Introduction
Taxation as a professional industry, is in relation to the wealth of public and society. Compliance and ethical behaviors are always upholding and distribute to the public interest, professional tax accountants are trusted to report and planning practices on behalf of the clients. However, in the recent years, the tax industry has been challenged by the public that it cannot be trusted to regulate by itself.
Self regulation of an industry is the process that persevering in its own principles and monitoring behaviors to reach the legal and ethical standards without any external governance to accomplish those standards. Taxation is a principle based regulation system in UK, to maintain the quality of taxation, professions are relying on the guidelines from professional bodies. Although number of guidance are issued by the professional bodies in order to give a clear interpretation for their members in relation to their obligations, public is still questioning that whether it is sufficient for an industry to solely comply with its own principles or does it needs other alternatives in terms of regulation? This article is to give a basic knowledge in the field of taxation, combining with the real life example to discuss on whether or not tax accountant should regulate themselves and also aim to bring up some suggestions by comparing with other European taxation system.
Code of Ethics with Fundamental Principles, Threats and Safeguards
Members, students, affiliates and member firms in all of their professional and business activities are applicable to the Code of Ethics. Code of Ethics is an ethical guideline to helps its members to meet their obligations for upholding the reputation of accountancy profession. Behavior of members is not just representing themselves by individually but on the profession as a whole. In order to protect the industry reputation, Code of Ethics sets out the five fundamental principles and illustrating how they are applied in different scenarios. These principles are a general terms and are constituting the basic requirement of professional behavior, this document is also providing the frame of what is expected from professional accountants with the common situation that might arise in practice or in business.
Five fundamental principles:
Integrity – Professional accountants must act straightforwardly and honestly in the relationship of professional and business. Members are required to be truthfulness and fairly dealing with his clients and should not knowingly be associated with any report or other information that contains misleading statement and false materials.
Objectivity – The principle of objectivity imposes that members’ responsibility is to not compromise their business judgment due to the bias, conflict of interest and undue influence from others. Any relationship and events which may impair member’s objectivity must be avoided.
Professional competence and due care – A member must carry out his work with professional knowledge and skills at the requisite level and has an obligation to fulfill his clients’ interest within the regulation and legislation framework. Member must not accept professional work which he is not competence to carry out unless he receives other appropriate assistance.
Confidentiality – To not disclose any information to third parties for their own personal benefits or third parties advantage without client’s consent and proper authority, unless there is a legal right or duty to disclose e.g. to enable a member to defend and clear himself from suspicion and criminal charge. Personal self interest must not prevail over those duties.
Professional Behavior – A conceptual framework for member to comply with all regulatory duty and relevant laws to avoid any behavior that discredits the profession while dealing with client’s tax affairs. Disagreements and conflicts may arise between members and HMRC when they fulfilling his client’s interest, member shall manage such conflicts with a professional manner and balance the services to client where principles appropriately applied.
Threats and Safeguards
Threats may be created by a relationships or circumstances and could affect the professional accountant’s compliance with fundamental principles.
Self-interest threat – Financial or other interest that may influence the professional judgment and behavior.
Self-review threat – The threat that member may not appropriately re-evaluate the previous judgment.
Advocacy threat – A promotion of client’s position in which objectivity may be compromise.
Familiarity – A close relationship of member and client will be too sympathy to their interests.
Intimidation – When actual and perceived pressures influence over the professional accountant and prohibit them from acting objectively.
Safeguards are those actions attempt to eliminate and reduce threats to an acceptable level, certain level of safeguard can reduce the likelihood of unethical behavior. Beside the ICAEW’s Code of Ethics, specific safeguards could also be created by firm with requiring continuous professional development, training and experience requirements, regulatory monitoring and disciplinary procedures.
Tax Planning and Tax evasion
“It is only right that companies pay their fair share of tax according to the profits they make from their economic activity in the countries in which they do business.” Margaret Hodge, the Chair of the Public Accounts Committee, said. In the recent years, tax planning arrangement became a popular topic among the public and the Parliament. Public are concerning that the boundary of tax avoidance and tax evasion has been blurred and evolved significantly, and some of the real cases have proved that there is a loophole and vulnerability from the tax evasion. For a better understanding, we should first clearly distinguish the difference between tax planning (avoidance) and tax evasion. Basically, tax planning is legal while tax evasion is not. Tax planning contains any legal methods to reduce the tax liability, businesses attempt to gain benefits from the tax shield and taking legitimate tax deduction to lower their tax bill whereas tax evasion is trying to not pay taxes, through not reporting income and expense or on purpose to report false income amount and any other materials.
