Ethics in Taxation and Business

1. Ethics in Tax Administration
Advanced Mid-Career Training Programme for Commissioners of Income-tax
At IBFD, Amsterdam, the Netherlands
21st July, 2015
Group 1
Sandip Garg
Anshu Shukla Pandey
Sunil Kumar
Dinesh Sawkmie
N. Jayasankar

2. ethics: definition and drivers
• A standard of behavior that instructs human beings on their
action in different situations
– Impacts transactions and relationships between the individual and the
society at large including organizations
• Commonly mistaken for:
– Law –can guide or impose ethical action, but may not always be ‘ethical’
(e.g. apartheid, euthanasia)
– Culturally accepted norms – Some practices are not ethical (e.g. honour
killings, slavery, caste system).
• NB: Some have evolved into ethical standards and law
• What drives ethics?
Personal sense of right/wrong (intuitive)
Information, knowledge and
wisdom (or lack of these) -
cognitive Perceptions of rewards and threats – system-generated
Will – discipline and energy towards a higher ideal
and/or subjugating self to a “noble” cause

3. tax administration environment
Overall Tax Policy and Administration
(Tax Officials)
Tax Payers
The Environment
The Transactional Interplay
International
Trends
Economic Behavioural
Output
Maximization
Ethics

4. evolving context
The ethics of tax administrators
• Do Taxes Matter? Tax Compliance and Morality by James Alm and Benno
Torgler [Journal of Business Ethics [July 2011, Volume 1, Issue 4, pp 635-
651] speaks of 3 paradigms
• Based on the unsurprising finding that individuals are not merely rational
and self-interested but also ethical
Traditional “Enforcement”
paradigm – neo-classical
Less traditional “Service” paradigm –
kinder and gentler administration
New “Trust” paradigm – on a
foundation of ethics
Ethics is increasingly a variable in tax
compliance behaviour studies
Need to change the Tax Administration
Environment
Employ not merely
administrative/policy/economic measures
but also
Measures that will attend to Theory of
Planned Behaviour (TPB)

5. Implementing ….

6. Enforcement:
– Annual Information Report (AIR)
– Criminal Investigation Branch (CIB) – [now the Directorate General of
Income Tax (Intelligence & Criminal Investigation or DCI)
– Other Third Party Information Sources
– Data Warehousing Business Analytics (DWBA)
Services:
– E-Filing, CPC, CPC (TDS), Refund Banker
– Authority on Advance Rulings (AAR)
– Advance Pricing Agreements (APA)
Trust:
– Self-Assessment, Advance Tax, Safe Harbour Rules
what has been done

7. 1. Dispute Resolution Panel
2. Filtering of cases– substantial Revenue and
Substantial Question of Law
tools - direct
what needs to be done
Ethical Standards and Principles
Code of Conduct
An Effective Enforcement System
An Effective Tax Appeal System
Standard of behavior expected of the employees in
the performance of their duties. The code provides
guidance as they make decisions, both personal and
professional
The code aims to:
1. Standardize behavior
2. Establish minimal standard of conduct
3. Formalize existing practices
should have the following traits:
1. Written and (legally) enforceable
code;
2. Clearly defined penalties for
infractions;
for minor offenses (administrative
discipline and punishment);
for fraud and corruption (prosecution);
3. Obligation to Report (Protection of
Whistleblower);
4. A continuous education system that
creates awareness of responsibility for
both the taxpayer and the public;
5. An independent monitoring
system/mechanism to ensure
compliance

8. tools – indirect (environmental)
• Standardization
– of Procedures
– Norms
• Simplification
– of the Tax System
• Reorienting Existing Professionalism
1. Reduce discretion of officials
2. Limit scope of scrutiny
3. Limit one-one/out of office contact
with the taxpayer
4. Internal controls
5. Performance Standards
1. Simple and clear rules
2. Anti-convolutism [e.g. fewer exemptions]
3. Concerted effort to remove ambiguities/
loopholes
1. No political appointments
2. Recruitment/promotion on merit
3. Responsibilities clearly defined (job description
manuals)
4. Segregation of duties
5. Staff rotation and continuous training schemes
what needs to be done
Enforcing the code of ethics of Tax
Advisors/Consultants and
Professionals
Coordinating with ICAI, the Bar
Councils and other Forms

9. tools – indirect (tax professional ethics)
cvc.nic.in/codeethics.pdf
• International Federation of Accountants (IFAC) Guidelines on Professional
Ethics for the Accountancy Profession
Fundamental Principles
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
Technical Standards
Objectives
Credibility
Professionalism
Quality of Services
Confidence
“The rigorous disciplinary action of ICAI also seems to be ineffective to some extent in
deterring some of the Chartered Accountants from resorting to undesirable practices. The
reason for this, seems to be that many a time undesirable practices are not caught and only
sparingly CA(s) get punished for their intentional misdeeds; which again is a time taking
process”
Referred to Examples
Mandated a Policy
Ethical Standard Board
esb.icai.org/
Know Your Ethics - ICAI
regular publication

10. Theoretical Economics Letters
Vol. 2 No. 1 (2012) , Article ID: 17361
Corruption, Growth, and
Taxation
Yazid Dissou, Tatsiana
Yakautsava
Department of Economics,
University of Ottawa, Ottawa,
Canad

