Tax consciousness and trust in international tax planning: The substance of the matter

The international tax community is becoming increasingly aware of the global trend to combat tax evasion backed by the G20 as well as the EU and promoted by the OECD with a mandate of implementation. The reasons for this unprecedented collective action are deeply rooted in the aftermath of the financial crisis that began in 2008 and, for many countries, is still ongoing. Nevertheless, one could also argue that the strong and definitive measures which the OECD intends to employ to battle tax evasion are the indirect results of a large scale lack of tax consciousness.

The OECD’s chosen weapons in this war on tax evasion are resourceful and include a Base Erosion and Profit Shifting (BEPS) Action Plan, Automatic Exchange of Tax Information through a Common Reporting Standard, new Transfer Pricing guidelines, country by country reporting of revenues and profit. In short, initiatives aimed at not only illegal practices but also tax planning strategies that take advantage of current rules, exploit gaps and ‘mismatches’ in laws with a view to shifting profits and making them ‘disappear’ for tax purposes. In essence, measures that will put an end to the abuse of double tax treaty benefits implemented almost a century ago with a view to facilitating cross-border business.

While the intention of the international community to eliminate aggressive tax practices may be noble and in fact extremely necessary in the face of shortage of liquidity experienced by countries worldwide, skeptics fear that implementation of these measures will be the sledgehammer that breaks the fragile economies of countries that have benefited (and continue to benefit) from flexible and attractive taxation regimes. On a similar footing, it is feared that these measures could backfire creating double standards among competing jurisdictions that have traditionally prospered from strong financial services sectors based on loose taxation systems. From the commercial side, such measures could drive those highly sought-after, golden-egg bearing multinational corporations to remote jurisdictions in their effort to safeguard corporate profits from high taxation rates. The OECD actions may appear to offer solutions but are they really directed at the root of the problem? Is actual tax compliance the issue or is that part of a wider problem being the degradation of tax consciousness on a global scale?

It is particularly challenging to expect from multinational corporations employing thousands of people in a number of jurisdictions to not use double tax treaties when it (still) is purely legitimate to do so. While OECD Director, Pascal Saint-Amans, may advocate that ‘Tax is all about trust’, it is difficult to see how rich taxpayers (corporations or individuals alike) are expected to trust their tax administrations when all they perceive from this exercise is a large portion of their hard-earned profit being taken away from them. On the other side of the coin, taxes have, from antiquity, been both a moral as well as a statutory obligation, even though the emphasis on the moral aspect has, evidently, been dispensed with along the way. The overhaul of the international tax system will be incomplete without an equal effort to enhance the concept of tax consciousness in the minds of those who are expected and required to comply with their tax obligations diligently and consistently giving back to the society that has enabled their operations to flourish and bear fruit.

International tax planning is under fire and it is likely to become cumbersome, possibly unavailable to everyone, in the future. Yet, it could be worth educating –reminding even- tax administrations and ultimately taxpayers of the reasons for this orchestrated effort by the OECD and the international community to render tax planning so difficult. Tax consciousness is not, as suggested by a leading German tax practitioner, a value by itself. It is the by-product of an individual’s environment on which he/she can exert influence. As such, tax consciousness is a reaction aimed at the avoidance of negative actions such as non-compliance and it is (or at least, should be) aimed at the community. It is not a coincidence that the aftermath of the financial crisis was characterized by an extraordinary failure of the ‘society’ in all affected countries. Perhaps, displaying the positive effect of tax compliance on corporations as well as on the countries that benefit from this would prove an ally in the hands of the OECD and its efforts to eliminate tax evasion.

A direct way of enhancing tax consciousness while satisfying the high thresholds of double tax treaty enjoyment which the OECD is currently advocating and soon to be implementing, is the creation of the appropriate level of substance in the countries where (or through which) corporations choose to operate. Cyprus, a jurisdiction with one of the most attractive tax regimes in the EU and a wide network of double tax treaties has a key role to play in this evolving tax level playing field. As long as it becomes clear to all parties involved that the ‘good’ days of entering the international tax planning arena unarmed, are gone.

For more information on this article please contact Stella C. Koukounis at

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