The Paradise Papers leak has put a spotlight on tax governance and the debate around directors' obligations.
With over 13.4 million files released, it’s the largest leak in history (by volume). The November Paradise Papers named royals, Hollywood stars and business entities funnelling funds through tax havens.
With the complete ramifications of the data not fully understood, Tax Institute Senior Tax Counsel Bob Deutsch said the Paradise Papers leave us to interrogate a question around whether company directors should consider ethical and moral issues when structuring their tax affairs. “To put it another way, are company directors free to pursue whatever legal means are available to them to minimise tax payable by the relevant company without so much as giving a thought to the moral and ethical dimensions of what they are doing?” Deutsch said.
The ABC reported 6.8 million of the documents came from Bermudan law firm Appleby, half-a-million from Asiaciti Trust in Singapore and further six million from “corporate registries located in 19 tax havens”.
A senior reporter for the group responsible for the worldwide distribution, the International Consortium of Journalists (ICIJ), said the momentum from the China Leaks, Lux Leaks, Swiss Leaks and finally the Panama Papers exposed an “underground financial system that everyone knew existed but had never seen”. “In an age of austerity, it was now incontrovertible that many of the world’s richest citizens were not paying their fair share.”
While condemnation and fall-out was swift and expansive following the Panama Papers leaks (the ICIJ say the leak wiped an estimated $135 billion off the value of nearly 400 companies), Deutsch says the sheer volume of this latest data dump may take months, even years, to get to the bottom of.
Legislation like general anti-avoidance provisions, “while not explicitly referring to morality and ethics may be providing a broader ambit to enable revenue authorities the ability to challenge schemes which aggressively work to diminish the taxation liability which would otherwise arise in the country which is the true source of the economic activity in question”, according to Deutsch.
The leaks aren’t going to stop
Andrew Mills GAICD, Second Commissioner at the Australian Tax Office (ATO) responsible for law practice and dispute resolution, said OECD revenue authorities are collaborating with each-other and the ICIJ to comb through the leaks efficiently and effectively.
“[The Paradise Papers Leak] shows that nothing is secret,” Mills said. “Due to community group pressure there’s a narrative in the public domain and all organisations, or individuals for that matter, are being held up to the harsh light of day.” If a company has any kind of public profile, scrutiny of their affairs is inevitable, Mills said.
Deutsch agreed saying it was unlikely that this would be the last leak of this nature. “Openness and transparency is now more essential than ever as there are going to be leaks of this nature on an ongoing basis,” he explained.
However, both experts noted that companies entering into a structure through a tax haven, like the Caymans, the Virgin Islands or the Bahamas, doesn’t necessarily entail wrongdoing. “What it means is we have to look at it,” Mills said.
Beware the sign-off
Deutsch warned definitively against outsourcing tax risk to third party advisers. “Boards have readily seen the sign off from a third party professional advisor and simply relied on that sign off. I don’t think that’s going to be enough going forward particularly in relation to matters where we’re talking about large possible tax liabilities and large penalties,” Deutsch said.
Mills said it was a given that third parties had a role to play in tax advice. “Tax law is sometimes complex, everyone acknowledges that. And third party advisers are a necessary part of the way in which tax is managed,” Mills said. He implored boards to be very clear with their advisers about their organisation’s culture, and that they receive acknowledgement of that culture form the third party. “Advisers need to be aware that they need to be aligned with what the corporate expectations are.”
Maintaining public trust while undertaking effective risk strategy
The Board of Taxation and the Federal Government endorsed the Tax Transparency Code (TTC) in the 2017 budget - a voluntary set of principles and minimum standards to “guide medium and large businesses on public disclosure of tax information”.
Mills said the voluntary code was producing great results because large entities, including miners and banks, understand the benefits. “They see that it’s important to explain what their tax positions are, why they are that way, where they pay their taxes and so on particularly if their operations are international. It should be causing directors to think about whether their organisations have appropriate risk management policies that incorporate tax as one of those risks.”
He advised that good tax governance should not be “shelf-ware” and rarely used. “We distinguish between a document sitting on the shelf - something you’d cut your finger on if you open it because it’s never been thumbed - compared to one that is actually lived.” He said “good corporates” were getting regular updates to their audit committees or to the board itself on their tax position, tax performance and relationship with the ATO.
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