exempt themselves from the rules of countries from which they make profit by avoiding the tax rules of those countries, and some make profit by moving the profit to those countries which have less strict rules (McGee & An, 2006; OECD, 2004).
However, it must be noted that this is not illegal but it is also not ethical. Payment of fair share of tax is considered as biggest and most important responsibility of the individual and business organizations, and by evading the tax organizations and individuals fail to fulfill their duty. MNCs involved in tax evasion bear different duties and responsibilities towards the government of the country and society in which they make profit, and by paying tax organizations and MNCs give return to the country and society.
Organizations which evade tax will not be considered as god model for other companies, because it makes loose of considerable amount of money which they can use in different productive functions. As per the formula of humanity organizations must act in such manner as it not only provides benefit to them but to other also because of which they conduct their operations and makes profit. It can be said that organizations involved in tax evasions only care about their profits and not about their obligations they owned towards society in which they operates. Therefore, as per this theory, tax evasion is an ethical action which causes severe damage to the countries.
Four main virtues related to business are stated below:
As per this theory, MNCs and individuals must take actions to ensure above stated virtues in their decision making. In other words, organizations take stands on high tax provisions that would be imposed on the profit they make by evading the tax, and this is considered as wrong idea because it reduce the ability of countries to spend the accurate money on necessary issues. In context of panama papers, individuals and organization follow the provision of honesty by keeping their stakeholders happy and by providing good working conditions to the employees, but they fail to fulfill their duties towards their major customers that is country in which they make profit (McCaffery, Edward & Baron, 2004). Tax evasion is the practice in which organizations pay less to the countries by avoiding the tax, as it is not considered as honest way to handle the profits made in the country. Justice is also absent in the practice of tax evasion because those who are rich does not pay their fair amount of tax. Therefore, as per this theory also tax evasion is an unethical practice (Barker, 2009).
Above stated facts and theories clearly reflect the differentiation between the legal and ethical actions. As it stated that action must be both legal and ethical, and organizations must not only focus on legal solutions but also focus on ethical solutions (Slemrod, & Shlomo, 2002).
Conclusion:
After considering the above facts, it can be said that tax evasion is a legal but unethical practice and this can be evidenced through different theories of ethics stated above. Panama papers is an big scandal and reflect number of unethical practices conducted by wealthy individuals and government must take strict action on this issue.
References:
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Bonucci, N., & Moulette, P. (2007). The OECD Anti-Bribery Convention 10 years on. The
Boortz, N. & J. Linder (2005). The Fair Tax Book: Saying Goodbye to the Income Tax and the
Business Source Premier, (2010). The Blurring lines in tax planning. International Tax Review 21(10).
Barker, B. (2009). “The Ideology of Tax Avoidance.” Loyola University Chicago Law Journal 40:229–51.
GFI, (2018). Money Laundering. Available at: https://www.gfintegrity.org/issue/money-laundering/. Accessed on 1st March 2018.
Hall, K. The Ethics of Tax Minimization and Tax Evasion. Available at: https://www.neumann.edu/about/publications/NeumannBusinessReview/journal/Review2015/Hall.pdf. Accessed on 1st March 2018.
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IBE, (2013). Tax Minimization as an Ethical Issue for Business. Available at: https://www.ibe.org.uk/userassets/briefings/ibe_briefing_31_tax_minimization_as_an_ethical_issue_for_business.pdf. Accessed on 1st March 2018.
Le, A. (2017). Ethics Analysis: The Panama Papers. Available at: https://sevenpillarsinstitute.org/ethics-analysis-the-panama-papers/. Accessed on 1st March 2018.
McGee, R. (2016). The Panama Papers: A Discussion of Some Ethical Issues. Journal of Insurance and Financial Management 3(3): 1-41 (2017).
McGee, R.W. & An, Y. (2006). The ethics of tax evasion: A survey of Chinese business and economics students. Proceedings of the International Academy of Business and Public Administration Disciplines (IABPAD), 2006 Winter Conference, Orlando, Florida.
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McCaffery, Edward J., Baron, J. (2004). “Framing and Taxation: Evaluation of Tax Policies Involving Household Composition.” Journal of Economic Psychology 25:679–705
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Simser, J. (2008) “Tax evasion and avoidance typologies”, Journal of Money Laundering Control, Vol. 11 Issue: 2, pp.123-134.
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