The PwC case
In late 2014, PricewaterhouseCoopers (PwC), one of the Big Four international accountancy firm, had involved in the “Luxembourg-leaks” scandal. 28,000 documents were revealed in the tax avoidance scheme and indicated that more than 1000 businesses were involved where almost all those documents were on PwC headed paper. The report from Public Accounts Committee (PAC) has particularly quoted the case of Shire Pharmaceuticals in which with the promote of PwC, had able to arranged its tax liability on operating profit to Luxembourg for just 0.0156%. Shire ensures the low tax payable by acquiring £800 millions external financing and created £10 billions interest payables of intra-company loans. Neither Shire nor PwC could convince the PAC that Shire’s intention was anything other than a willful tax evasion.
Michael Izza, the chief executive of ICAEW, considered the report as an insinuation for policy maker to rethink the multiple jurisdictions and legislations of the taxation work. “Tax advisers are a huge part of the global problem of tax dodging, which also costs developing countries billions of pounds a year.” He said.
The tax arrangement scheme PwC promoted is contribute to the calling of tighter regulation and is key to altered UK Government and professional bodies to updated their code of conduct, Professional Conduct in Relation to Taxation (PCRT), in order to ensure the balance of transparency and competitive within the tax system, and to protect the reputation of professional.
PCRT was first issued in 1995, since then the document has been updated on a regular basis. Both Code of Ethics and PCRT are similar to the used in a position to assert the five fundamental principles, however, PCRT is requiring more judgments where it is explicitly sets out what action is appropriate or prohibited in which it is a supplement to, not substitute for, the five fundamental principles and is a requirement to members, not guidance. The significate change in the latest version of PCRT is the additional set of Standards for tax planning, it relates to the expected behavior of tax advisers on the tax planning process. For the purpose of addressing the public concerns, it focuses on the potential abuse of tax planning, under the new Standards, members must not promote or knowingly create tax planning arrangement which contrary to the legislations enacting by the Parliament. New standards are effective from 1 March 2017 are administering and enforcing by HMRC and the courts.
Public remain their criticism that deterrent effect of restriction and punishment from any code of practice or other guidance are far not enough to prevent or inhibit the events of non-compliance, therefore, even under the cover of Code of Ethics and PCRT, the tax industry is still not be trusted to regulate by itself whilst in fact that PwC’s arrangement is permitted by its own code of conduct, PwC is still trying to defend that they are serving the needs of clients and they are being confidential to not wanting HMRC to know. Public are strongly believing that it is necessary for the UK Government to expand the traditional taxation system with a forward looking approach and should introduce a wide range of sanctions and regulatory interventions, such as independent inspection unit. Hence, rules based regulation may consider as an alternative to address public concern.
Rules based and Principles based regulation
There are different paths to regulate the tax industry within European countries, they can be recognized as two diverse approaches: rules based or principles based. Principles based approach is being extensively used in the UK, and in this section, I would like to discuss whether the UK public and tax industry will benefit from shifting to a rules based regulation.
Principles based approach is restricted to a few number of principles and therefore it is easier to manager and adopt to new circumstances. However, UK tax industry is now in a situation that professionals are failed to follow the guidance and only limited case law is available, this is a big part of public concerns. In the UK system, professional bodies carry the responsibility of domestic regulation for tax industry with the absent of statutory regulating. My thought is it might be benefit for the UK to reform their system with rules based regulation and more state interventions, since the rules based regulation emphasis on higher level of legislation for the professionals to be regulated by the rule, it could reduce the degree of autonomy and lead to a strong deterrent effect on the event of independent professional associations. Thus, the clarity of rules and standards application will reduce the risk of any action that discredits the profession in which reputation is the current issue in the UK.
In my opinion, UK Government could make reference to the German system. In German, there are much more state regulations in force to apply directly on tax professions, tax professionals are treat as separate occupation and has been highly protected and ruled by the regulatory framework. Despite tough legislations apply in German, their rules based system also include fundamental principles in related to professions’ confidentiality and independent, so the professions will not leave out their belief while compromising to the regulations.
With the comparison between UK and Germany, the reputation from public attitudes toward tax industry has been radically damaged in the UK, which might be explained by the more precise regulatory framework in Germany and followed by a positive interaction to the value of tax professional work within the tax landscape.
