TAX CO-OP CONFERENCE November 3, 2015 Montreal

1. TAX CO-OP CONFERENCENovember 3, 2015Montreal MORALITY AND TAXATION Brian J. Arnold Senior Adviser, Canadian Tax Foundation, Toronto

2. Basic Concepts • Where there is a legal obligation to pay tax, whether there is a moral obligation to pay is irrelevant • Where there is no legal obligation to pay tax, is there a moral obligation to pay? • debatable, but doubtful • even if there is a moral obligation, what are the consequences? • Is there a moral obligation not to try and avoid tax?

3. Basic Concepts • Corporations are legal fictions • therefore, it makes no sense to talk about moral obligations of corporations • It is appropriate to talk about the moral obligations of directors, officers and shareholders of corporations

4. Basic Concepts • Taxpayers and their professional tax advisers will act in their self-interest • no sense appealing to their moral obligation to pay their fair share

5. Fundamental Legal Principles • Duke of Westminster principle – everyone has the right to arrange his or her affairs to minimize tax – is widely recognized • Implications: no obligation to pay any more than than the law requires or not to take actions that reduce tax • Competing principle: everyone has an obligation to pay their fair share (abuse of rights) • implications: what is one’s fair share? who determines what one’s fair share is? • Impossible to base a tax system on such nebulous standards

6. Fundamental Legal Principles • Real question is: What actions can persons take to avoid tax? • is this a moral issue or just a legal issue? • is the analysis the same for taxpayers and tax advisers? • If it’s a moral issue – no clear standard; up to each individual • If it’s a legal issue – standard varies from country to country; result of tax rules and case law

7. Fundamental Legal Principles • Problems often occur where: • tax legislation is deficient • courts adopt benign approach to tax avoidance • emphasis on textual interpretive principle: if an action isn’t prohibited, then it’s allowed • tax consequences are based on the legal form of transactions • taxpayers and their professional advisers are aggressive

8. Solutions • Morality may be an effective basis for public naming and shaming of MNEs by journalists, NGOs and politicians • The coverage of tax issues by the general media is usually poor • Criminal prosecutions for tax evasion are not effective

9. Solutions • Tougher legislation to alter the risk/reward analysis for taxpayers and tax advisers • Regulate the tax advisory profession • Better courts: “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.” (Arrowtown Assets Ltd. [2004] 1 HKLRD 77 (HKCA)) • Better enforcement by CRA and Justice

10. MNEs and BEPS • Oxfam report refers to “rigged” and uncoordinated international tax rules that allow MNEs to “dodge” taxes • Wealthy individuals exploit loopholes and secrecy

11. NGO Solutions for BEPS OECD/G20 solutions: • Reform process in which developing countries participate equally • Country-by-country reporting • Make companies taxable based on their real economic activity • Automatic exchange of information

12. NGO Solutions for BEPS Other solutions: • Taxes on wealth • Stop the use of tax havens with a blacklist and sanctions • Worldwide formulary apportionment • Transparency for tax incentives

13. Conclusion • Taxpayers, especially wealthy individuals and MNEs, should not be able to easily avoid paying tax • blame/responsibility rests squarely on the tax authorities, the courts and the legislature to deal more effectively with tax avoidance