ACCA first published its Twelve tenets of tax in a policy paper of 2009. The principles set out then hold true even against the changing backdrop of world affairs, in which taxes remain a key strategic issue.
Tax systems are fundamental to society. They are the conduit through which the state gathers the resources it needs to support public spending, and are often the direct mechanism for implementing policy.
Every citizen is affected by the operation of tax systems, and the efficiency and effectiveness of the system and its administration will have effects far beyond the direct impact of tax collection.
Tax systems, however, have grown increasingly complex, reflecting the societies and economies in which they operate. As the world changes, tax systems must change to keep up. The arrival of the shipping container, the executive jet and the internet have changed the face of world trade and domestic economies beyond all recognition. The enhanced mobility of goods, people and capital has transformed societies, but the importance of tax in maintaining those societies is undiminished.
The impact of the Covid pandemic has prioritised revenue raising for governments, but longer-term changes, driven by demographic shifts, climate change and the digitalisation of the economy, have not gone away.
As governments seek to 'rebuild better', the long-term importance of tax systems’ influence over behaviour must be factored into decisions about whether fundamental changes are made and, if so, what they should be.
ACCA’s 12 tenets of tax
- Simplicity
- Certainty
- Openness and transparency
- Efficiency
- Fairness
- Justice
- A presumption of neutrality
- Tax shifting has a role to play
- Stability
- Taxing rights are a matter of national sovereignty
- Tax is subject to the rule of law
- Accountability and regular review
Simplicity
ACCA believes that tax legislation and operations should be as simple and straightforward to understand and to comply with as possible.
Complexity in the tax system is in itself a distortion of the economy, diverting productive energies into non-productive administration.
It is also essential that the volume of legislation is kept to a minimum. Anti-avoidance measures, in particular, can result in complex and detailed legislation that is often of very limited application, but by its nature is potentially widely drafted.
Small businesses, especially, can suffer when the volume of tax law becomes unmanageable. Changes in tax law – particularly those changes that reverse previous tax breaks or incentives and that have been a basis of business planning – should be kept to an absolute minimum.
Tax authorities should make the most of opportunities afforded by digital tools to simplify the process of engagement with the tax system.
Certainty
Certainty is a key requirement – and the lack of certainty of outcomes or operations is something for which tax systems in many jurisdictions can be criticised.
Lack of certainty can confer a discretion on tax officials to establish the correct treatment. At its extreme this can facilitate the corruption of tax officials, who could seek to exploit their perceived ability to impose excessive tax demands, a feature which governments will (and already do) seek to eliminate.
Alternatively, the scope to ‘do a deal’ with the tax authority can lead to imbalance between taxpayers. Often, only the largest business or wealthiest individual taxpayers will have access to favourable rulings, which can give rise to issues such as illegal state-aid concerns.
Elimination of the underlying uncertainties on which such deals are predicated would be beneficial for all involved, and for society more widely because where disparities arise between effective tax rates for otherwise similar taxpayers there is a distortion of what should be a level economic playing field.
While allowing for such agreements (whether prospective or otherwise) creates certainty for the individual taxpayer, their existence creates uncertainty, and potential inequity, for other taxpayers who might not have access to them.
Many tax systems call upon the taxpayer to self-assess their liability to tax, yet the wording of the legislation may make it impossible or unreasonably onerous for taxpayers to accurately establish their liability under the law. Many tax authorities do not explicitly ban certain types of tax planning, which are within the law, but nonetheless take a negative view of them. (In the US these are sometimes referred to as ‘abusive transactions’.)
Taxpayers using legitimate tax-planning techniques may find themselves having to report to the authorities or becoming the subject of onerous tax enquiries. Often these artificial ‘blocks’ are used by the tax authorities as a way of ‘fine-tuning’ the legislation when it is unclear where the boundaries of acceptable tax planning are drawn.
This can be a significant problem for businesses and individuals trying to plan their activities, for which they need certainty.