I highly recommend the UK Government to make reference to the German model and believe that it can be greatly inspire the UK Government for addressing the public concern in taxation industry.
UK Government and HMRC’s action
Nevertheless, in some cases, problems and disadvantages may arise, for example, tax industry require professionals to keep their knowledge up to date and the code of conduct is amended regularly, therefore, when excessive regulations apply, it might be difficult for the professionals to deal with new circumstances or other unexpected situations, thus, the intensive regulation may harming the efficiency of professionals. Also, tendency of regulatory tightening or external regulator may circumscribe accountant’s flexibility to deliver their professional knowledge and quality works to clients. Inevitable results will be decreasing the competition within the industry and may also harmful to the international competitiveness of UK tax industry, regulator will then be futile. This explains the reason of why HMRC being in the ambiguous position from the demand of Public Accounts Committee (PAC) because HMRC does not want to inhibit the growth of tax field but also understand the need of adjusting regulations. “we are aggressively fighting tax evasion and is winning” HMRC said. It has also publicly asserted that there it has no intention to become a regulator for tax field.
The effectiveness of self regulation in taxation field has become a heated and debatable topic in the UK politics. Based on the investigation from PAC, in particular to PwC’s tax arrangement scandal, the PAC requires UK Government to elevate their degree of control and take a more active role in governing because it has sufficient evidences to not trust the tax industry. PAC also implied that the government has an unhealthy relationship with large multinational accountancy firms and is allowing them to obtain a powerful position in tax field, it is because the insiders, who seconded to the government, has advised the government then turn back to their firm and tell their clients how to reduce their tax liability by using those tax laws. Therefore, member of Parliament (MPs) are demanded by the government to determine whether the individuals who seconded and advise to the government can get into the public sector at the same time.
In 2015, the UK government has rejected the demanded of PAC of putting direct regulation on the industry but called on professional bodies to review their regulation standards. For responding, professional bodies have agreed to update the PCRT, despite it is not the out come of what PAC expecting, it does enhancing their regulator role.
Recommendation
In order to rebuild public trust and to avoid the inquisitorial legislations as the same time, there is a need to establish a new independent trust unit. It will be a representative and truly open body to provides a high transparency with its obligations of investigating, resolving and being responsive to the public complaints. The trust body would be aiming to provide a careful and discreet conciliation process, which without a legal adjudicatory power, for the both public and industry.
Rather than a direct regulator and being in thrall to the tax industry, it should be viewed as a new regulation tool in delivering a better justice towards public and treat as a protection for the industry from any aggressive and undue interference. Although the intention of establishing new trust body is similar to the purpose of HMRC’s code of conduct, it shall be completely independent from HMRC as they are holding different attitudes in terms of regulations, it will only be effective to resolving public concerns from a different starting point while HMRC is adhering to their code of conduct. I believe that by introducing an independent body, it could maintain the balance between governing process and the industry’s autonomy in self regulation.
In fact, it is vitally important that we, both public and industry, must reach to an agreement of the meaning on an independent trustee, public and the industry need to be congruously put effort on rebuilding the trust and reputation of tax professionals.
Conclusion
Professionals deliver trust based goods, if the public seek to protect their own interest blindly without taking the value of professional work into account, neither of perfection or imperfection of the tax system would be meaningful. Public should having proper tolerances of the faults in taxation, willing to trust and allow the industry to improve the system by itself may further encourage and motivate the ethical behavior.
On the other hand, the biggest threat of the industry is the industry itself, unless it rebuilds its professional reputation and trust, threats and public complaints will keep on and on. Therefore, professionals should take the initiative, they must adopt to make change and should understand that being change is an improvement not threat. I would strongly suggest to keep the industry self regulation but to introduce the non legal adjudicatory body to facilitate a better improvement.
However, if the Parliament decided to no longer allow self regulating, what we should focus on is, to what extent will the industry be regulated by new rules rather than what rules we should make. It is because whenever we try to make change, it is always easier to make rules but will be difficult to create the outcomes that we desired. Moreover, what sort of regulations are appropriate may very depends, people who eager for a fair taxation environment, could very welcome for the tighter regulation, because in general, most of us believe that a severer regulation will bring to a fairer taxation administering and should have protected our public interest. And yet, people who are the users of industry may worry that regulations are likely to increase their cost for service.