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Tax System: KPMG’s Questionable Tax Shelters Ethics Case

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Abstract

Tax systems and policies have changed in the past years and have highly influenced

research on tax issues. The ethical dilemma which affects tax issues was identified by the

American Institute of Certified Public Accountants (AICPA) and stipulating one major moral

problem concerning the body. However, the KPMG tax shelter case study gives us to prove that

the tax profession has not yet untainted in different in many corporate and accounting scandals.

Nonetheless, there are a great number of highly-rated scandals that speculate many unethical

happenings among tax practitioners and accountants until the ethical issues in tax have been

highly explored. This paper explores tax systems at large and the moral codes as per the AICPA

code of conduct. The KPMG's questionable tax shelter is addressed concerning relationships

between tax enforcement officials and tax accounting professionals.

Keywords: tax systems, code of conduct, ethical issues

Introduction

Since ancient times, taxes existed in human civilization. Therefore, one can term taxes as

something eternal. It does not surprise us that taxation is subject to a discussion that is extensive

on their purpose, meaning effects, and size. This is a true categorization from the current

changing surrounding due to advancements in technology. Taxation generally is the imposition

of compulsory levies to organizations or individuals by the government. However, they are

levied in almost every nation to raise government revenue for expenditures, though they play the

same roles. KPMG is an international service network that deals with financial auditing,

advisory, and tax. In general, it is a tax and advisory body with headquarters in Amstelveen,

Netherlands. This article discusses the tax system in general, whether the system serve public
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interest, the offshore tax has ns, and KMPG's Questionable Tax Shelters ethics (Galaz &

Fichtner, 2018).

Reason for having Tax System

In current times, taxes are an essential source of government revenue. The difference

between taxes and other sources of income is that: charges are compulsory levies plus they are

unrequited, which means that they are not paid in exchange for certain services or things like the

sale of public property, a certain public service, or offering of public debt. As taxes get collected

as the welfare of the general taxpayers at large, the liability of a taxpayer is independent of any

received benefit. However, there are some exceptions like payroll taxes, which get levied on

labor income to finance benefits of retirement, payments of medical plus other social security

schemes- all of which benefit the payer of the tax. Therefore, due to the links between charges

paid and received benefits, payroll taxes are often termed as contributions. Broadly, in all

countries, the payments are commonly compulsory.

Principally, in the 19th century, the prevailing idea was that taxes are mainly used to

finance the government. Nonetheless, today and in earlier times, the government has made use of

charges in merely fiscal; purposes. One major way to view major methods of taxes is to

distinguish between objectives of allocation of resources, the stability of income, and income

redistribution. Without a huge interference reason like the reduction of pollution, the first

objective allocation of resources majors when tax policy has no interference with the market-

determined assignments. The next objective of redistribution of income is to reduce the

distribution of wealth and income inequalities. The stabilization objective - which gets

implemented through monetary policy, expenditure policy, and management of debt – is the

price stability and high employment maintenance.

Generally, in fostering economic development and growth of government structures,

taxes act as a successful source of funds for public investments and social programs. At most, all

programs offering education, health, infrastructure, plus other services are essential in achieving

the goals of a functional, orderly, and prosperous society. The plans need that the government

raises revenues for them to get appropriately financed. Taxation is not only applied in paying

goods and services of the public but also a major contract between the economy and the citizens.

However, holding the government accountable ensures good financial management.

Nonetheless, there are two types of taxes; direct taxes, which are taxes imposed directly

on the income or property of the taxpayer, and indirect taxes, which are the tax paid by

customers through getting imposed on products they make on daily purchases. The government

applies both types in collecting revenue required to match the needed expenditure levels and shift

the behavior of the economic agent. For example, the tax incurred in tobacco or alcohol that the

government applies to discourage such undesired traits.

