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1.Discuss the overlaps and distinctions among tax planning, tax avoidance, and tax evasion, with particular reference (but not limited) to Xynas (2011). (500 words excluding bibliography).
Answer: Australia is one of the most developed countries in this world and their taxation laws are pretty strict. They levy specific taxes and their tax laws are also explicit about what type of conduct constitutes a criminal act. Here we will discuss the differences between tax planning, tax avoidance and tax evasion
Tax planning- it is true that certain provisions are made for the members of the economy where in they can minimize the amount of money they have to pay .The government allows all tax payers to mitigate their amount of tax with the help of tools such as rebates, allowances, exemptions, deductions and various other economic tools. all of these are within the law and actually help the company minimize its tax liability in an optimal manner within the law frame and it also helps them save money. Tax planning is thus essential for every company where they can arrange for a detailed analysis of their experiment current financial and positions and all their future goals with a dash of tax saving perspective.
Tax evasion – it refers to the act of deliberate avoidance to pay a true tax liability. This happens when a citizen tries to reduce their tax liability by using more than the available tax deductions provided under the law by the government. Big companies can just overuse their deductions or simply lie about their income by under reporting it. Misrepresentation or wilful omission of wealth is also a way of evading taxes. Making a compromise on taxation by finding a loophole in the laws is something some citizens do to not pay money to the government but this is heavily penalized by the government. Nobody is going to force the big companies to pay tax, but there has to be some kind of exercise for the financial and moral fortitude( Xynas 2018)
For instance, the government came up with the idea for increasing the GST on sugary foods and fizzy drink as a measure to combat against increasing nation wide obesity by using taxation as a social engineering tool.
Tax avoidance- this is in a way an extension of tax evasion where a citizen deliberately avoids paying their due taxes to the government by either completely defying the law or finding some loopholes in the system. It uses the shortcomings of the tax law where it makes use of all the provisions but it is in no way moral. But some companies find a way to make the argument that informed tax avoidance by giving some lawful excuse that seeks to minimize the liability in shirt run. Even though it is legal it renders the actual tax law as defunct. This technique is usually used by tax advisors to instruct the tax payers because it will directly benefit them. The financial affairs are deliberately and purposefully adjusted in aw ay that the citizen can get out of the whole tax paying responsibility.
With regard to Xynas and Australian law, Australia actually uses taxation as a social engineering tool to create a sense of accountability among its citizens. The taxes are needed to serve the community therefore there needs to be sense of awareness and commitment to the taxation laws. The ultimate objective is to influence human consumption and behaviour as such that they become more responsible towards the area around them (Xynas, 2018)
2. Explain and evaluate the concept of transfer pricing and how it relates to the above quotes. You should address the issues including (but not limited to) the social, political, financial and ethical implications on business and broader society.
Transfer pricing is the process in which resources are allocates within the group of same companies in a way that the prices are renegotiated. It refers to the price that one company charges the subsidiary part or affiliate of the same company. This is the prices that one division asks the other division for the goods and services provided. This can help that particular group of company to reduce their tax liability in the short term but this is not morally right for the country and its tax system in the long term and has several implications in various contexts (Kirchler, 2003).
Transfer pricing with regard to tax planning is a comprehensive topic that needs lots of study. Companies need to plan their taxes in a way that makes the transfer of prices an easy process. This study can help them in an immeasurable manner when it comes to tax audit. To make sure that all of the transfer comes with thin the legal provision provided by the government the group of companies must ensure that they have a proper data analysis and research where they come to know the proper pricing of good and services in not just their country but also other countries so as to determine accurate transfer prices. The autonomy of various divisions in a company and the organisational structure paly a very important role. Similarly, they must allocate the appropriate income portion to correct entities and pay taxes accordingly. Conducting all these procedure without actual tax documentation is not legal. This is extremely crucial for risk prevention. They basically transfer their income to low tax jurisdictions to escape the liability altogether (Mclaren, 2017)
A taxpayer wanting to mitigate their tax payment amount is understandable but what they must understand is the moral implication of this process. The reason why an adequate tax system or proper laws around taxation exist is because there are certain parts of the community that can only be strengthened using these laws. The trickle-down effect where the big companies that get richer can help their lesser privileged counterparts by simply paying their taxes on time, is real and there exists proper systems around big companies with huge amounts of income so as to ensure that consumer culture is positively influenced. The implementation of any taxation law is supposed to maximise the social welfare for all aspect in every sense. But in this case if it used for provisionally allowed but morally incorrect transfer of price it will only lead to social impoverishment(Rossing, 2017).
When we speak of this in political or social context, the obvious class consciousness comes into place because inherently the system is flawed even though it is designed with welfare in mind. Whether it is tax evasion or transfer pricing, what we see is clear instance of power play where taxpayers with that kind of leverage simply choose to not pay their tax (Xynas, 2018). Yes, the loopholes in the system allow for this, but the moral or societal obligation is completely disregarded. When a system of taxation is created, the expected effect is that of strengthening of the sections that need most help. In short it is legal and right way of moving excess of money from the very rich to the very poor in way that consumer culture is influenced and the impoverished class is uplifted. The money cannot just stay with the rich and reduce the economy to such a large extent that the poor continue to remain poor. Despite their need to prosper companies and tax payers must have a moral responsibility.
