ArticlePublisher preview available

Ethics of Tax Interpretation

Authors:
To read the full-text of this research, you can request a copy directly from the author.

Abstract

This article joins a somewhat nascent, but growing, body of scholarship addressing the ethical obligation to pay tax. The analysis is grounded to the ethical duty to obey law generally and highlights two competing orientations to statutory interpretation. The norms of self-interested advocacy suggest that tax planners should assert that interpretation that will generate the most wealth for the client. The norms of professional advising, by contrast, direct the tax planner to interpret tax law with reference to plain meaning, interpretive maxims, court precedents, and legislative purpose. When the two orientations differ, the ethical duty to obey law requires the tax planner to recommend, and for the taxpayer to follow, the latter view. Case studies drawn from a Louisiana sales tax avoidance scheme and from Google’s profit-shifting activities illustrate the ethical issues incumbent in tax interpretation.
Vol.:(0123456789)
1 3
Journal of Business Ethics (2020) 165:83–94
https://doi.org/10.1007/s10551-018-4088-7
ORIGINAL PAPER
Ethics ofTax Interpretation
DanielT.Ostas1
Received: 15 April 2018 / Accepted: 7 December 2018 / Published online: 19 December 2018
© Springer Nature B.V. 2018
Abstract
This article joins a somewhat nascent, but growing, body of scholarship addressing the ethical obligation to pay tax. The
analysis is grounded to the ethical duty to obey law generally and highlights two competing orientations to statutory inter-
pretation. The norms of self-interested advocacy suggest that tax planners should assert that interpretation that will generate
the most wealth for the client. The norms of professional advising, by contrast, direct the tax planner to interpret tax law
with reference to plain meaning, interpretive maxims, court precedents, and legislative purpose. When the two orientations
differ, the ethical duty to obey law requires the tax planner to recommend, and for the taxpayer to follow, the latter view.
Case studies drawn from a Louisiana sales tax avoidance scheme and from Google’s profit-shifting activities illustrate the
ethical issues incumbent in tax interpretation.
Keywords Tax avoidance· Tax advising· Legal interpretation
Introduction
Too often, a literal interpretation of a tax regulation is used
to circumvent the policy goals and normative compromises
that inform the regulation itself. This article compares and
contrasts a literal, plain-meaning interpretation of regulatory
language with an interpretation that employs the full pano-
ply of interpretative steps, including deference to legisla-
tive policy compromises, respect for judicial precedents, and
most importantly, an application of traditionally embraced
maxims of statutory construction. The article contends that
the ethics of tax interpretation require due deference to the
latter approach.
The article begins by considering and accepting the prop-
osition that there is an ethical obligation to obey reasonably
just laws promulgated in reasonably just societies, includ-
ing most local, state, and federal tax laws. The article then
explores the implications of this ethical duty. It defends the
idea that in tax planning and in professional tax advising, the
duty of legal obedience requires a fair-minded application of
the full array of interpretive tools. The ethical dimensions
of tax interpretation are illustrated with an example drawn
from a dispute over a state sales tax law, and then extended
to the global arena where profit-shifting to international tax
havens has generated widespread attention.
Tax scholars draw a distinction between tax compliance,
tax evasion, and tax avoidance (Prebble and Prebble 2010).
To comply means to abide by both the letter and the spirit of
the law. Evasion violates both letter and spirit, and avoidance
follows a literal interpretation of the law while purposefully
circumventing its spirit. Whereas tax evasion is criminal,
tax avoidance is not, and judicial remedies for the latter are
limited to civil penalties, nullification of the tax position,
and payment of back taxes with interest (Kahan 1997).
The scholarly literature identifies a so-called “tax gap,
defined as the difference between taxes owed and taxes col-
lected. Estimates place the U.S. tax gap at about $450bil-
lion per year, or one-fifth of all taxes due (U.S. Govern-
ment Accountability Office 2017). About two-thirds of
this gap derives from tax evasion, one-sixth from taxpayer
insolvency, and one-sixth ($75billion annually) from tax
avoidance, that if challenged, would be invalidated in court
(Ostas and Hilling 2016, pp.748–749). To the extent that
abusive tax shelters and other avoidance schemes are per-
ceived as manipulations of one’s legal obligations, general
cynicism rises and voluntary compliance erodes (Kovach
2008, p.275).
* Daniel T. Ostas
dostas@ou.edu
1 Michael F. Price College ofBusiness, University
ofOklahoma, 307 W. Brooks Street, Room 206, Norman,
OK73019, USA
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... If external parties believe that the company is engaged in socially or environmentally unethical behavior, this can result in salary cuts or job losses for managers. Ethical aspects can direct companies to avoid opportunistic actions (Ostas, 2020), such as tax aggressiveness. Therefore, corporate social responsibility activities that promote ethical behavior and are crucial to gaining legitimacy from the community then inhibit various factors related to tax aggressiveness and encourage managers to choose ethical business strategies (Zheng et al., 2014). ...
