Paradise lost?

Dec 01, 2017
The leaking of confidential information damages lives and reputations, irrespective of the circumstances.

The issues raised by the Paradise Papers last month – the leak of confidential documents from the Appleby law firm – are not new. The rights and wrongs of taxation pre-date the tepid “fair share” guff we hear from politicians, journalists and other campaigners, some of whom have agendas far removed from any objective consideration of what is acceptable and what is not.

Taxation presents particular ethical questions because it involves a payment without a clear bargain. Tax is paid towards an often unspecified common good. You pay your taxes, but you don’t see anything directly in return. Nor does everyone pay the same amount, either in absolute terms or relative to the income they earn. This can happen by virtue of the legal status of the taxpayer, corporate or individual, or by virtue of the legal status of the income or gain. Recognising the rule of law is second nature to Chartered Accountants, but some of the consequences of applying the rule of law don’t sit well if you expect the tax system to deliver a clear bargain.

Confusing the matter further is the fondness of governments to use the system to shape social or commercial behaviour. Not that this is new either. While many people have heard of the Rosetta Stone, an ancient tablet with the same message in three languages which permitted the unravelling of the meaning of Egyptian hieroglyphics, few enough might tell you what that message was. In fact, it was a piece of tax legislation offering a tax exemption for any Egyptian high priest sensible enough to worship the Pharaoh of the day as a god.

Finance ministers in the western world have not (recently, at least) sought deification, but they usually look to get re-elected. The principle is the same; the difference merely one of degree. The mismatches in tax systems across borders is sometimes accidental, but also sometimes by design. These mismatches are being ironed out, largely through the efforts of the OECD and partly by EU initiatives, but they make slow progress.

It doesn’t suit a finance minister’s re-election prospects to be seen to be acquiescing to international pressures to change domestic tax rules, if those changes result in less tax being collected in his or her own country. Projects like the EU’s Common Consolidated Corporate Tax Base (CCCTB) promote a brave new world of cross-border cooperation on the taxation of companies, but such projects tend to stall. That’s not because of philosophical or ethical objections, but because all cooperative arrangements involve give and take. No finance minister wants to run the risk of losing some of their tax take.

Instead, what the Paradise Papers will do is accelerate cross-border cooperation in areas not directly linked to calculating the tax which might be collected. Predecessor revelations to the Paradise Papers – Luxleaks (which involved the publication of confidential material from PwC) and the Panama Papers (which involved the publication of confidential material from the law firm, Mossack Fonseca) speeded up agreements between governments to share financial information about their citizens and businesses with a view to tackling tax evasion. But apparently, not all information is fit to share.

The New Yorker magazine has reported that the journalists who received the Paradise Papers leaks analysed the material on computers which were not connected to the internet. I find that insight interesting. The private and confidential nature of the materials which had been leaked was only respected insofar as security was needed to preserve the journalistic scoop.

The Paradise Papers may well prompt further coherent action against aggressive forms of tax avoidance across borders, and few would argue that is unreasonable. The end should not justify the means, however. The leaking of confidential information damages lives and reputations, irrespective of the circumstances. A debate on what constitutes a “fair share” of taxation should not be taking place against the background noise of people jumping on the bandwagon.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.