Characteristics of an Effective Tax System

Normally, discussions happen within economists, politicians, tax practitioners, and others

concerning the changing subnational and national tax systems. Several suggestions for tax rules

modifications, whether major or minor, always pose questions concerning how well we can

compare and analyze proposals on the best tax system. Principles of a good taxation platform got

formulated in earlier times by the father of contemporary economics, Adam Smith, through his

very famous The Wealth of Nations (1776). He idealized the general principles of an effective

tax structure globally and is modernized based on the original information. A good taxation

system should have several laws.

Principally, the first one is fairness, which considers that taxpayers in one financial

condition must incur similar tax amounts. The principle calls for equity in tax burden distribution

among taxpayers. It indicates that taxpayers possessing similar income levels should suffer the

same tax levels (horizontal equity). Those taxpayers with higher-paying ability should pay more,

and those with lower skills should pay less (vertical equity). In which, vertical equity gets

addressed under different schemes of taxes: progressive – in which rich payers pay higher of

their incomes compared to poor taxpayers; regressive – lower-income earners spend more of

their income as taxes; and flat or proportional rate- whereby every taxpayer pay equal tax levels

which is equivalent to their levels of income (Mintz, 2018).

The next principle to consider is the ease and simplicity of compliance. In this, the

taxpayers should clearly understand why the tax is getting imposed and the method of complying

with tax regulations. Certainty and transparency- it is the principle in which taxpayers must

know where and when they pay taxes plus can undermine the link their burden of charge and the

services and goods offered to them. Administrative ease- it is the principle that considers the tax

collection cost, which must get minimized. It is essential to ensure a balance between the tax

enforcement cost and the rate of compliance. The last principle to consider is neutrality. It

involves making sure that the tax system reduces welfare losses and economic inefficiency plus

be neutral to the traits of commercial agents except to taxes designated to minimize a specific

behavior.

Conversely, the overall principles call for reduced rates of taxes posed to the society at

large plus create a limited exceptions list. Yet, fairness tax rates levels get seen differently in

different cultures. The reason being that it is hard to implement all the above principles under a

single tax system. In different nations, tax payments mention the filling of various reports and
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forms through national legislation, which violates the convenience and simplicity principle.

There are cases in which tax authorities lack data and capacity to impose tax compliance, which

leads to various tax burdens for the very honest and diligent taxpayers.

Nonetheless, different governments bring together various taxation schemes, make use of

tax exemptions or tax refunds to meet their taxation goals, which currently get the past collection

of revenue. Therefore, the higher the level of inequality in a community, the more rational it is to

apply a regular tax schedule. Still, in some nations, the more income equitability there is, then a

flat model is used since it aims to express fairness to taxpayers.

Ethical Issues with Offshore Tax Havens

Research shows that somehow tax havens are legal globally. Still, they function under

huge secrecy. Individuals or corporations incur costs to the agents who manage they havens,

which makes sure they remain anonymous concerning their work in the company. Tax havens

existence requires great consideration in financial transaction regulations, which happens on the

shores plus the ethics on the way they perform work. Generally, tax havens operate in a very

injustice manner since they permit corporations and other rich families to run from their moral

obligation of paying the given tax proportion in their nation, demoralizing their tax schedules,

and exacerbating national variation.

Conventionally, tax havens influence taxpayers' profits from lower taxes and allow

organizations to reduce their tax charges. The overall use of tax havens by agencies is profit

shifting by corporates in which organizations register their heads with a tax haven instead of the

nation where its sales happen. This ensures that businesses pay fewer corporate taxes. At large,

individuals can benefit from tax havens by becoming the dominion resident. They can place their
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trusts upon the havens and escape from paying gain taxes. All in all, tax havens get majorly used

for tax avoidance and personal benefits.

According to Paradise Papers leaked by a certain German newspaper, several famous

individuals and corporations were exposed, including at most a hundred international companies,

notably Apple, Uber, and Nike. The paper noted down the methods the agencies used, like

shifting the corporate profit and formulation of strategic planning ideologies to minimize taxes

further. Similarly, over 120 politicians, families, and celebrities got mentioned. Like the Liberian

President Ellen Johnson Sirleaf, some cabinet members in Donald Trump administration, and

Prime Minister Justin Trudeau. Queen Elizabeth investments and finances by Dutchy of

Lancaster had over Ten-Million-Euro investment in offshore tax havens. The major question that

arises is that, is the application of tax havens ethical?

