By Ian Lavis on behalf of Praxity
Rightly or wrongly, it comes as no surprise to find accountancy in the firing line following the publication of the Paradise Papers, the second biggest data leak in history after the Panama Papers.
The 1.4 TB of data and 13.4 million documents that make up the Paradise Papers shine a light on the tax affairs of the world’s most rich and powerful including multinationals such as Apple, Nike, Google and Facebook. The leak exposes the complex structures to shelter wealth in offshore tax havens and the professionals complicit in creating them.
There is no suggestion of any wrongdoing or illegal behaviour, but publication of the Paradise Papers brings into question the structures that exist to allow tax avoidance and the role of accountancy firms. Among those firms that have come under intense media scrutiny are EY, PwC and Deloitte, all for their role in tax planning or avoidance schemes. The ensuing public outcry over ‘secret’ tax havens and avoidance suggests accountants and their clients need to pay close attention to transparency, ethics and reputation when advising on tax planning.
The content of the Paradise Papers comes from two offshore service providers and the company registries of 19 tax havens. The material was obtained by the German newspaper Süddeutsche Zeitung and shared by media including the Guardian, the BBC and the New York Times.
Has this leak of tax arrangements been sensationalised by the media? Should accountancy firms change their approach to tax planning and tax avoidance schemes? Maybe it’s a bit of both.
Russell Guthrie, Executive Director, External Relations, and Chief Financial Officer for IFAC, commented back in 2014 on the dilemma facing professional accountants and his comments are just as true today. He said: “At one extreme, it is clear that tax evasion – which is illegal – should be condemned by all parties and no professional accountant should ever be associated with it. At the other, leveraging tax incentives in the way they are intended by governments is certainly appropriate. Between the two extremes lies the complex question of ‘tax avoidance’, which is by definition legal. This poses a difficult dilemma for taxpayers and, thus, for the accountancy profession.”
Commenting in November 2017 on the fallout from the Paradise Papers, the IFAC CFO said he was struck by how the media had generally offered a “more balanced” tone this time round, perhaps indicating that there is a greater understanding about the role of accountants.
Mr Guthrie stressed that accounting firms would be well advised to think about not just commercial interests but also wider issues such as the interests of stakeholders: “There is an important discussion to be had internally about what degree of outcome we want to be associated with.”
Supporting calls for more transparency to avoid misunderstandings, he added: “If companies make a greater effort to explain tax arrangements and the reason why something is done it will lead to rational business decision-making”.
The problem accountancy firms have, apart from having to use their highly-specialised knowledge and expertise to negotiate complex tax rules in different jurisdictions to provide advice on perfectly legal schemes, is that those schemes are often viewed suspiciously if not considered downright dodgy by much of the public. The negative publicity that ensues does nothing for the reputation of the firm, its client and, by association, the accountancy profession as a whole.
All qualified accountants are bound by a strict ethical code and required not to bring their professional body into disrepute. Tax avoidance is perfectly legitimate, expected by many clients, and practiced by almost everyone at some point – even social security programmes quite legally take advantage of regulatory arrangements that enable you to avoid tax.
On one hand, accountants strive to do the job the client expects, which usually involves saving the client tax, while on the other hand they face a public backlash for doing exactly that. Public perception and its easy amplification through social media can be extremely damaging. And much of that perception is driven by concerns about fairness and trust – the public wants a fair tax system where everyone pays what they owe.
But there are many different types of ‘fairness’, often conflicting, and there has been a growing public distrust of firms advising on secretive tax havens and schemes which are seen to provide an unfair advantage to the wealthiest individuals or organisations.
The G20 Public Trust in Tax report, from ACCA, IFAC and CA ANZ, was the first ever in-depth study of views about who is trusted on international taxation. It makes interesting reading. It’s reassuring for accountants, but it doesn’t gloss the scale of the challenge for the future, nothing less than “a reset – to win back the public’s trust, and create a more effective international tax system fit for the twenty-first century”.
The results show people want governments to cooperate for a more coherent international tax system. They trust professionals, but have developed a deep distrust of politicians.
Until these conflicts are resolved, the question will remain – how do you manage the potential reputational risks of a client engaging you to mitigate a tax bill? For now, your answer may involve considering things beyond your strict understanding of the law.
Watch this space!
This is just one of the issues we’re likely to return to in future. Please get in touch with any comments or ideas for future themes and features.
Contact: Simon Tyrrell, copywriter: firstname.lastname@example.org