11. international
• Ethical preferences of individuals compounded by those of tax
administrations and corporates (MNEs) - individuals can be handled through
resident rule and passive income taxation
• 70% of world trade through MNEs
11
self-interested strategising
and hard-nosed hardballing
game-theoretic scenarios
Encouragement of
voluntary
compliance can
take place only
through consensus
and realignment
ethicality versus reality
versus practicality

12. internationally
speaking...
Corporate
objectives and
frameworks
Fuzzy
Logic of Ethics
The
Environmental
Mosaic

13. ethics respecified
• Constant and continuing social tension on distribution and levels of
taxes
• The fuzzy ethical logic above leads to corporate tax avoidance
• History: Window Tax in the UK  1696 to 1851  Result:
Windows Bricked-up
Moral/Ethical
Taxes: the prices that you pay
for civilization
Practical/Business-oriented/Cynical
Taxes: an unfair burden; a process of
transferring money to undeserving/
underperforming others
The Great Fuzzy Ethical Divide
Paying the lowest amount of
tax is unethical/immoral
Exploiting legal loopholes perfectly legitimate;
Argument of tax efficiency and contributions in
other ways and kinds (VAT/Employee Tax, etc.)

14. ethics respecified
• “People of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the public, or in
some contrivance to raise prices” – Adam Smith
• International (transactions) taxation – more about Corporate (read MNE)
issues than individual issues
Business (also corporate) ethics: a form
of applied (or professional) ethics that
examines ethical principles and moral or
ethical problems that arise in a business
environment
Corporate Objectives and Framework

15. ethics respecified
• Most major corporations today promote commitment to non-economic values
under headings such as ethics codes and social responsibility charters
interaction of profit-maximizing
behaviour
non-economic
concerns
business ethics
Tax Fraud
Tax Planning
Tax Evasion
Tax Avoidance
Tax Mitigation
Treaty Abuse
Tax Sheltering
Scale of Legal Aggression
In line with the Text
and Spirit of the Law
In line with Text but the Spirit
of Law violated
Both the Text as well as the
Spirit of Law violated
The Environmental Mosaic

16. “unethical” methods
• Simply shifting tax events (bearing activities) to an offshore “tax paradise”
• Change the nature and constitution of the business units [e.g. hybrid
entities]
• Transfer Pricing manipulations
16
Residence Rule comes in the way
• Rearrange Economic (FAR) Events
jurisdictionally [e.g. shift debt]
• Artificial avoidance of PE status
[e,g. Amazon in the UK exploited
the definition in OECD Convention
Article 5, paragraph 4 that does not
“include the use of facilities solely
for the purpose of storage or
delivery of goods or merchandise”]
• Business Restructuring
• Elaborate Tax Treaty/
Jurisdiction driven structures

17. administrative solutions
• Change tax laws or frame tax rules so that there is a smaller scope for
avoidance
• Better collaborative action and exchange of information; incentives for
and/or sanctions on tax havens
• Stimulate and encourage ethical approaches and practices
17
• Limiting tax credits; Withholding/Refund Approach; Alternative
Minimum Tax
• General Anti-Avoidance Rules (or General Anti-Abuse Rules)
abbreviated as GAAR
• Shifting Burden of Proof; Increased information reporting
• Activist Judicial Doctrines: [e.g. in the UK as in IRC v Ramsay
(1981) followed by Furniss v. Dawson (1984)] - rejected as
unpredictable and impractical in most countries
• Retrospective Action; Formulaic apportionment?

18. whither tax administrators?
• Tax administrators internationally have tried to differentiate amongst
• Tax Avoidance frowned upon because it distorts
– Investment and Capital Flows
– International Competition
Tax Evasion
Tax Avoidance
Tax Planning
Avoiding Taxes without
Avoiding (Tax) Liability
A way of removing,
reducing or postponing a
tax liability other than by
tax evasion/planning
Removing/Reducing/
Avoiding Tax Liability
Economic/Tax Neutrality

19. whither tax administrators?
• OECD Guidelines of Detection: “International Tax Avoidance
and Evasion: Four related studies”, 1986 on page number 17
• OECD Action Plan on BEPS, 2013 after describing a case
– Offends the spirit of the law that allowed relief in a genuine interest
– The main benefit was the obtaining of a tax benefit and not a loan
– Artificial and not carried out in a normal commercial manner
• Contrarian views
Elements of artificiality: No
economic or business aims as
primary purpose
Features of
secrecy
Taxes advantage of
loopholes in law for
unintended purposes
USA: 1934 Helvery vs. Gregory  Anyone may arrange his
affairs so that his taxes shall be as low as possible
European Court of Justice: Freedom of Establishment;
jurisdiction shopping a legitimate exercise; concept of “not
wholly artificial”

20. actions statement
• Tax jurisdictions need clarity on what is “ethical” and what is not
– Turning blind eyes towards tax havens and/or abetting these is counter productive
– Increasing proof of changes happening
• Multinational companies themselves have 3 key challenges
– how to foster a culture of ethical conduct in all countries of operation
– how to engage a global workforce in understanding and adopting its corporate
values; and
– how to meet the web of complex legal and compliance obligations that may exist
in all its locations
• Command-and-Control [cum-Corruption-and-Bribery?] versus mutual and
public trust
Taxation principles of
Simplicity, Accountability,
Equity, Predictability,
Efficiency and Neutrality
Bridging the divide between
corporate and societal
interests
Play offs

21. Consensus on the ideal of
contribution maximization in
an organic, humanized world