Universally, when the general citizen is obliged to pay their taxes without fail while

corporations and other wealthy individuals can run from their tax payments, there is an ethical

and national interest that comes up. Normally, charges are a kind of social responsibility for any

business. They are fundamental in boosting government revenue for public services like

healthcare, infrastructure, and public transportation. Therefore, tax avoidance businesses operate

for profits and fail to overlook the state of the nation. Consequently, it reduces the business to a

greedy and capitalistic platform hence spoiling their statuses. Tax havens lead to immoral

practices by offering corporations with a loophole to reduce their tax costs. Thus, tax havens

ensure corporations undermine and elude their social requirements.

Through major consensus concerning tax havens being an unethical model, the question

that comes through is: why do the structures still exist in nations? We understand that most of the

firms are in general under political influence, hence by their political strengths, financial
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sustenance, the power behind those platforms prevents action getting taken upon tax avoidance

through tax havens. So, tax havens continue to be a breeding ground for avoiding tax. This

brings about compromising the tax system by showing that wealthy individuals and individuals

are not of similar standards as normal citizens when it comes to paying taxes. There this will

bring a huge inequality since the rich pay low tax proportion of their salary to taxes.

A tax haven can entail just like the name says: a financial haven used by greedy people

escaping from their home country economic instability. Furthermore, there is a commercial

advantage of tax haven existence. They boost investment in international platforms and increases

the globalization rate. The offshore investments reduce overreach by the government in which

some corporations have to pay double taxes, but they ensure that the free marked happen more

efficiently. Internationally, countries considered tax havens to operate highly on global

investment and business as a huge GDP proportion. Therefore, tax havens are not at large

government regulated, and hence they continue to exist although morally unethical (Lisa Snyder

CPA, 2017).

Tax Accountants Ethics Towards Compliance

All members of AICPA must follow the professional conduct code of AICPA, plus all the

technical standards. Generally, a major distinguishing mark for an expert accountant is the

acceptance of the act of responsibility in the public interest. Accordingly, acting based on public

affairs involves considering the general publics' attention first rather than the corporation.

Professional accountants find the importance of the public plus reasonable public perception

bearing in mind the interests of the people in tax payments and the entities in the eye of the

public at large.
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Principally, history speculates that professional bodies contain ethical virtues, ethical

obligations, and discourses that serve the public interest as a section of their professional status

claim. Through the earliest accountancy professionals, a charter was set to ensure members

conducted their duties in ways that benefited the public. In taxation, every accountant must first

serve towards the interests of the general public. Professional accountants are entailed in

accountancy bodies that make rhetorical claims on helping the attention of the audience.

Researches indicate the American Institute of Certified Accountants (AICPA) that put across the

responsibilities of a professional accountant. The body idealizes the public's interests as the

collective community well-being plus other institutions that they serve. In our case, accountants

must ensure taxes are paid equally without biasness in the general citizens. They must ensure

there is no tax havens plus other violations like tax avoidance (Nigamaev, & Savchenkova,

2018).

The prioritization gets covered by the European Union and UK law that identifies the

persons in the public who violates those laws. However, the general public can hold them

accountable if they realize any harm; hence, the bodies must reinforce the accountants to make

the interests of the public priority in their line of work. Broadly, the contradiction in the

accountancy profession that the accountants are serving the nations based on their self-interests

is having so much attention. Research indicates that huge tensions arise from professional

accountancy agencies claiming to serve the interest of the public, whereas performing tasks like

trade organizations in which they advance their members' interests. The speculation raises a lot

of dilemmas. They try to reconcile by applying the steps. Thus, self and public interests'

relationship is hard and might get intertwined sometimes.

