Is tax avoidance illegal?

By Bruce Chooma

It’s Monday 9^th November, 2015 on a bright day at Wits University in Johannesburg, South Africa. The university is full of activity as it host the2015 Power Reporting Conference on investigative reporting in Africa.   I decided to attend an insightful lecture on how companies evade paying taxes. The lecture was delivered by John Christensen Director of the Tax Justice Network- an expert-led network that leads global efforts to curb tax havens. John is a trained forensic investigator and economist.

I have argued during media interviews in Zambia that the award of tax holidays by the Zambian government to foreign investors  was a bad policy and was not in any way a means of reducing the cost of doing business and providing incentives for Foreign Direct Investment (FDI). I was happy to hear John support this view as he began his lecture. In fact he provided evidence from various parts of the world to prove that lower taxes do not attract investment. Action Aid recently published a report where they demonstrated how West Africa loses US$ 5.8 billion dollars through unnecessary tax incentives.

Christensen argues that tax is not a cost to doing business because tax is a redistribution of profit. It is in my view illogical to consider tax as a cost to businesses because companies are taxed on profits, that is why mines in Zambia hardly pay much tax because most have developed the habit of declaring losses.  

A senior partner at Ernest and Young was quoted as saying that tax is a cost to doing business so naturally a good manager will try to manage this cost and the risks associated with it. This is an essential part of good corporate governance he argues.



Chritensen

The Tax Justice Network argues correctly that it is a contradiction to support increased development assistance, but turn a blind eye to actions of multi-nationals and others that undermine the tax base of developing countries.

If my economics lessons are anything to go by an effective tax system must generate revenue for government to provide public goods, redistribute wealth and income, re-price goods and services and strengthen and protect political representation.

As a journalist attending business reporting class I recall many times having to be reminded that tax evasion was illegal but tax avoidance was legal. Tax evasion was deliberate non-payment or understatement of tax which was a criminal offence. 

John argues that tax avoidance cannot be said to be illegal unless the court determines so hence it can be legal or illegal. However consider the following statement from a KPMG partner:

“Tax avoidance does not damage corporate reputations and may even enhance them”

John observed that KPMG knowingly, purposefully and wilfully violated the federal tax shelter law.

Sitting through that lecture made me realise how complex the tax systems of the world were and how sophisticated these systems have become. Understanding these systems does to a large extent help to explain the challenges the Zambian government faces in collecting taxes from the foreign owned mines.

Joe Sugluz was quoted by the Guardian in 2013 as follows:

“It is time the international community faced the reality. We have an unmanageable, unfair, distortionery, global tax regime that is pivotal in creating the increasing inequality that marks most advanced countries today.”

It is am matter of grave concern that corporations are creating elaborate structures to move profits through subsidiaries to offshore centres to avoid handing over money to tax collectors in the countries where their goods are produced and in those where they are consumed. 

Even the US government is aware of this. Take a look at this quote:

“Utilising tax haven secrecy laws and practices that limit corporate, bank and financial disclosures, financial professionals often use offshore tax haven jurisdictions  as a “black box”  to hide assets and transactions from the Inland Revenue Service, other US regulators and law enforcements.”    

According to the Tax Justice Network the tax rules have gone bananas. The problem is that there is lack of legislative clarity, lack of enforcement capacity and under resourced tax authorities.  Rules and regulations have often been found to be inadequate and impractical. These systems I am talking about are increasing the profitability of economic crime.