Professional Practice - Taxation

Table of Content

Discussion on Distinctions among tax planning, tax avoidance and tax evasion

Concept of Transfer Pricing

Referencing

1-. According to the study conducted by (Xyans, 2011) states that the tax Planning is the procedure of scrutinizing one’s economic situation in the most well-organized manner. Through tax planning, one can diminish one’s tax accountability. It necessitates the planning of one’s income in a lawful manner to assist various exonerations and deductions. Tax Planning necessitates various dominant amenities which are lawful and entitles the appraise to assist the satisfaction of deductions, modifications and exonerations Whereas

Tax Avoidance is an act of utilizing legal methods to reduce tax encumbrance. In simple words, it is an act of operating tax jurisdictions in a single protectorate for one’s personal welfare to contract one’s tax implications. Tax avoiding is a kind of occupation of taking inequitable ascendancy of the imperfections in the tax rules by finding new ways to circumvent the remittance of taxes that are within the curtailments of the law. Tax Avoidance can be done by calibrating the accounts in such a technique that there will be no transgression of tax rules. Tax Avoidance is constitutional but in some manifestations but sometimes it could come in the department of crime.

Tax Evasion is an unlawful way to reduce tax hindrance through counterfeit techniques like intentional under the announcement of taxable income or expanded expenses. It is an illegal attempt to minimize one’s tax burden. It is done with the intention of manifesting fewer profits in order to circumvent the tax burden. It presumes unlawful practices such as making treacherous statements, thrashing appropriate documents, not conserving complete records of the negotiations, the seclusion of income, embellishment of tax credits, or dispensing personal expenses as employment expenses. Tax Evasion is a misdemeanour of which the appraises could be penalized under the law.

The distinction between tax evasion and tax avoidance has been well entrenched in the Australian taxation administration. Nevertheless, someday the Australian Government has disregarded the differentiation between the two conceptions when it approaches Australians using tax shelters and being scrutinized as part of “Project Wickenby”. According to the study conducted by (Maydew, E.L., 1998), the Australian Government is intentionally categorizing all endeavours to diminish income tax through the use of tax shelters and nearshore monetary centres as tax evasion and consequently a criminal act.

The Australian constitutional law, as well as the ordinary law, acknowledges the predominant distinction between taxpayers enchanting in a comportment that inaugurates tax evasion and comportment that comprises tax avoidance (Willmott, H. 2010) . However, Governments are detecting it progressively strenuous to raise and collect tax receipts to fund public commodities or reconstruct wealth. Many of the mechanizations for tax avoidance and global under enlargement are accelerated by tax shelters and nearshore monetary centres. The law to discourage the advancement of tax strategies of the “Taxation Administration Act” disregards the distinction between tax evasion and tax avoidance and allocates with “Tax Squeezing Strategies” instead (Arifin, R., 2019). The “Anti-Money Laundering and Counter-Terrorism Financing Act” is another illustration of the obscuring of the distinction between tax evasion and tax avoidance because it authorizes government representatives to discover Australian taxpayers using tax shelters by requiring their comptrollers, legal practitioners, and economic advisers to report “apprehensive transactions” that presumes the transfer of money between the tax shelters. These two illustrations of constitutional law are clear examples of the “Australian Government” consciously designating all attempts to reduce income tax through the use of tax shelters and nearshore economic centres as tax evasion and consequently a criminal act. 

Question 2. According to the study conducted by (Sikka, P. (2005), demonstrates that transfer pricing is a concept in which the price of goods and services that are sold between related legal entities within an enterprise are set. Transfer pricing is an accounting method that illustrates the price that one division in the company charges contrary division for goods and services supply. For example, a parent company purchases goods from a subsidiary company. The price of those goods paid by the parent company to a subsidiary company is known as the transfer price. Single corporations that include companies and branches that are wholly or majorly owned by parent companies considered or control legal entities. Transfer pricing method also known as profit allocation method because it is used to allocate the profit and loss of multinational corporations.setting of prices among divisions in an enterprise is termed as transfer pricing (Sikka, P. 2017). Transfer pricing has various advantages. With the help of transfer pricing companies can earn a profit on goods and services in other countries that have lower tax rates.

Regulatory authorities use transfer pricing for the avoidance of tax. Organization for economic cooperation and development (OECD) adopted in 2015 by Australia and come into effect in 2016. It regulates international tax laws and international auditing firms’ audit financial statements. Australia used transfer pricing rules to avoid underpayment of tax.The pricing that does not act in accordance with transfer pricing rules of Australia termed as “international profit shifting” the terms and conditions of international dealings in Australia should be considered carefully so that business outcomes come out properly. The need for the transfer price concept in Australia arises because of three major categories that are tax planning, tax avoidance, tax evasion. The rise of transfer pricing facilitates the free movement of capital and tax avoidance. Transfer pricing can be termed as a technique that is used for optimum allocation of cost and revenue. Transfer pricing deeply implicated in the processes of wealth retentiveness that enable companies to avoid taxes and facilitates the light of capital. Australia’s double tax system and pricing of goods and services and income and expenses allocation between related parties obey the arm’s length principle.