Differences between Tax Havens and Tax Shelters

Although both tax strategies aid in the High-Net-Worth Individuals (HNWIs) and reduce

income tax burdens legally, there is a huge difference between tax shelters and tax havens.

Broadly, tax havens are global locations for having nonexistent tax rules, which allow

corporations or individuals to minimize their tax liabilities by offshore holding their assets

largely. On the other hand, tax shelters are investment accounts, tax planning strategies, and

securities, which reduces tax liability in a person's nation tax system.

Generally, a tax haven is a locale, whether a state or country is possessing fewer stringent

laws. In some cases, the nations have no income at all, or they charge a smaller taxes amount.

Tax havens are widely used in international economy to identify a multinational institution

which does not advantage themselves with the tax havens. Nonetheless, the bastions of the

profits from the free-tax are only for large corporations. Tax havens still offer banking services

to non-resident individuals and organizations. Foreigners can easily access trusts and offshore

bank accounts plus form an international business corporation (IBC). The entities of the business

are guaranteed exemptions for tax for a given period. The advantage of a tax haven is ensuring

an individual or corporation possesses a huge property piece without connecting it to him.

On the other hand, tax shelters seem to get covered by misery or only accessible to the

famous and rich persons, plus taxpayers of each stripe only use them. However, a tax shelter is a

way of reducing your burden legally through the application of certain investment strategies or

designs. Although tax shelters are just temporary and might ask for tax payments at some time in

the future, they are useful platforms for those requiring to minimize their tax liability in their

earning years that the rates are at highest points (Lisa Snyder CPA, 2017).

The investment products for tax sheltering are products that offer taxation deferred on

your investment. Instead of paying taxes on the year, the money was earned. They get included
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in the annual taxable income for the year they get withdrawn, possibly many years after.

Broadly, many individuals are in lower tax brackets after retirement. Therefore, making smaller

contributions to the tax-deferred account might play a better role in lowering their current tax

liability and enabling them to pay a lower tax rate after retirement (Jenkins, Popova & Sheldon,

2018).

Additionally, businesses and individuals can use tax sheltering as an investment design

by combining certain investment vehicles with timing to lower their tax liability. For example,

under the United States tax code, investment gains held longer than a year get taxed as capital

gains rate and not ordinary income. The reason is that most of the people make use of buy-and-

hold strategy to avoid incurring high tax rates on lower term gains.

The most common tax shelters are retirement savings plans like IRA and 401(k)

accounts. In the two cases, contributions get incurred in dollars, and holders of the accounts pay

income tax upon withdrawals. The reason is that IRA restricts withdrawal at certain age brackets,

the funds are subject to the smaller tax rate on income during pullbacks since the owner of the

account has retired plus income reduced. The general application of tax sheltering is shielding

your gains until withdrawal after acquiring your retirement.

Socialization Between Tax Enforcement officials with Tax Accounting Professions

Socialization means organized mentoring done by tax institutions by counseling on

taxation control, service, and practice. Conversely, obedience by taxpayers is the core sign for a

successful taxation measurement. Socialization ensures compliance by taxpayer’s trough

fulfillment of their tax obligation. A good taxation system must reduce obedience disparities.

Due to many taxation rules, taxpayer accountants must find it hard to understand them a
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professional tax aid must be ordered to investigate and recognize the state of taxation. It helps in

the accountancy platform and boosts the obedience cost in a compensation form to the tax

professional. However, the higher the taxation rules complexity, the higher the taxpayer's

obedience in taxation duty fulfillment. In finding the solution, the taxation rule must not make

hard times for the taxpayer or that the law of taxation must be made simpler, although it is hard.

The director-general provides socialization as a taxation rule, which ensures that the

taxpayer has not understood the new taxation rules that are even hard to guess. The obedience

cost ensures we can get recognized and comprehended easily. Without socialization, accountants

might make profits while evading or minimizing their taxes. However, it is essential for

government officials to interact and socialize with tax accounting professionals to maximize

accountability and provide them with knowledge on charges havens. They also educate

accountants on new methods of filing taxes for taxpaying corporates and individuals at large.

