Recent political attacks on so-called tax avoiders display a worrying tendency to ignore the rule of law, says Alan Binnington
He who bids the law rule may be deemed to bid God and reason alone rule, but he who bids men rule adds the element of the beast; for desire is a wild beast, and passion perverts the minds of rulers, even if they are the best of men.” (Aristotle)
The recent financial crisis in Europe has generated a great deal of passion in the minds of rulers, but what effect has this had on the rule of law?
Two examples suggest a worrying trend. The first relates to the preservation of confidential information, a matter which is of considerable importance to those who use international finance centres. There are many reasons why individuals might wish their financial affairs to remain confidential other than the perception of the popular press that they must be evading tax.
The fact that funds are held offshore is not a badge of tax fraud. Many wealthy families have a presence in multiple jurisdictions – they may find it tax-efficient to hold their assets in a tax-neutral jurisdiction or they may simply live in a country where corruption is rife.
In 1998 a report for the UN concluded: “For much of the 20th century governments around the world spied on their citizens to maintain political control. Political freedom can depend on the ability to hide purely personal information from a government.”
Nevertheless, the need to repay substantial financial deficits following the crisis has forced some European governments to resort to the practice of paying employees of offshore financial service providers for stolen client data to increase tax revenues.
There has been very little adverse comment directed at this publicly, presumably because of a popular assumption that all the clients must be tax evaders and therefore the theft is justified.
The concept of whistleblowing was originally about making a disclosure in the public interest. It now seems to have been extended to include the theft of confidential information for monetary reward, with little analysis of whether the information contains evidence of actual wrongdoing.
And it goes further. In April 2008 there was the curious spectacle for a few hours of the outgoing Italian government publishing on the internet financial information filed by all Italian taxpayers. The deputy finance minister failed to see what the problem was, stating at the time: “It’s all about transparency and democracy.”
Where does that leave the rule of law and the right to privacy? The advent of the internet (and we should not forget that the worldwide web was only released to the public in 1991) has brought about a change in the way information is exchanged. It has become far easier to disseminate unlawfully obtained confidential information with very little risk of being prosecuted.
The government practice of paying for stolen information can perhaps be contrasted with recent governmental outrage at self-appointed whistleblowers such as Wikileaks disseminating confidential information in relation to US diplomatic exchanges.
The second example relates to the distinction between tax evasion and tax avoidance. Historically, there has been a clear distinction between the two and it was perfectly legitimate to organise one’s affairs to minimise the amount of tax payable provided one complied with the relevant tax statutes.
However, again prompted by the need to fill substantial deficits and fuelled by the popular press, one now hears pronouncements such as that by Chief Secretary to the Treasury Danny Alexander in September 2010 to the effect that “tax avoidance and evasion are unacceptable in the best of times but in today’s times are morally indefensible”.
If Parliament regards a particular piece of tax planning as morally indefensible it can, of course, choose to legislate against it, but until it does so it remains lawful. Yet political pronouncements now routinely use the words ’evasion’ and ’avoidance’ as if they were interchangeable.
That may be a vote-winner but it makes it difficult for citizens and their advisers to determine what is lawful and what is not. One may indeed, from time to time, come across tax planning that appears to confer an unfair advantage on the taxpayer, but surely the remedy for that is to pass appropriate legislation rather than impose a nebulous test of morality.
This does not bode well for the rule of law. Thankfully, we seem to be pulling out of the financial crisis, and the passion of rulers may be diminishing. Nevertheless the rule of law has stood the test of time from the days of Aristotle and we should be cautious about allowing it be overlooked for the sake of short-term political expediency.
Alan Binnington is a private client director at RBC Wealth Management