1. TAX CO-OP CONFERENCE November 3, 2015 Montreal 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? 2

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 3

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 4

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 5

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 6

7. Fundamental Legal Principles Problems often occur where: 1)tax legislation is deficient 2)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 3)taxpayers and their professional advisers are aggressive 7

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 8

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 9

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 10

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 11

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 12

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 13