AICPA Code of Professional Conduct

It is a set of rules, interpretations, and principles that govern CPAs in their professional

responsibilities' performance. For many centuries, CPAs have adhered to the codes in the

realization of professional accounting objectivity, integrity, and independence. AICPA code

ensures uniformity. Without uniform set ethical standards, CPA might find it hard to cross

different countries for assets. The system also provides a conceptual framework so that CPA can

get through even without guidance. Another benefit is that it ensures relevancy- it means that the

code is highly evaluated to ensure that it remains relevant and addresses all emerging issues. A

corresponding ethical system has been set through a professional CPA code based on

fundamental objectivity, integrity, independence, and care to the interests of the public.
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However, many boards adopt the AICPA code to reflect the dedication to the desired consistency

upon their values.

Generally, the CPA's professionalism ensures that every day a person attends work, they must

behave professionally. There are moments we have to put the interests of the organization over

our personal needs. However, a better ethical arrangement is to have our own interests below

those of the organization. As per CPA, the hierarchical arrangement is to consider organization

needs first. Thus, if all interests get balanced then it is easier to avoid conflicts hence a

profession is required to do what is needed under any circumstance.

Similarly, public interest gets defined a collective community well-being of the people

plus the institutions they serve. To support profession features it is important that the profession

creates a set of values which guide the other members in a professional manner. The desired

personal values include, objectivity, honesty, discretion, integrity, courage of pursuing

convictions, character strength among others, which aids in handling clients. Moreover, without

those values, the needs to gain trust in creating a fiduciary interrelation cannot get maintained.

Failure to follow those standards is considered a criminal offence and can bring remedial

measures, expulsions, suspension of rights or even fines.

Nonetheless, in KPMG Questionable Tax Shelters case study we examine that officials of

the CRA who in general were offering tax amnesty packages to KPMG customers got

entertained at a classy Rideau Club in Ottawa with KPMG personnel included. People were

furious to see KPMG entertain the officials of the government responsible for tax collection. It

was unethical for CRA enforcement staffs to come together in a private reception paid and

sponsored by CRA personnel and they needed to get penalized. Nonetheless, the assistant

commissioner for CRA defended his workers and said they are trying to solve the problem (Lisa
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Snyder CPA, 2017). On the other hand, KPMG partner Gregory Wiebe had doubts that the CRA

stuffs could get easily influenced. He said that he did not think that a beer and a cheese piece

could influence their integrity in any way.

The major argument is that tax accountants are violating the law spirit as they are looking

for loopholes in laws prohibiting tax havens to have their wealthy clients invest in the havens,

which does not promote the interests of the public. Critically, KPMG staffs were against the

AICPA code of conduct since they were eating on the same table with officials who were

supposed to get penalties and fines after violation of laws.

References

Galaz, V., Crona, B., Dauriach, A., Jouffray, J. B., Österblom, H., & Fichtner, J. (2018). Tax

havens and global environmental degradation. Nature ecology & evolution, 2(9), 1352-

1357.

Jenkins, J. G., Popova, V., & Sheldon, M. D. (2018). In support of public or private interests? An

examination of sanctions imposed under the AICPA code of professional

conduct. Journal of Business Ethics, 152(2), 523-549.

Lisa Snyder CPA, C. G. M. A. (2017). AICPA Proposal Raises the Ethical Bar: Incorporating

International Standards into the Code of Professional Conduct. The CPA Journal, 4.

Mintz, S. (2018). Accounting in the public interest: an historical perspective on professional

ethics. The CPA Journal, 88(3), 22-29.

Nigamaev, A. Z., Gapsalamov, A. R., Akhmetshin, E. M., Pavlyuk, A. V., Prodanova, N. A., &

Savchenkova, D. V. (2018). Transformation of the tax system during the middle ages: the

case of Russia.