Ethics of tax planning

[Berkut]

WHat about something that is possibly illegal, or even certainly illegal, but your tax advisor assures you that you can get away with it?

Speaking for major corporations, I think the idea of tax advisors pitching illegal structures is more myth than reality. Working on the edge of the tax world and spending lots of time with tax attorneys, what I see is this:

-unlike personal returns, major corporations are often under continuous audit, so the question of an auditor looking at something is very high
-even if an auditor doesn't find something, there are signficant whistleblower benefits, including IRS bounties, that can turn a whistleblower into a multimillionaire
-the incentive to do something illegal is lower than you might think--if caught destroy your career and possibly go to jail, versus a windfall going to your employer?
-the tax code has lots of ambiguities, to the extent that outright illegal activity tends to be an issue far less than a topic of multiyear litigation regarding whether the corporate taxpayer underpaid.

I think the last bit is the key - there are a lot of ambiguities, and hence a lot of stuff that is technically legal while clearly being outside the intent of the law, and hence rich ground for tax lawyers to save their clients millions.

And if you get audited? So what - like you said, these guys are under audit pretty much all the time anyway.

It's "ambiguous" after all! So we were not breaking the law, we thought that was perfectly fine! Indeed, we still do! Let's fight about it in court for the next five years! And if we lose, we will pay the tax we were supposed to pay along with a fine a decade later, and so what - we got to keep all that money and invest it for the decade!

This is the point though - tax law is complicated, so of course it is open to "interpretation". Hence the idea that anything you can get away with is by definition not just legal but actually ethical? It takes a pretty mercenary view of the word "ethics" to come to that conclusion.

Not that business people like Trump give two shits about ethics anyway.

[DGuller]

The complicated thing about ethics is that bad systems can force you into unethical behaviors.  Doping is unethical, but in 2000's in cycling you would have no future without it.

[Berkut]

They kind of are.  Taxes are how society pitches in to get things done that are in common interests.  Someone who avoids taxes via loopholes or worse is shirking the arrangement.

But what is a loophole?

When I was in public accounting, I audited (financial not tax) a publicly traded company that made paper and packaging products.

An environmental bill was passed at that time, that gave generous tax benefits to companies that used organic materials and recycling in manufacturing processes. It turned out that the law was worded in a way that certain normal paper and packaging processes could get the benefit, and the effect on tax revenues was in the billions. It was, imo, a classic loophole--there was no public policy purpose for this to apply to the existing industry.

There were a couple theories I heard why the "loophole" for paper and packaging companies came about:
1) Congress made amendments to the bill at the last minute, and fucked up.
2) A lobbyist for the industry with a sympathetic congressman got language into the bill at the last minute and know one noticed.

Either way, the company I audited took advantage as did the rest of the industry. On conference calls, the CEO said, "hey, this is not going to last forever, eventually congress will cut this off."

And for a few years congress did nothing. It eventually got closed as a part of Obamacare - it was one of the tax loopholes closed to provide additional revenue to offset the cost of the bill. The cynical part of me wonders if congress didn't let it sit out there as a kind of piggybank to pay for a future spending program like obamacare.

I don't think the company i audited did anything unethical. In fact, management probably had no choice. All their competitors were taking advantage, and I suspect investors would have pushed for a management change had they decided not to take advantage.

Yeah, "everyone is doing it" is the best defense to an accusation that you might be doing something unethical.

Second only to "I had no choice! They would have fired me!"

[Berkut]

The complicated thing about ethics is that bad systems can force you into unethical behaviors.  Doping is unethical, but in 2000's in cycling you would have no future without it.

Ahhh, finally someone gets it!

Indeed - and doping is a great example.

But the system forcing you into acting unethically doesn't suddenly make the action ethical.

If some cyclist had stood up and said "I am quitting cycling because I am not willing to make the personal compromises with my integrity necessary to compete" we would not sit around and call them a fool - in fact, we would call them a paragon of ethics.

Indeed, the very best example of integrity and ethics is when your stance actually costs you something. Ethics without a cost are shallow indeed.

[DGuller]

It's not always that simple.  Sometimes taking a stand is an act of suicide with nothing good coming from it.

[alfred russel]

Yeah, "everyone is doing it" is the best defense to an accusation that you might be doing something unethical.

Second only to "I had no choice! They would have fired me!"

Why is it unethical to take advantage of a tax code that makes it possible to pay less taxes through a bizarre provision?

[Berkut]

It's not always that simple.  Sometimes taking a stand is an act of suicide with nothing good coming from it.

In which case you should not do it, and that would be understandable.

But it doesn't make it ethical to do something you know is wrong.

And there is a big difference between doing something in order to avoid harm, and doing something that will help you...

Of course it isn't "simple" though - who ever said ethics were simple?

[Berkut]

Yeah, "everyone is doing it" is the best defense to an accusation that you might be doing something unethical.

Second only to "I had no choice! They would have fired me!"

Why is it unethical to take advantage of a tax code that makes it possible to pay less taxes through a bizarre provision?

If you cannot even imagine why that *might* be unethical, then I don't think there is anything I can possibly say that would matter.

