Like most full time tax lawyers, I spend some of my time counseling clients interested in aggressive tax planning schemes. These sorts of arrangements have a number of common characteristics. Usually they have been suggested to the client by a friend, a business/financial advisor, or some other third party. The referring person is seldom an experienced tax professional. Usually the plan promises an immediate and substantial tax benefit, at little up-front cost to the client (other than the promoter’s substantial implementation fee). And often the plan is being flogged about at this time of year, in anticipation of year-end tax planning. I have seen many variations on the theme over the years, and each year brings a new strain, much like the annual recurrence of various types of the flu. A recent example from the UK reminded me of another aspect of such arrangements, one that is often not considered.
Before turning to that, it is important to note that the sort of tax plans I’m referring to here are legal, at least in a technical way. Although they may push the acceptable tax planning envelope, they do not cross the line into fraud or criminal tax evasion. So, as an independent advisor I may be able to say that entering into the scheme will not expose the client to tax evasion charges, and get on with assessing the likely costs in taxes and interest in the event of a successful challenge by the CRA. So what is the downside to the client in deciding to enter into an aggressive tax planning arrangement, apart from the risk of a possible reassessment at a later date, especially if substantial taxes were going to be paid anyway if the plan was not tried?
Well, increasingly, there is an additional risk here – the likely public reaction to the scheme if it becomes fodder for the public media. That reaction is now predictable. The scheme will be denounced as morally wrong, and the participants will be demonized for not paying their fair share of the national tax burden. Comparisons will be made to the 99 percenters who struggle to pay their bills while the 1 percenters enjoy the high life by exploiting tax loopholes.
This brings me back to the recent UK example which started me on this. Earlier this year it came to light that a very high profile entertainer (Jimmy Carr) had avoided vast amounts of tax by offering his services to various UK TV and radio shows through an offshore holding company. The press were quick to jump on him, as were leading politicians of all three UK parties. Knowledgeable tax professionals knew the scheme did not amount to criminal evasion. However, the following quote is typical of the reaction in the media: “Jimmy Carr may be an idiot and a hypocrite, albeit with a low pain threshold, but he’s an easy mark for David Cameron and the lynch mob on Twitter to condemn for the tax-avoiding scam he embraced – and now repents – while mocking Barclays Bank’s similar scams on telly to sustain his overpaid career.”(The Guardian, June 22, 2012.)
It is pretty clear that once you become the target of the media there is little prospect of emerging unscathed, even if the tax plan is legal. The distinction between tax avoidance (legal) and tax evasion (criminal) is subtle and often misunderstood by the general public. As one commentator put it: “(In) any public debate on tax issues, …(it is).. being conducted by those who are ignorant in the tax law and are simply expressing their own personal prejudices.” (Trevor Johnson, Tax Notes International, July 23, 2012, p. 335.) The possibility of public condemnation is the sometimes overlooked downside of engaging in aggressive tax planning. Even if the plan withstands a CRA challenge, the reputational damage can be severe if public and social media take up the cudgel. Not every participant in an aggressive tax plan will worry about this sort of publicity, but for those with a public profile, the reputational risk is an additional factor not to be overlooked when weighing the pros and cons of participating in the plan.