Corporate Tax Avoidance: Rozvany’s Solution

Illustration by Rocco Fazzari

Blithely disavowing the reality of an annual trillion-dollar global tax racket, and the fact they are right in the thick of it, accounting giant EY published a note to clients last year: “A New Mountain to Climb – tax reputation risk, growing transparency demands and the importance of data readiness”.

The report, further evidence the Big Four accounting firms reside in a parallel universe to the rest of us, failed to recognize tax avoidance as a problem at all, only that their beleaguered multinational clients were being increasingly skewered by “aggressive news coverage”.

The game was now all about “brand” issues and managing “reputation risk”. Not that the public and the media should be engaging in this “fair share of tax debate” anyway as “too much information is also susceptible to misrepresentation”.

Many EY clients, said the report, felt “the need for greater transparency and more information is … not something that should play out on the public stage.”

“Nothing is clear cut where transparency is concerned,” was another gem.

Also grappling with this new uncertainty, and all the advisory fees it might reap, EY’s peer PWC told its clients in a note this year, to “be prepared to revisit your approach as the law changes”. The report, Managing Tax Disputes in Asia: new strategies for the post-BEPS environment, says: “countries are moving very quickly to implement changes to protect and secure their tax base and you need to ‘read the play’ and be agile as the landscape shifts”.

“The ethical tax regime will largely eliminate international tax avoidance”

Meanwhile, reading the play in the real world, there is a hard number published each year in a company’s financial statements which shows exactly how much tax is paid – and, a few lines above it, there is another number; how much cash is received.

In the real world therefore, we know there is a real problem. This is undeniable. The solution, however, is less clear.

George Rozvany, the veteran tax industry insider turned reformer who called this week for the break-up of the Big Four, says he has the silver bullet, a solution which “will largely eliminate international tax avoidance”.

Busting up the oligopoly is one step. The centrepiece however of Rozvany’s “five-point plan” is what he calls the “ethical tax regime”, a proposal which has drawn support from Second Commissioner at the Australian Tax Office, Andrew Mills, and from CPA Australia, one of the world’s largest accounting bodies. More on that to come.

The Ethical Tax Regime

Under George Rozvany’s ethical tax regime, large corporations would actually pay a lower rate of income tax if they were deemed by the Tax Office to be “ethical taxpayers”; say 25 per cent rather than the present rate of 30 per cent.

How to become an ethical taxpayer? Directors would simply present their “tax position” to the Tax Office, that is, their tax structures and strategy. Then, were these to be approved, they would be classified ethical. And once classified ethical, their “tax risk” would be eliminated.

Broadly, this “tax risk” has two elements: regulatory risk, that is, the risk the Tax Office will haul you through the courts as it is doing, for instance, with oil giant Chevron at the moment. The second is, as EY puts it, “reputation risk”.

It is fair to say that company directors have an obligation to their shareholders to eliminate risk, says Rozvany, both regulatory and reputational, and many would therefore elect to cooperate with the authorities. This would engender better tax behavior, less aggressive transactions, and therefore more revenue to government.

A lower tax rate, zero tax risk; these are surely a director’s duty to pursue. What director would choose to pay 30 per cent if a 25 per cent rate were on offer for being ethical?

“Conducting one’s tax affairs in a conservative manner does not mean a negative financial outcome,” says Rozvany. Rather it eliminates court costs and penalties, and reduces the cost of external advisers and audits and so forth.

“The major audit firms,” says Rozvany, “Would play a significant role in this as their tax strategies/advice on tax positions would need to be evaluated and approved”.

It is highly unlikely however the Big Four would support the proposal as they benefit from tax uncertainty and would have less scope for generating fees from creating byzantine tax positions. Questions about George Rozvany’s proposals were put to Deloitte, PwC, EY and KPMG. All refused to comment.

Then there is the flip side of the ethical tax regime. Those companies whose schemes were not approved would fail to achieve ethical status. Many of these would probably not pay much income tax anyway so the difference between 25 per cent and 30 per cent may not amount to much.

They might not be officially labelled “unethical” but they would still not be “ethical” either and, over time, as rising tax risk took its toll, directors could well elect to pursue ethical status and shed risk, bringing therefore more revenue to the nation’s coffers.

Support In High Quarters

Rozvany’s prescriptions, while perhaps distasteful to the Big Four, have found support in high quarters. Having stepped down as head of tax for Allianz in Australia last year (he was previously at ICI Australia, PwC, EY and Arthur Andersen) the tax lawyer has written the first of five books.

Second Tax Commissioner, Andrew Mills, has penned the forward for the first in this Pentalogy, “Corporate Tax Ethics”.

“Rozvany encourages ongoing dialogue and constructive relationships with the revenue authority … I recommend this book as essential reading for anyone with an interest in good business practices and for those who want to make tax compliance their minimum standard,” writes Mills.

A view was sought from CPA Australia, the largest professional accounting body in the country. Calling it “lateral thinking” which might drive better tax behaviour, the CPA welcomed

“the concept that taxpayers who get the equivalent of a ‘Heart Foundation tick’ from revenue authorities as ethical taxpayers”.

“The model proposed, rewarding ethical entities with a reduced corporate tax rate, is worthy of further consideration and research to address any suggestions that taxpayers without the imprimatur of the revenue regulator (ATO) are less than ethical.”

“Aggressive tax practices should not be seen to be smart nor worth the risk”

Says Rozvany: “Aggressive taxation behaviours may be viewed by some as little more than a game of chance in the casino of life. Such behaviours only seek to financially benefit the individuals who seek to play the game to the detriment of the wider society.

“Aggressive tax practices should not be seen to be smart nor worth the risk to an organisation pursuing such practices.

Returning to the five-point plan; besides the ethical tax regime and the break-up of the Big Four along tax and audit lines, Rozvany advocates a second break-up to create 16 firms, and therefore bring greater competition.

His fourth recommendation is to enforce a regime of proper penalties for directors. At present, there is not enough incentive to comply with the tax laws as directors, who have the fiduciary duty to the company, are so rarely penalized.

Finally, all tax deductions on transactions which are associated with a tax haven – whether loans, royalties and intellectual property transactions, or service arrangements – should be denied.

With related party transactions accounting for more than half of international trade, the profits siphoned into tax havens are enormous.

There is the issue of course of deciding which nations should be deemed tax havens. Singaporeans for example bridle at the suggestion Singapore is a tax haven even though a deal with the authorities there can result in a corporate tax rate of just five per cent, compared with our 30 per cent, and transparency is poor to boot. That is a story however for another day.

  • ChrisR

    Great thinking, but why stop there? Why not calculate an absolute minimum on gross turnover (rather than adjusted taxable income) that must be paid as tax, so zero isn’t an adjustable option? Reward those that are ethical get additional time to prepare, lodge and pay if they’re paying over X% of their turnover. Once the risk is gone the ATO and Govt can concentrate on those that don’t achieve. Reductions in payroll taxes where companies employ youth or long term unemployed. These Large companies that spend multi millions trying to convince the public they’re ‘ethical’ via mass media would simply need to appear on the lists of good behaviour.

    • Anarco Soma

      Good idea – Ive thought of it as a tax floor where a minimum based on turnover or revenue gets paid for larger firms – if they have losses this will make dircetors more inclined to save during booms and dampen bubbles a bit. The ATO can offer payment options so an individual company is not pushed into crisis