In the most natural sense economics is all about the movement of money. The dynamic nature of an economy is the reason it continues to thrive. The selling and buying of goods and services forms the backbone of an economy. The best thing an individual can do is find what they love to do, create a value around it that can utilized by others earn money for it and then spend that money by pouring it back into the government. Thus, government spending individual expenditure and consumerism is important to keep the momentum of the money in the economy.
The worst thing that can happen to the GDP of the company is that the money stays stagnant. Transfer is not the creation of new capital stock in fact evasion also ensures that money does not benefit anyone else. Creation of facilities like Medicare or other social welfare amenities may prove harmful to the rich person but these are the things that can truly help us elevate the society. In sense the economical sanctity of a government is disrupted every time the rich try to evade their taxes.
The government does not place any social obligation on the very rich this regard, but different stages of economy bring in different demands from its citizens. Expansion of production possibilities is just as necessary as military training because the free flow of money due to consumption of goods and services is the basic structure of an economy and the more dynamic it is the better (Blouin , 2018).
The provisions made by the government are strict but they leave some room for discrepancy within the legal framework. But this is where the concept of class consciousness comes into place. It’s truly important to understand the effects and repercussions of a company’s action. If they are ready to manipulate consumer reaction or exploit labour for production, then they have the faculties to understand exactly what effect their operations can have, instead of just benefiting by millions and millions of dollars they must exercise a certain level of awareness and social responsibility towards their country before allocation of transfer payments to avoid taxation. Money as medium of exchange is supposed to benefit society, though alterations must be made in order to create equal opportunities for the lesser privileged, but the very rich must realize their responsibility up to some extent(Xynas 2019).
This act of transfer pricing is detrimental to the economy for a country too. An economy has to view things in a broader sense as inn they have to look at their laws and their activities with regard to the long-term effects of the same on all parts of the population. In any case the concentration of capital with any sole entity leads to stagnation and the prevention of capital flow ca have adverse effects depending on the phase of the economy (Killian, 2019)
Policy makers use taxation as a social engineering tool for maximum political social, ethical and financial impact. They can directly influence human behaviour patterns and ways of spending by altering their tax treatment. Their main objective is to provide a natural healthy environment that leads to the growth if all parts of society. It aims to combine the three pillars in this approach- law, ethics and economics to create a comprehensive network that awakens a sense of empathy and responsibility that ensure the growth of the economy in truest sense.
Though the judgement of its efficiency can only take place over a period of time, an ideal system of taxation requires that the government continues to comprehensively analyse how they are affecting the economic behaviour of the country. They have to measure the extent and purpose of their tax laws for members of each income bracket. This requires objectivity yet a little more attention for the lesser privileged. The social utilities of consumption should be beneficial for all and the ethical side of this is heavily reliant on this principle alone when it comes to taxation.
We must understand that for tax payers no matter what the level, financial acumen is just as important as moral fibre. This highlights the importance of legal and ethical knowledge for all businesses without which there can be no income equality in the economy.
The only way to generate greater wealth in an economy is to keep the money moving. Awareness of trade is extremely important in this arena. By enabling the fact that the poor shall have increased spending power everybody will be benefiting in the long run and this will help the economy grow exponentially. Labour should be mad expensive in an ideal society so that the poor have more spending power. This will ensure that only the rich do not continue to stay rich and that the money keeps on moving, successfully impacting consumer behaviour.
Xynas, L., 2018. Taxation as a social engineering tool (No. Ph. D). Deakin University.
McLaren, J., 2017. The economic development of northern Australia: A critical review of the taxation benefits and incentives both past and present and the potential taxation options for the future. J. Australasian Tax Tchrs. Ass'n, 12, p.1.
Alstadsæter, A., Johannesen, N. and Zucman, G., 2019. Tax evasion and inequality. American Economic Review, 109(6), pp.2073-2103.
Besley, T., Jensen, A. and Persson, T., 2019. Norms, enforcement, and tax evasion (No. w25575). National Bureau of Economic Research.
Cobham, A., 2005. Tax evasion, tax avoidance and development finance. Queen Elizabeth House, Série documents de travail, 129, pp.1-20.
Kirchler, E., Maciejovsky, B. and Schneider, F., 2003. Everyday representations of tax avoidance, tax evasion, and tax flight: Do legal differences matter?. Journal of Economic Psychology, 24(4), pp.535-553.
Blouin, J.L., Robinson, L.A. and Seidman, J.K., 2018. Conflicting transfer pricing incentives and the role of coordination. Contemporary Accounting Research, 35(1), pp.87-116.
Dutta, S. and Reichelstein, S., 2020. Capacity Rights and Full-Cost Transfer Pricing. Management Science.
Rossing, C.P., Cools, M. and Rohde, C., 2017. International transfer pricing in multinational enterprises. Journal of Accounting Education, 39, pp.55-67.
Killian, S. and O’Regan, P., 2019. Taxation and Social Enterprise: Constraint or Incentive for the Common Good. Journal of Social Entrepreneurship, 10(1), pp.1-18.
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