Staying in Tune With the Tax Spirit of the Times

When is it acceptable to avoid taxes? And when should taxpayers refrain from actions that will cut their bills, even if their actions are legal?
With the European economy sluggish, the public mood has turned against those who are not seen to be paying their fair share of taxes. Last week, for example, Goldman Sachs abandoned an idea for switching British bonus dates to cut its employees’ tax bills, and there was also an intensification in the battle over Greek tax cheating.
The cases are, of course, very different. In Greece, tax evasion — which is against the law — is rife. The International Monetary Fund’s latest review on the country, published Friday, says that the “losses to the state from tax evasion are enormous.” It estimates the black economy is 25 percent of gross domestic product.

Three years after its financial crisis began, Greece has made little progress in cracking down on tax cheats. Although Athens did adopt a strategy of focusing on priority areas, the I.M.F. says implementation has been stalled in part because the tax administration has not been shaken up: “Anti-corruption efforts have been minimal, and efforts to remove underperforming staff have met stiff resistance.”
But the rot extends beyond corrupt tax officials.
In recent months, Greek politics has been transfixed by the scandal over the so-called Lagarde list, which contains the names of more than 2,000 Greek citizens who had bank accounts at a Swiss branch of HSBC. Christine Lagarde, then the finance minister of France and now head of the I.M.F., passed the list to George Papaconstantinou, her Greek counterpart, in 2010.

Insufficient effort was made to investigate whether taxes had been paid on the money in these Swiss bank accounts. At some point, the original list was even lost. Further fuel was added to the fire when it emerged that three of Mr. Papaconstantinou’s relatives did not appear on a copy of the list that survives. Parliament voted last week to investigate him. He says that he did not remove his relative’s names and that he is the victim of “a crass and blatant attempt at incrimination.”
Whatever actually happened to the Lagarde list, Greece is at the extreme end of the spectrum of tax cheating in Europe. But even in Britain, where tax evasion is less common, the zeitgeist has changed. Individuals and companies have come under attack by politicians and officials and in the news media for tax-reduction programs that are either in the gray zone or are legal.
One practice is the habit of people’s providing their services through companies they own, rather than being classified as employees, which incurs higher tax. Last year the government discovered that 2,400 civil servants were being engaged in this way and tightened the rules.
There has also been a fight over how Starbucks cut its British corporation tax by paying large sums of money to an overseas sister company to use the Starbucks brand. After a torrent of criticism, the coffee chain agreed to pay more British tax.

Now Goldman has buckled to pressure after it emerged it was considering shifting the date that it was to pay some bonuses to take advantage of an expected drop in the top rate of income tax to 45 percent from 50 percent. Mervyn A. King, governor of the Bank of England, described the idea that Goldman would do this as “depressing.”
Goldman misjudged the public mood and made a hasty U-turn. That was clearly the right thing to do to protect its reputation, given the hostility toward the banking industry and the fact that banks were all directly or indirectly bailed out by taxpayers during the financial crisis.
But what Goldman had been considering was not illegal.

Under British tax law, bonuses that are part of a contractual entitlement have to be paid on the due date. But companies are free to pay discretionary bonuses whenever they wish. Indeed, many businesses will be delaying their bonuses this year to take advantage of the lower tax rate.
Taxpayers should, of course, abide by the spirit as well as the letter of the law. Indeed, there is even a British code of practice for the banking industry that says precisely this.
But it is hard to argue that “bonus-shifting” even contravenes the spirit of the law. The government, after all, knew that this was likely to happen. When the top tax rate of 50 percent was introduced in 2010, many companies accelerated their bonuses to avoid the higher rate.
Last year, the government estimated that £16 billion to £18 billion, or about $25 billion to $28 billion, in income, not all of it bonuses, had been brought forward in this way. It also factored such income-shifting into its estimate of what would happen when the tax rate was cut..

If Parliament had wanted companies not to engage in such behavior, it should have said so. But it did not. George Osborne, the chancellor of the Exchequer, even took apparent pleasure in the previous Labour government’s having gotten the math wrong on the 50 percent tax rate, which it had introduced.
The important ethical principle that taxpayers should adopt is that they will abide by both the spirit and the letter of the law. But, as the Goldman case shows, this does not necessarily protect one from being pilloried. Public attitudes about what is fair when it comes to avoiding taxes are hardening. Companies in the public eye should therefore add a further practical principle: abide by the spirit of the times.

Hugo Dixon is editor at large of Reuters News.
 

Πηγή : nytimes.com

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