... It is suspected that ethical factors from corporate social responsibility activities do not significantly suppress the company's drive to achieve these short-term goals and engage in accrual earnings management activities. The ethical aspect of corporate social responsibility activities is expected to prevent companies from engaging in opportunistic behavior in accrual earnings management when interpreting different provisions (Ostas, 2020). However, this cannot be confirmed by the test results in this study, which indicate that the aspects of the situation and pressures that encourage companies to practice accrual earnings management, as described above, play a far more significant role than the considerations of whether accrual earnings management actions are actions that are morally questionable (Moratis & van Egmond, 2018). ...
Article
Full-text available
This study empirically examines the association of managerial ability and financial reporting quality (represented by accrual earnings management and real earnings management) on tax aggressiveness. Besides, this study employs corporate social responsibility disclosure as a moderating variable. The analysis was conducted on 44 manufacturing companies listed on the Indonesia Stock Exchange (IDX) selected through purposive sampling from 2014 up to 2019 so that 264 observations were obtained. This study uses two multiple-linear regression models with panel data. This study finds that managerial ability is negatively associated with tax aggressiveness. Meanwhile, accrual earnings management is positively associated with tax aggressiveness, while real earnings management is not associated with tax aggressiveness. The results also suggest that corporate social responsibility disclosure strengthens the negative association between managerial abilities and tax aggressiveness but fails to moderate the association between real earnings management and accrual earnings management with tax aggressiveness. This study shows that the Indonesian Tax Authority should formulate tax policies and incentives to stimulate companies to be more involved in sustainable activities and make excessive social responsibility disclosure
... A companies's reputation and legitimacy can be boosted through various planned initiatives to improve its activities, such as Corporate Social Responsibility (CSR), and be portrayed as "good business". CSR activities prevent firms from taking actions that negatively affect society's values, norms, and expectations, such as tax aggressiveness (Alsaadi 2020;Ostas 2020). ...
Article
This research aimed to examine the incremental effect of COVID-19 on sustainability reports disclosures towards tax aggressiveness by moderating Good Corporate Governance (GCG) in a balanced period before and during COVID-19. Disclosure of sustainability reports and tax aggressiveness are measured using the GRI Standards index and the Effective Tax Rate (ETR), respectively. Meanwhile, GCG is measured based on 15 indices (ICGI) developed by Tanjung (2020). An analytical method in the form of multiple linear regression was used on 100 companies listed on the Indonesia Stock Exchange (IDX) from 2019 to 2020 as the research object. The results did not show significance in proving the incremental effect of COVID-19 on the variables tested. Additional testing was carried out with a split per year, which showed that before COVID-19, sustainability reports disclosures did not affect tax aggressiveness, as opposed to during its occurrence. Before COVID-19, GCG weakened the negative relationship between disclosure of sustainability reports and tax aggressiveness. Meanwhile, during COVID-19, it had a lower level of weakening the negative relationship between the two.
... Because tax codes are always somewhat indeterminate, administrators and judges have discretion on whether to accept particular tax minimization arrangements (Ostas 2020). Authors in the critical legal tradition (Edgley 2010, Likhovski 2003 have argued that the interpretations about the legal scope of antiavoidance measures should be understood as the use of political discretion of judges. ...
Article
Full-text available
Social scientists have neglected the ways in which the consultancy assignments of legal scholars mediate private interests, even though their opinions provide important guidance in legal proceedings. Through a case study from Finland, we document a process where private tax advisory firms utilize their access to academic forums to defend their clients’ interests. With further evidence on related dependencies, we trace a two-fold process that amplifies the voice of tax advisors and suppresses public interest-related concerns. By achieving positions of trust in the academia, tax consultancy firms gain important gatekeeper roles that facilitate corporate-friendly research and subdue critical arguments. The findings challenge the conventional understanding of the dynamics of knowledge production, and call for a greater attention to the pitfalls of the marketization of academic legal advice. The national-level interpretative power of major tax advisory companies is also an important building block for international network power. This article is protected by copyright. All rights reserved.
Article
Full-text available
This manuscript proposes that tax avoidance can be better understood and mitigated as a sustainability problem. Tax avoidance is not just a financial problem for tax authorities, but one that erodes critical common spaces necessary for the smooth functioning of regulatory compliance, organizational integrity, and society. Defining tax avoidance as a sustainability problem offers a broader and more holistic understanding of the organizational and societal consequences of tax avoidance behavior. Sustainability is also a mature and legitimized concept that can readily incorporate taxation. A variety of established sustainability metrics have the capacity to incorporate anti-tax avoidance measures or publicize firms that engage in fair tax practices. This manuscript concludes that integrating sustainability principles, in conjunction with important extant work on corporate social responsibility and taxation, can advance the goals of decreasing the occurrence and acceptability of tax avoidance.