Towards a new tax morality


Many governments are taking heed of the public mood for taxpayers to pay their fair share of taxes; Singapore should also seek a fairer distribution of the tax burden.

When I first met Mr Koh Yong Guan more than 20 years ago, he had just been appointed the Commissioner of Inland Revenue. One thing he said then and which has stuck with me ever since was: "Tax evasion is illegal - and tax avoidance is immoral."

The Inland Revenue Authority of Singapore eventually became a client of my technology consulting firm, and I would often caution my staff that we should be whiter than white in our personal tax returns, especially with a tax commissioner who thinks like that.

That said, my feeling then was that Mr Koh was unique in his view of tax morality. In fact, I knew, and still know, of more than a few chief financial officers and accountants who consider it not only fair, but their very duty, to minimise, as much as possible, the taxes they and their companies pay.

Indeed, a whole "tax planning" industry has sprung up to help individual and corporate taxpayers push the envelope in tax avoidance, and so, legitimately pay little or no tax.

Turning the tide

HOWEVER, events of recent years suggest that society may well be coming around to Mr Koh's point of view. There is a palpable change in public opinion towards each person and corporation paying their fair share of taxes, and not getting away with merely paying what might be within the tax rules of the game.

In the 2012 United States presidential election, one of the issues which dogged Republican Mitt Romney's campaign was how his tax bill was lower than the average American's despite his income placing him in the top 1 per cent of earners. "I pay all the taxes that are legally required and not a dollar more," he said in his defence.

In December 2012, Starbucks announced that it would voluntarily pay the British taxman about £10 million (S$21 million) more a year in 2013 and 2014 than it was required to pay by law. The company was not doing so under any pressure from the tax authorities. Rather, it was responding to British consumers, who were upset over the revelation that multinational corporations (MNCs) such as Starbucks, Amazon and Google were paying little or no taxes despite their massive sales turnover.

Ironically, it is governments who are encouraging this notion of minimising tax by dangling tax incentives and schemes in their quest to attract targeted individuals and companies to their countries.

During its first 14 years of operations in the United Kingdom, Starbucks, for example, paid a total of only £8.6 million in taxes. This was less than 0.3 per cent of its sales turnover of more than £3 billion. Based on its tax submissions, it was profitable in only one out of those 14 years.

However, Starbucks admitted that its British business made large payments for coffee to a profitable Swiss subsidiary and large royalty payments to another profitable Dutch subsidiary.

Among MNCs, it is common and legitimate for the cross-charging of goods and services between subsidiaries (known as "transfer pricing"), or for one subsidiary to charge another for the use of intellectual property and other rights (known as "royalty payments"). When the transfer prices or royalty payments are artificially high (or low), then what could be profits in one subsidiary is effectively "shifted" to another subsidiary - which is often located in a tax jurisdiction where that subsidiary pays little or no taxes.

By itself, a tax authority can do little as what the MNCs do taxwise are entirely within the rules of each tax jurisdiction. However, governments are recognising that, taken collectively, in effect, the total tax revenue is reduced (what is called "base erosion").

Perhaps encouraged by the public mood swing towards a new tax morality, governments are implementing tax reforms and banding together as they seek to recoup lost revenues from the economic downturn.

A key focus is the tax avoidance schemes enjoyed by MNCs and high net worth individuals.

OECD's action plan

IN JULY 2013, the Organisation for Economic Cooperation and Development (OECD) released an "Action Plan on Base Erosion and Profit Shifting (BEPS)" to address, in a coordinated and comprehensive manner, the issue of their collective tax loss and the integrity of their tax systems.

The plan identified 15 specific actions to give governments the domestic and international instruments to prevent corporations from structuring their finances so that they end up paying little or no taxes.

Some of the areas addressed are structural, for example, how to tax companies in the digital economy when transactions are conducted in cyberspace. Several areas relate to addressing aggressive tax planning and abuse of the tax system, especially the issue of transfer pricing. Other areas are to support the broader programme such as dispute resolution between countries and the renegotiation of tax treaties.