It should always be the case that different taxpayers who look at the legislation come to the same interpretation of the law. Taxpayers must have certainty over tax authorities’ interpretations, and authorities themselves should ensure that their application of the law is consistent. Authorities should establish a proper and efficient clearing mechanism for complex anti-avoidance provisions.
Openness and transparency
Taxpayers should understand what they are paying, why they are paying it, and what the benefits of paying will be.
Paying tax may never be fun, but engagement with a demonstrably fair tax policy will be more palatable. In addition, research indicates that better engagement with tax systems is linked with improved economic and social well-being; understanding the tax system is the first step towards engagement with it.
There should be openness on the application of tax policy.
So-called ‘stealth taxes’, such as the quiet reduction of tax exemptions, and the phenomenon of ‘fiscal drag’, whereby personal tax thresholds are not increased in line with rising prices and incomes, thus bringing more individuals into higher-rate tax bands, are an undesirable consequence of inaction and lack of scrutiny. Tax rates and thresholds should be reviewed against inflation to ensure that any divergences can be justified. Tax rises should be made openly and be subject to debate.
On major issues of tax policy, there should be clear consultation where the differing options are specified at the start and properly considered, with an audit trail that should include unambiguous minutes of meetings and written responses.
ACCA supports the use of independent tax policy committees, consisting of a body of experts, separate from government, which would be appointed and empowered to formulate and propose tax measures designed to implement government policy.
Government, under this model, would set the overall economic framework of the tax environment. It would need to define the public policy objectives (eg environmental, social welfare, etc) in terms of public finance demands and fiscal targets that the taxation measures were designed to achieve.
Efficiency
Tax systems should be an effective and efficient means for governments to secure the revenue due, and to prevent tax leakage and the development of a black economy. But taxpayers should also be able to comply with tax requirements efficiently.
Small businesses represent the bulk of economic activity in most countries and regulation can have a disproportionate effect on small firms, as the smaller the business, the heavier the compliance cost.
Research has shown that the smallest companies incur five times more administrative burden per employee than larger firms (Businesses’ Views on Red Tape, OECD, 2001), so every effort must be made to increase the efficiency of compliance.
Some test questions for administrations to consider might include the following:
- Can related businesses be treated as single entities for tax purposes and so be able to make only a single tax filing?
- Do different parts of the tax authority make multiple enquiries of the same taxpayer?
- Are the sizes of tax return forms and the numbers of new or revised forms that need to be completed reasonable?
- Does the taxpayer have a choice of completing a paper return or an electronic return?
Governments should embrace new technology where practical to streamline the administration of the tax system. Tax is an integral part of economic activity. As economic activity changes, so should taxation.
Computerisation of banking systems, the virtualisation of trade and commerce, and the move to technologies such as e-invoicing and digitalisation of tax returns, have profound implications for the measurements and remission of taxes on income and consumption, in particular.
Fairness
An essential principle of tax law must be that income should be subject to tax only once.
This applies both to direct tax, where an individual or business should suffer tax once, and consumption taxes such as VAT, where input tax recovery should be available at each stage of the transaction chain and only the end user, in the form of a private individual, ultimately pays the tax.
In the case of direct taxes, an efficient and effective mechanism should be available in all countries to give relief to a business or individual that has already paid tax in another jurisdiction before subjecting that same income, in whole or in part, to taxation.
In practice, too many countries do not give sufficient priority to seeking to offer full relief for tax suffered in another jurisdiction. This aspect of the global fiscal regime is an additional cost burden on multinational businesses.
The ‘arm’s length’ principle, whereby tax authorities treat transactions between connected parties by reference to the amount of profit that would have arisen if the same transactions had been executed by unconnected parties, is a sensible and long-established convention which should be the basis of international tax affairs.
Sales tax regimes are meant to tax only the end user, but all too often governments place restrictions or long delays on full input tax recovery and this again imposes unfair costs on businesses. If full recovery is not facilitated, it is unjust to charge the full VAT rate on the end user and only reduces efficiency in the business environment.
