#6 – Reputation
Think for a moment what your reputation is worth. How long have you worked on it and how would you feel if it were destroyed overnight?
Is it possibly one of those things where you don’t realise how valuable it was until it was gone?
In China, what the government offers you in terms of services is directly connected to your economic and social reputation, or officially, your “Social Credit”. The more trustworthy the government considers you, the more you are rewarded with shorter waiting time at hospitals and government agencies and higher chances of employment offers. Not paying taxes or bills on time will result in a reduction in this “trust score” and can result in blacklisting, denying certain government services.
This concept is perhaps an extreme form of what is known in the west, but still, your “trust score” is perhaps less tangible in other countries than in China. I think this “trust score” with society, with the government, and particularly tax administrations is one we need to guide our clients to pay more attention to in future.
My intention with this blog article is to flag the importance of including an additional factor when considering tax planning measures, namely reputation risk.
In 2016, a data leak of a certain Panamanian law firm and corporate agent led to searchable databases of its customers being made available by a coalition of journalists. The unspoken, but very clear implication, being that only people who are doing something naughty use offshore companies. Effectively this was the biggest of a number of recent reputation tests. Fortunately, given the widespread use by pension funds, investment funds and others of tax neutral (i.e. you are paying tax, just not extra tax on that entity) corporate vehicles, the argument was quickly made that not everyone on the list had done something shady. However, of course, some had, and paid the price.
Things were different when I was a lad...
In the heady days of the 1990s and 2000s, the trend in offshore banking environments tended towards a laissez fair attitude towards tax matters. For some, the game was simply hide-and-seek. The US banking centres, along with the British, the Swiss and the Liechtensteiners were not required to enforce other countries’ tax laws and they didn’t. All was fine. Not my problem.
The biggest problem was getting caught, but some banks, and lawyers went the extra mile for their clients to assure privacy in their banking matters. By way of example the case of U.S. v Paltzer (prosecuted in 2015) shows a fascinating insight into some of the lengths some bankers and some professional advisers went to, in order to keep their clients’ affairs from being disclosed to taxing authorities.
Presumably everyone who was caught was very sorry. Being investigated and prosecuted is not particularly funny. Getting caught is never fun, and the associated reputational damage was probably pretty unwelcome too.
The successful prosecution by US prosecutors of a number of non-paying taxpayers and (primarily Swiss) banks seems to have been a gamechanger in taxpayer behaviour, and the attitudes of larger institutions.
How did we get here so fast?
By about 10 years ago, the environment had shifted. About this time, not long after the dotcom crash of 2008, and the deferred prosecution agreement entered into by UBS with the U.S., various governments initiated a number of voluntary disclosure schemes to provide a way for fiscal amnesiacs to correct the mistakes of the past, whilst paying modest penalties. This was of course the carrot, with the stick being in the foreseeable future, in the form of US FATCA (which after being enacted in 2010 eventually came into force in 2014) for US taxpayers with foreign funds. This was the dawn of governments finding much more sources of information on what their taxpayers were doing.
Developments continued in this vein for the next few years. In 2016 the OECD’s Common Reporting Standard required trusts, banks, companies and insurance companies to declare beneficial owner information to the countries they believed their clients were living in. Sadly, in the case of some structures like trusts, the government can’t really rely on the information they receive when assessing their residents for tax because the rules are crudely drafted.
For example, a person who put money into a trust they can’t control or benefit from 5 years ago will still be reported as the owner of the trust funds under CRS, causing unnecessary excitement on the part of the tax administration (they think they caught a cheat) and unnecessary problems for the former owner of the assets (he/she has to ensure enquiries from a tax administration and explain he/she’s no longer the owner and hasn’t been for a while).
Still, there is a lot of information flowing which enriches tax administration’s files, and perhaps faulty information is more useful than no information. As the saying goes: “If you don’t ask, you don’t get” (but be careful what you wish for).
In addition, beneficial owner registers have been established in many countries (even the US) requiring company administrators or directors to report the beneficial owner of companies to the authorities, who sometimes (UK) include this in corporate information available to the public. Frustrating to those with security-related privacy concerns, but these rules are usually passed under the mantle of reducing the scope for anti-terrorist financing, and most people don’t like terrorists. Everyone else just has to accept that they’re caught up in the same net.