You simply don't understand what the term means in any meaningful sense.

[Valmy]

Going back to my original example if you claim you are headquartered in the Cayman Islands but you are, in practical fact, headquartered in Frankfurt it seems to me you are gaining all the advantages of being in Frankfurt while not having to pay for it like everybody else does. Strikes me as unethical and a bit like stealing, even if not technically illegal. But I don't know how all these weird shell company gymnastics works.

[grumbler]

I don't think some in this discussion (Berkut, for example) have really thought through what the concept of "ethical" means.  For him, and others, "unethical" seems to mean "outrages me" and ethical means "does not outrage me."

The ethics of running a business are different from the ethics of writing posts to an online forum.  A corporation officer has a fiduciary responsibility to act in the best interests of corporate owners, so the officer that deliberately forgoes taking advantage of tax breaks due the corporation under the law, because the officer believes that these tax breaks were not intended by the legislators writing the law, is acting unethically.

There are lots of unethical behaviors related to taxation, but taking advantage of tax breaks is not one of them.  Like all matters regarding the law, there are going to be grey areas, because law drafting/enactment is never perfect.  Tax laws are nothing special in this regard, though.

[grumbler]

Yeah, "everyone is doing it" is the best defense to an accusation that you might be doing something unethical.

Second only to "I had no choice! They would have fired me!"

Why is it unethical to take advantage of a tax code that makes it possible to pay less taxes through a bizarre provision?

If you cannot even imagine why that *might* be unethical, then I don't think there is anything I can possibly say that would matter.

You simply don't understand what the term means in any meaningful sense.

One of you doesn't.....

[Berkut]

I don't think some in this discussion (Berkut, for example) have really thought through what the concept of "ethical" means.  For him, and others, "unethical" seems to mean "outrages me" and ethical means "does not outrage me."

You've nailed my entire argument perfectly.

[grumbler]

You've nailed my entire argument perfectly.

Thanks.  It wasn't hard.

[alfred russel]

It's "ambiguous" after all! So we were not breaking the law, we thought that was perfectly fine! Indeed, we still do! Let's fight about it in court for the next five years! And if we lose, we will pay the tax we were supposed to pay along with a fine a decade later, and so what - we got to keep all that money and invest it for the decade!

I don't think that is the attitude of most companies. Fighting in court for five years and then paying interest and penalties is an expensive proposition. Also, losing cases (or even winning them) can be bad publicity.

The publicity thing is actually quite important. I've heard tax attorneys say that the IRS is more aggressive with companies more sensitive to bad publicity, as they know they will be more likely to settle cases that are contestable before they hit the papers.

This is the point though - tax law is complicated, so of course it is open to "interpretation". Hence the idea that anything you can get away with is by definition not just legal but actually ethical? It takes a pretty mercenary view of the word "ethics" to come to that conclusion.

Not that business people like Trump give two shits about ethics anyway.

I'd say that any legal and sustainable tax position is ethical by definition. The tax code is completely arbitrary. If we are talking about corporate taxes, even the existence of corporations is just a legal fiction.

[Berkut]

It's "ambiguous" after all! So we were not breaking the law, we thought that was perfectly fine! Indeed, we still do! Let's fight about it in court for the next five years! And if we lose, we will pay the tax we were supposed to pay along with a fine a decade later, and so what - we got to keep all that money and invest it for the decade!

I don't think that is the attitude of most companies. Fighting in court for five years and then paying interest and penalties is an expensive proposition. Also, losing cases (or even winning them) can be bad publicity.

That just goes into the cost-benefit analysis though. If the publicity isn't a concern, or the costs of litigating are less than the cost of paying the taxes, then it makes business sense to go ahead and not pay them.

This is the same argument made for why some car company might decide it isn't worth the cost to fix some defective part that is going to kill some people. Maybe they are wrong about that publicity cost, but I would argue that if you decide to leave the defect and accept the lawsuits because your analysis says that even with the publicity it is simply cheaper than fixing it that is NOT ethical.

Indeed, the reason they get the bad publicity is because the public innately understands that it is unethical.

The publicity thing is actually quite important. I've heard tax attorneys say that the IRS is more aggressive with companies more sensitive to bad publicity, as they know they will be more likely to settle cases that are contestable before they hit the papers.

I don't doubt it - but bad publicity is, at the end of the day, just another financial cost. You bear it if it is worth it, and you don't otherwise.

This is the point though - tax law is complicated, so of course it is open to "interpretation". Hence the idea that anything you can get away with is by definition not just legal but actually ethical? It takes a pretty mercenary view of the word "ethics" to come to that conclusion.

Not that business people like Trump give two shits about ethics anyway.

I'd say that any legal and sustainable tax position is ethical by definition. The tax code is completely arbitrary. If we are talking about corporate taxes, even the existence of corporations is just a legal fiction.

And I would argue that that position is basically that there are no possible un-ethical actions at all, and hence the term simply doesn't apply to tax law (or any law I guess) at all. If you can get away with it, or if the cost of not getting away with it is less than the cost of compliance, then it is by your definition "ethical". And since the law itself is arbitrary, then even clearly illegal actions are just as ethical...as long as you can get away with it...