Justice
Taxpayers have rights as well as responsibilities.
They are obliged to pay their tax due, in full and on time, as this is the only way governments can generate the funding to provide the public services on which everyone depends. In this sense, tax is part of the social contract of any civilised society.
The broad international commitment to transparency and accountability in tax matters should extend to the exercise of powers by tax authorities. Taxpayers, especially individuals and smaller businesses, may not be able to challenge the decisions or demands of their tax authority, or even to judge whether these are reasonable.
Tax authorities should be subject to full and open legal process. Given the asymmetric nature of the taxpayer’s relationship with the state, the rights of the taxpayer to reasonably challenge the tax authorities exercise of its powers should not be restricted by the costs of bringing such a challenge.
Taxpayers should have access to the support they need to engage properly with the tax system. Tax authorities should be sufficiently resourced to provide this support.
A presumption of neutrality
Tax distortions can artificially encourage certain kinds of economic behaviours over others.
Tax policies should be non-discriminatory, unless part of a declared discriminatory policy, such as one aimed at discouraging undesirable behaviours.
There is a wider political question about the extent to which it is appropriate for taxation to be used as an instrument of social policy (eg penalising smoking by heavy duties, or imposing environmental taxes to mitigate climate change).
ACCA’s view is that this use of tax by elected governments is legitimate, but such taxes should then meet the other principles, such as being transparent, simple and effective. Governments should be wary of the effect on the complexity of the tax system of too much tinkering to ‘reward’ certain groups of taxpayers.
While the deeper issues of whether neutrality is best served by taxation of income or consumption may never be amenable to definitive resolution, ACCA argues that governments must seek to remove the distortions in their own national tax systems (which also include, for example, tax incentives being given for businesses to structure themselves in a certain way) and work together to try to iron out the differences in tax bases that give rise to tax arbitrage.
Tax shifting has a role to play
Elected governments have the right to use taxation, in certain circumstances, in pursuance of agreed social policies.
ACCA believes one of the most important examples is to change behaviour that can damage the environment, an approach supported by a majority of the general public across the G20 (Public trust in tax: surveying public trust in G20 tax systems, ACCA 2021.)
Accountants should play an active part in efforts to pursue the United Nations’ Sustainable Development Goals, and promote the concept of ‘tax shifting’ by increasing carbon taxes on the use of fossil fuels while reducing them for payroll, income or corporate taxes (Tax as a force for good: rebalancing our tax systems to support a global economy fit for the future, ACCA 2018).
Governments must aim to use tax policy as an instrument of positive change by encouraging investment in new cleaner technologies across a wide range of industries. When combined with other tax reductions, green taxes should be seen as a positive step rather than a threat to taxpayers.
Governments across the world are beginning to take significant steps towards creating a low-carbon economy, and accountants should help to identify the emerging fiscal incentives that will be a crucial part of this.
Green taxation is one area where it is particularly important that there is international coordination, partly because of the global nature of the environmental problem and partly to deter polluting companies from moving operations to avoid the taxes. Arbitrage opportunities here would defy the purpose of protecting the environment.
However, it should be acknowledged that a significant shift in the tax base to rely on green taxes at currently recognisable rates will probably prove unsustainable in the long term. Conventional wisdom suggests that where such taxes are imposed on emissions and general pollution, a successful system will erode its own tax base.
The way forward will be through progressively increasing rates on a well-balanced and broad tax base, as well as relying on regulation or other measures where these are better than tax at driving down pollution.
Stability
The more stable the tax regime, the easier it will be for taxpayers to engage with it.
Research has shown clear correlations between tax revenues as a percentage of GDP and rates of economic growth (Tax capacity and growth: is there a tipping point? (2016) Gaspar, V, Jaramillo, L and Wingender, P, read here), as well as between levels of tax morale and compliance with levels of wealth and education (Tax morale: what drives people and businesses to pay tax? OECD 2019, download here). Levels of tax morale reflect taxpayers’ perception of whether they are being treated equitably.
