ACCA’s 12 tenets of taxation

Avoidance/Evasion

There is a clear division between tax avoidance (or planning, or mitigation), which is legal, and tax evasion, which is not.

The former attempts to reduce the amount of tax that is payable by means that are within the law, while making a full disclosure of the material information to the tax authorities. In contrast, tax evasion works outside the rules by hiding income through nondisclosure, or making wrongful deductions.

Tax law must be clear and certain (see points 3 and 5 below) and it should be remembered that businesses will try to minimise tax impact as a part of their normal commercial activity.

But, while most businesses try only to comply with the law, there are cases of convoluted tax planning schemes designed simply to exploit loopholes in the law. ACCA does not support this artificial activity.

Tax as a percentage of GDP

ACCA accepts that the current unprecedented economic turmoil may require special measures from national governments.

Notwithstanding current conditions, we believe that levels of taxation should be clearly stated as a percentage of Gross Domestic Product (GDP), as far as is practicable.

Once new measures are put in place, there should be a means of measuring and evaluating their impact in terms of their proclaimed public policy objectives.

Government should rationalise and set a target of taxation as a percentage of GDP as part of its economic management, and then be held to account via objective measurement and variance analysis.

Tax simplification stability

ACCA believes that tax legislation and operations should be simple to understand and comply with.. Research shows that, globally, companies spend almost two months per year complying with tax regulations – 15 days for corporate income taxes, 21 days for labour taxes and contributions and 21 days for consumption taxes.

It is essential that the volume of legislation is kept to a minimum. Much of the increase in tax law and administration in recent years is due to new anti-avoidance measures introduced by tax authorities. Small businesses in particular have no time to engage in esoteric tax planning and are simply trying to cope with the volume of laws. Changes in tax law – particularly those which reverse tax breaks or incentives and on which basis business have made plans – should be kept to an absolute minimum.

Openness, Transparency and Accountability

Tax policies should be transparent and non-discriminatory unless part of a declared discriminatory policy, such as one aimed to encourage new enterprise, for example.

ACCA’s view is that this use of tax by elected governments is legitimate but such taxes should then meet the principles of being transparent, simple and effective. Governments should be wary of over-complicating the tax system with too much tinkering to ‘reward’ certain groups of taxpayers. On major issues of tax policy, there should be clear consultation where the options are specified at the start, and properly considered with an audit trail.

There should also be openness on the application of tax policy. So-called ‘stealth taxes’, such as the phenomenon of ‘fiscal drag’, whereby personal tax thresholds are not increased in line with rising prices and incomes, thus bringing more individuals into higher-rate tax bands, cannot be justified.

Certainty

The tax systems in many jurisdictions can be criticised for their lack of certainty in outcomes or operations.

The UK and US authorities do not explicitly ban certain types of tax planning, as they are within the law, but nonetheless take a negative view of them. Companies using these legitimate tax-planning techniques may find themselves having to report to the authorities or becoming the subject of onerous tax inquiries.

Often these artificial ‘blocks’ are used by the tax authorities as a way of ‘fine-tuning’ the legislation. This is unacceptable for companies trying to plan their business activities. It should always be possible for different taxpayers who look at legislation to come to the same interpretation of the law.

Tax competitiveness

The globalisation of business means that each country should ensure its tax rates are competitive and its regime user-friendly. Tax is a key factor in ensuring the overall attractiveness of a location to new business.

The danger with competition, however, can lie in very low tax rates, where offshore tax havens or flat tax systems can lead to ‘beggar my neighbour’ approaches which can entrench wealth inequality.

ACCA supports the principle of nations being free to determine their tax affairs within the context of a global competitive environment. But governments must be wary of causing retaliatory action and trade wars by drastic business tax cuts.

Efficiency

Tax systems should be efficient for governments in terms of their ability to secure the revenue that is due to them and to prevent tax leakage and the development of a black economy.

But a tax system should also be efficient for taxpayers in terms of their ability to comply with its requirements. It should not be forgotten that small businesses represent the bulk of economic activity in most countries and the burden of regulation can have a disproportionate effect on small firms, as the smaller the business the heavier the compliance cost.

‘Sunset clauses’

Tax systems should have a review principle that demands tax legislation be periodically overhauled and consolidated to bring it up to date and make it easier to follow. Outdated laws should be removed. All anti-avoidance legislation should have sunset clauses attached. This will ensure that it is regularly reviewed.

Clear link from tax to spend (hypothecation)

There is a lack of credibility with tax systems in that taxpayers do not know why they are being taxed and where the revenue is being spent on. It would be of benefit to society, individuals and businesses if there is a clear link from tax taken to its application.

Avoidance of double taxation

An essential principle of tax law must be that income be subject to tax only once.

This applies both to direct tax and consumption taxes, such as VAT where input tax recovery should be available at each stage of the transaction chain. In the case of direct taxes there needs to be an efficient and effective mechanism available in all countries to give relief to a company which has already paid tax in another jurisdiction, before subjecting that same income, in whole or in part, to taxation. In practice, too many countries do not consider it important enough to offer this full relief.

The ‘arm’s length’ principle, whereby tax authorities treat transactions between connected parties by reference to the amount of profit that would have arisen if the same transactions had been executed by unconnected parties is a sensible and long-established convention which should be the basis of international tax affairs.

Human rights

Taxpayers have rights as well as responsibilities. They are obliged to pay their tax in full and on time. But states have a responsibility to not impose their will in the field of taxation in an arbitrary or vexatious way.

For instance, the incorporation into UK law since October 2000of the European Human Rights Act has empowered tax payers to challenge pernicious tax law in cases.

For example, where it could be argued there is fundamental uncertainty or unjustified additional cost of operating in one particular business vehicle rather than another. A similar approach throughout tax jurisdictions should become the norm.

‘Tax shifting’ – green taxes

One of the most important ways in which elected governments can use taxation for social policy is to change behaviour which damaging to the environment.

Accountants should play an active part in efforts to reduce global carbon dioxide emissions. The concept of ‘tax shifting’, by increasing carbon taxes on the use of fossil fuels but reducing them for payroll, income or corporate taxes should be promoted.

Governments must also look to use tax policy to aid positive change by incentivising investment in new, cleaner technologies across a wide range of industries.

(Tax Principles: From Adam Smith to Barack Obama is available at www.accaglobal.com/tax_principles)