Since 2014 the UK’s HMRC has required Disclosure of Tax Avoidance Schemes which are legal schemes designed to obtain a tax advantage by professionals to HMRC which rather spoilt the endless game of cat and mouse which existed in the use of, and legislation to prevent, strategies which test the limits of tax legislation. And the EU recently followed suit with similar legislation called DAC6, with local legislation requiring intermediaries to declare any transactions designed for a tax or reporting advantage within 30 days. Other countries have also brought in their own General Anti-Avoidance Rules (or GAAR for short).
So, a few things have been happening: on the one hand, governments are seeking more information to tackle what they consider as tax avoidance, sharpening the rules and getting information earlier so they can address anything they don’t like, and they’re also making it harder for tax planners to create identify and use new loopholes without telling the government so they can monitor it and take action if they choose. But for me the more interesting development is the social change which is happening. Governments are hard up for cash, especially since COVID, and not paying your fair share has become increasingly socially unacceptable.
So in summary, the developments of the last few years have increased the amount of information that might prompt tax agencies to take a closer look at what taxpayers have been doing. Even the most honest taxpayer fears a tax audit…
What would your grandmother think of all this?
My dear, late, grandmother once told me that she thinks all tax planning is bad. And improper. Tax planning takes many forms – from aggressive use of technical schemes to timing your expenses to make sure you can deduct these. Gifts too. Some of my most exciting personal tax planning revolves around when to make income-tax deductible improvements to the house (yes, I live a sheltered life…) and considering whether and when it will one day make sense to make gifts to the kids to clear unneeded money to save inheritance and gift tax (and wealth tax), by using the allowances the government gives us. Even my grandmother wouldn’t have a problem with this – it wouldn’t have occurred to her that this counted as tax planning (but she would probably see things differently if the kids weren’t mature enough for larger sums and we set funds aside in a trust instead). Governments deliberately give you some tax incentives to encourage certain behaviour. Not using it because “tax planning is wrong” kind of defeats the policy object the government had in mind.
And this is the question, isn’t it? What’s (socially) acceptable and what’s not? To some extent it will depend on your social circles.
It's legal, but is it right?
Following the bad PR it received in the UK in 2012 on tax matters, Starbucks decided they could pay a bit more tax in the UK after all (but it could still afford to pay a lot more). The debate on multinationals rages on today. It would be foolish to assume that companies should set up their affairs to pay as much tax as possible (who would?), and multinationals face the very real danger of paying tax on the same profits in multiple jurisdictions if they don’t plan correctly, and shareholders get upset about such things. However, there is probably a fairer balance to be had, and the recent European attempts to apply a digital services tax are a step towards finding an appropriate compromise. And whilst addressing the tax balance is important, are people so skeptical that they just expect big companies not to play by the same rules as the rest of us? Would individuals be judged more harshly?
On personal planning, clients approach advisers because most tax planning is complicated (and cross border planning even more so) and they want advice. Some clients want to just understand what options are available to them. Some want to maximise their planning opportunities. Some want to push the envelope.
Tax and wealth advisers have the experience and knowledge that a lot of lay clients don’t have themselves. They also see the trends and can anticipate how tax agencies are likely to react to a particular set of facts. They have specialist expertise and are trusted by clients for that reason. They are therefore best placed to help clients find the best balance. The better ones look a few years ahead to anticipate likely changes.
My view is that, alongside advising clients on whether their plans are legally recognised in all the right countries, and getting clarity on the tax consequences of executing their plan over the longer term, advisers should be advising clients to consider whether the planning they undertake will weather the test of time to help the client protect his or her reputation as well. This might involve advising a more conservative approach than could potentially be available under the rules as written. It might therefore involve advising clients not to exploit loopholes that other advisers have identified.
The canton of Zurich had a great awareness campaign in 2019 with the topic, drive as if you had your granny with you. Perhaps not such a bad concept to extend to other areas of life.
Imagine your granny is watching you… Or if that doesn’t do the trick, imagine that the government will see what you do (CRS) but won’t know why, so you might have to explain what you did and why you take the view it’s legitimate planning. The days of sloppy planning in the hope that no-one would take a proper look are long gone.
More importantly, and the thought behind today’s article, is to recognise that social attitudes have changed. So, when advising clients on their options, there should be a final thing on the advisory checklist: Will you feel comfortable if you read about this planning in the paper in a few years’ time? Will this adversely affect your reputation, as well as that of your clients? If so, what will it cost you in the broader sense?
(and for those in China it might go beyond harm to your reputation in the public realm and your own emotional reaction, and prevent you accessing valuable government services…)
Thanks for reading!
PhilG
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