Even though Singapore is not an OECD member, there are significant implications for it as an international business hub. For example, our tax incentives to encourage MNCs to locate activities and business here can result in a very low tax rate and consequently Singapore being deemed a potential "tax haven" and one that facilitates BEPS. Other action items, such as those requiring greater transparency, transfer pricing and controlled foreign corporations, create both opportunities and challenges.

No doubt, Singapore will be closely following the OECD developments to ensure that our domestic tax laws are aligned with the new international tax rules.

The OECD Action Plan focuses on cross-border tax situations. Countries are also reviewing their tax systems to ensure that they can generate appropriate levels of tax revenues to finance needed government programmes, while ensuring that the tax burden is equitably shared.

A key reason that Mr Romney paid a smaller proportion of income tax than most Americans was because his income was from investments from his US$200 million (S$250 million) fortune. This attracted a lower tax rate than earned income. "Should it be so?" is a debate raging in the US and elsewhere.

In Singapore, the possibility of revenue shortfalls is not a serious concern. We are fortunate to have access to past reserves and the returns from investing those reserves.

Here, the question is whether the Net Investment Returns Contribution from our national reserves that is now available for the annual Budget should be an integral part of Singapore's operating revenue, thus allowing the Government to reduce the overall tax bill and still have more money for social programmes.

More equitable tax system

LEAVING aside the question of how much tax revenue is needed, the key question is how that tax burden should be equitably distributed.

Few can dispute that, until recently, our tax system has been slanted towards favouring the well-off. Consider the low personal income tax rates, no capital gains tax or estate duty, and tax exemptions on most forms of dividend and interest income. Meanwhile, the burden on the lower income is increased with higher consumption taxes, although this is ameliorated somewhat by transfers to offset the impact of the goods and services tax (GST).

A year ago, Deputy Prime Minister Tharman Shanmugaratnam signalled a change in direction in his Budget 2013 speech. He announced that the Government is "making our fiscal system more progressive, by tilting our taxes and benefits in favour of the lower- and middle-income groups".

A start has been made. Most of the measures thus far have been in providing increased subsidies to the poor and increasing the progressivity of property tax (higher taxes for high-end properties, especially investment properties) and vehicle tax (a tiered Additional Registration Fee structure for cars). The "wealth" taxes on high-end properties and luxury cars were seen as largely symbolic as it was only a small fraction of the overall Budget.

But the momentum for change was not maintained in the 2014 Budget, which was focused largely on the pioneer generation. Both the 2013 and 2014 Budgets also saw an increase in "sin" taxes (tobacco, alcohol, gambling) which affects the rich and poor alike but can be justified on moral grounds.

There are calls and room to increase the progressivity of income tax, bring back estate duty, and introduce higher taxes on investment income, while reducing the burden of GST and other consumption taxes which hit the poor the hardest.

The Government seems to be hesitant about moving too far or too fast in making the fiscal system more progressive.

After all, our attractive tax structures have been cited as a major reason for the many wealthy and successful people setting up home and business here. It is true that they contribute to the economy.

DPM Tharman has pointed that our low taxes are an important aspect of attracting companies and investors to Singapore in the competition that "is at the heart of a healthy global economy". Furthermore, he argues that low taxes are also enabled by low government expenditure.

Still, in the mood of the times, the question we should ask is whether as a society we can afford to have a more progressive tax system. Will the better-off be willing to shoulder more of the burden of paying more taxes?

And even if higher taxes make Singapore less attractive to a minority of rich foreigners, should we want Singapore to be home to such people, no matter how wealthy they are, if they do not subscribe to our stated philosophy of a fair and inclusive society?

The writer is a former managing partner at Accenture, a global management and technology consulting firm. He is currently the chairman of the Singapore Institute of Directors, and sits on the boards of several commercial and non-profit organisations. He is the author of Doing Good Well.