The challenge of upholding a company’s mission while maximizing revenue can be a daunting one from an ethics perspective. How do you go about drawing a moral and ethical line in the sand when it comes to taxation matters? Are there provisions outside the realm of tax evasion or fraud that can be used legally and conscientiously to reduce the amount of money a business owes to the government?

We’re not accusing you of being illegal, we’re accusing you of being immoral.

These were the famous words uttered by Margaret Eve Hodge just over a decade ago, in her role as chair of the Public Accounts Committee in the U.K., as she took a stand against the tax avoidance practices of the likes of Starbucks and Amazon.

How ethics and tax planning intertwine has since been the subject of many multifaceted public discussions and attention-grabbing media headlines.

On June 14, 2023, Executive Education HEC Montréal hosted a conversation with two Quebec tax experts — Lyne Latulippe, Professor, Département de fiscalité, Université de Sherbrooke, and Brigitte Alepin, Professor, Département des sciences comptables, Université du Québec en Outaouais. The event entitled Ethics and Corporate Taxation: Implications for Society was moderated by Robert Gagné, Professor, Department of Applied Economics, HEC Montréal.

It can seem near impossible to determine what is right and wrong in a world where some courses of action, legal as they may be, are reprehensible by any other measure. Or in the case of tax haven jurisdictions whose sole focus is on keeping a leg up on other countries in a highly competitive global market. But let’s try to find some clarity nevertheless.

Yes, tax planning is legal

“Let’s not forget the core principle of tax legislation, under which every taxpayer is entitled to arrange their affairs in a way that ensures they have the least possible tax to pay,” said Lyne Latulippe, as the conversation got underway. “From the strict perspective of case law and statutes pertaining to taxation, there’s nothing really preventing an organization or an individual taxpayer from reducing their tax burden, as long as what they do is on the up and up. Now, whether that’s morally okay or not is debatable.”

A contribution to an RRSP, for example, is hardly the stuff of raised eyebrows. And yet the result is a lower tax liability. It’s all perfectly legitimate. Even lauded. “You can also get creative in how you manage a loan by using it to generate revenue rather than to buy a home. It’s a way of using the law to your advantage. And it’s a widely accepted practice.”

But when taxpayers come up with a scheme to avoid provincial capital gains taxes altogether, by twisting the situation around, they’re “treading in unethical waters, because as we all know very well capital gains are one of the basic principles of our tax system,” said Latulippe. Circumventing these legislative controls is going too far.

There are nevertheless plenty of nuances and complexities between the two extremes.

The situation in Quebec: Anti–tax avoidance measures

Before 1988, the Quebec government did not have that many legal instruments to counter abusive tax avoidance. But then new provisions to the Income Tax Act were adopted to deal with so-called “artificial” transactions whose sole purpose was “seemingly to avoid tax,” said Latulippe. “But making use of these provisions takes a solid understanding of how taxpayers plan around tax.”

A few years later, the federal government cracked down even harder on abusive practices with a set of general anti-avoidance rules. “That was a huge leap forward legally speaking,” said Latulippe. “A series of mechanisms have since been put in place to identify and deter against abusive tax transactions, especially from 2010 onward. And they’re not done yet.”

Constitutional powers and tax avoidance in other countries

In some countries, the idea of having everyone pay their “fair share of taxes” is written into their constitution.

A number of African countries have taken this approach, as have G7 nations like France and Italy.

“These constitutional foundations set out the guidelines for multinationals that might tend to avoid paying their fair share of taxes in every jurisdiction where they operate,” added Brigitte Alepin. This concept of tax fairness is nevertheless complex, as the event moderator Robert Gagné pointed out during the Q&A. “How exactly do you go about defining ‘fair share’? For an economist, the concept is an intangible one.” Alepin’s reply: “Generally speaking, fair share is calculated based on the ability to pay. But the concept of ‘ability to pay’ is in itself difficult to define. Is it purely income-based or do assets factor into the equation?”

Regardless of the constitutional framework in place, some countries are bowing to international pressure and deliberately overlooking unethical tax planning methods in an effort to attract multinationals to their shores. “That’s what the LuxLeaks financial scandal was all about,” said Alepin.

Using the legislation to full effect — but how far can you go?

Latulippe and Alepin reiterated that strategic tax planning is a normal thing for companies to do. But those that cross over from strategic to aggressive are not only venturing into illegal territory and attracting the ire of tax authorities, but they may also be incurring significant financial risk. For example, a complex administrative structure with multiple entities may be needed to underpin an approach of this nature.

The risk of reputational damage is not inconsequential either. “An organization that cares about its reputation wouldn’t want to end up making headlines and having to defend itself against questionable tax decisions,” said Latulippe.

Toward a more ethical tax system

One thing is certain: tax authorities and the public at large are becoming more, not less, demanding with regard to corporate ethics. A serious discussion about the way forward is unavoidable at this point.

The good news is that Quebec seems to be headed in the right direction. Our speakers emphasized that these concerns are being raised more in more in businesses of all sizes.

➲ Interested in learning more about best practices in corporate ethics and how to implement them in your organization? Then be sure to apply to the next cohort in the Certification in Ethics and Compliance program and take your skills to the next level.

➲ Questions? Feel free to reach out to Joëlle Zoghbi, Program Manager, to book an appointment.