ACCA does not seek to enter the political debate on the appropriate level of tax and public spending. But substantial tax increases represent a significant burden on businesses and individuals, and should be subject to an impact assessment before being introduced. These impact assessments should be used to challenge the need for new regulations and to establish an accurate and updated estimate of costs.
Once new measures are put into place there should be a means of measuring and evaluating their impact on achieving their proclaimed public policy objectives. Governments should rationalise and set a target of tax levels as a percentage of GDP as part of their economic management and then be held to account via objective measurement and variance analysis.
Taxing rights are a matter of national sovereignty
Tax revenues are vital to governments both for stability and policy implementation.
Autonomy of tax policy, including the setting of tax rates and tax base, is an intrinsic element of national sovereignty. Nevertheless, in this era of international trade and free movement, supply chain, labour and environmental challenges do not stop at national borders.
Therefore, governments need to find a delicate balance between national and international interests. The most effective path to ensuring a fair and sustainable tax environment globally is for governments to place tax cooperation ahead of competition. In doing so, the needs and rights of all parties to such cooperation mechanisms must be respected.
It is difficult to balance the rights of sovereign nations to set their own tax rates and policies with the danger that low-tax regimes will provoke retaliatory action and trade wars. ACCA supports the principle that nations should be free to determine their own tax affairs, but this should be within the framework of internationally agreed rules to ensure that profits are taxed where value is generated.
Tax is a key factor in ensuring the overall attractiveness of a jurisdiction to businesses, workers and investment. Sophisticated taxpayers and investors recognise the importance of considering the underlying tax base of a country and not just its rates of tax.
For instance, the headline corporate tax rate may be reduced, but the overall tax expense to a business could still increase if business tax deductions are abolished at the same time. It is the quality of the underlying tax system – rather than a simple focus on comparative tax rates – that is of interest to businesses.
Tax is subject to the rule of law
Taxpayers have a moral obligation to pay the taxes due by law, but should not be expected to second-guess the intentions of lawmakers.
‘Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again, the courts have said that there is nothing sinister in so arranging [one’s] affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.’
Honourable Learned Hand, US Appeals Court judge, Helvering v Gregory, 69 F.2d 809 (1934).
‘Taxes are the price we pay for a civilised society.’
Oliver Wendell Holmes Jr
Taxpayers are under a moral obligation to pay the level of tax set by the law. There is a clear distinction between:
- an attempt to reduce the amount of tax that is payable by means that are within the law while making a full disclosure of the material information to the tax authorities, and
- working outside the rules to try to frustrate legal obligations by hiding income through nondisclosure, or improperly taking deductions for which one is not qualified.
Tax law must be clear and certain, and it should be remembered that businesses will look to minimise tax impact as a part of their normal commercial activity. Tax is a business cost alongside any other and company directors typically have a fiduciary duty to run the business in the most cost-effective manner.
While most taxpayers try only to comply with the law, there have been many cases of convoluted tax planning schemes that are designed not for any proper business purpose, but to exploit loopholes in the law and avoid its spirit. ACCA does not support this artificial activity. Such actions, which may generate short-term financial advantage at the cost of long-term value, cannot be supported.
Accountability and regular review
Tax systems should have a review principle whereby tax legislation is periodically overhauled and consolidated to bring it up to date and make it easier to follow.
Outdated laws should be removed. Incentives operating to promote long-term aims, such as investment in green infrastructure, should incorporate regular reviews to ensure that the aim of the legislation is being met.
There should be a clear reason justifying the existence of legislation. All anti-avoidance legislation should have sunset clauses attached to it. This will ensure that it is regularly reviewed and the need for it to remain in place is actively considered. Governments and tax authorities should devise clear metrics to gauge whether the tax system is being appropriately and sufficiently reviewed.
