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Tax and Risk: Lessons from The Paradise Papers

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The globalization of the financial industry has meant a pervasive lack of specificity with respect to basic tax terms and concepts – even the word “tax” itself – is being exploited with very real consequences, from lost revenue for governments to the commission of financial crime.

It’s a wide-scale issue and whether it can be remedied may depend on something very subjective: Whether a sense of morality plays into how organizations approach their tax strategy.

Lessons from The Paradise Papers

During the January 23 Financial Crime Conversation, “Tax: The Final Frontier,”  Will Fitzgibbon, a reporter from the International Consortium of Investigative Journalists, detailed what he and 300 other journalists learned from poring over The Paradise Papers, a cache of13 million files that exposed how corporations and wealthy individuals were stashing money offshore in more favorable tax jurisdictions.

Fitzgibbon said “fluidity, lack of precision and difficulty of deciding certain terms,” like “tax,” and “avoidance,” make it easy for individuals and organizations to find and exploit loopholes.

That isn’t the only complexity. Society-wide, there isn’t a uniform tolerance for risk or borderline behavior. That means some entities are more comfortable toeing the line than others.

“Different companies, and even different offices in the same company, have a different risk matrix, and that makes it difficult to implement the kind of wholescale reforms we talk about seeing,” Fitzgibbon said.

A changing sense of obligation?

Tax avoidance (legally working within a legislative framework to minimize tax responsibility) and tax evasion (illegally reducing one’s tax obligation) are not the same thing, but the three panelists seemed to agree the public – and perhaps elected officials – are starting to view both with nearly equal suspicion.

Panelist Louise Delahunty, a partner at Cooley with three decades of experience advising clients on tax matters, noted there was a time when tax avoidance was seen as permissible, perhaps even clever. She now senses that may be changing.

“Are we at the stage now where we say, “It’s good to pay tax. It’s part of a responsible society?’”  she asked.

Panelist Richard Brooks, an investigative journalist and author, was more confident.

“People are realizing now that if you enter a tax avoidance scheme, even a legal tax avoidance scheme, you’re shirking your responsibility,” he said. “Also, what we’re increasingly seeing, through the Panama Papers and Paradise Papers, is that much of what’s being sold as legal tax avoidance entails illegal mechanisms.”

 The power of public shaming

If there is a sense of changing obligation with regard to paying taxes, it isn’t necessarily because we’ve collectively come to our conscience. As moderator Daisy McAndrew noted,“Is that just because they don’t want to be on the front page of newspapers?”

When an audience member asked whether there was any downside to tax avoidance beyond reputational damage, Fitzgibbon said there was – but reputational damage was really the driving factors.

“Some studies have shown that companies whose name appeared in the Paradise Papers…collectively lost something like US$140 billion in the stock market, so there was a financial cost. Money does come down to the bottom of it,” he said. “But you can’t measure the impact, the reputational hit. It’s more than just a bloody nose for a day or two.”

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