The principle of (OECD) organization for economic cooperation and development has been accepted in Australia when a taxpayer possesses property under an international transfer pricing is a concept in which the price of goods and services that are sold between related legal entities within an enterprise are set (Willmott, H. 2010) . It regulates international tax laws and international auditing firms audit financial statements. Australia used transfer pricing rules to avoid underpayment of tax.The pricing that does not act in accordance with transfer pricing rules of Australia termed as “international profit shifting” the terms and conditions of international dealings in Australia should be considered carefully so that business outcomes come out properly. The need for the transfer price concept in Australia arises because of three major categories that are tax planning, tax avoidance, tax evasion. The rise of transfer pricing facilitates the free movement of capital and tax avoidance. Transfer pricing can be termed as a technique that is used for optimum allocation of cost and revenue.

Transfer pricing deeply implicated in the processes of wealth retentiveness that enable companies to avoid taxes and facilitates the light of capital. Australia’s double tax system and pricing of goods and services and income and expenses allocation between related parties obey the arm’s length principle. The principle of (OECD) organization for economic cooperation and development has been accepted in Australia when a taxpayer possesses property under an international agreement. The transfer pricing policy rules of Australia contain division 815 of the income tax assessment act 1997 (Cth) (ITAA 1997).In Australia, there is no secondary legislation that applies to transfer pricing.In Australia, there are no additional regional (local state) legislation and revenue authorities pertinent to transfer pricing. Transfer pricing legislation of Australia states that it must be consistent with OECD's transfer pricing guidelines for tax administrations and multinational enterprises. The main purpose of DTAs, is to circumvent double taxation between countries.

The issues related to transfer pricing and avoiding transfer mispricing is censorious to the Australian government and Australian taxation system. ATO analyze some transfer mispricing issues in practice that is, entering into those transactions that are against Australian entities this will create the artificial risk that would never occur in the real world, pricing that transaction that would never take place with a third party. ATO plays a major role in reducing transfer mispricing. ATO provides assurance that expected tax consequences will be attained. When the Australian taxation office (ATO) makes transfer pricing adjustments, the profit of the arm’s length is ascribed to the other party to the transaction. ATO makes ‘fair and reasonable” adjustments to a tax position. For example, there is a deduction for foreign interest that is paid by an entity if transfer pricing rules reduce.

There are the most recent transfer pricing and arm's-length principle case of “chevron Australia holdings pty ltd (CAHPL) v commissioner of taxation (no 4) 2015 FCA 1092, where ATO was successful on some points. In this case, the Australian subsidiary company of chevron corporation which is a US company has scrounged or borrowed money from Chevron Texaco funding corporation (CFC), US subsidiary of CAHPL. The loan needed to be repaid after five years. The loan was not procured by any guarantee and the loan interest was in Australian dollars. Now it was analyzed that the transaction was not matter-of-fact.

ATO considered that the independent parties have provided security while dealing but in the absence of guarantee there is no reason for higher interest. The judge addressed to assess the creditworthiness of the borrower, and the court determines this on the basis of evidence. Cheron failed to prove that the transaction was at arm’s length. However, the decision has been declared but its reasoning and authority remain unresolved.

The transfer pricing concept is used to reduce taxes for the entity as a whole. The main strategy of transfer pricing is to generate low-tax jurisdictions or reduce tax liability by a considerable amount. But reducing tax liability or avoiding tax by transfer pricing methods raises some ethical issues that avoid tax makes them a bad corporate citizen. Our society gets harmed if international corporations adopt transfer pricing concepts for minimizing or avoiding tax liability or burden of tax. Transfer pricing destroys the ethical values. Transfer pricing policy raises some social, political, financial, ethical implications on business and broader society. There are both positive and negative impacts of transfer pricing. In some countries, transfer pricing facilitates the transfer of capital .The correct use of transfer pricing gives various benefits. Transfer pricing gives an effect on the evaluation of performance. Mehafdi as per his studies proclaimed that some companies use transfer pricing method to avoid capital controls or diminution of fund movements and this statement is absolutely true that transfer pricing is also used for capital control somehow transfer pricing is an illegal method to take out money from a country these practices exploits the ethical and social laws of the country.

Also on the other hand it allies companies to transfer their property if they see an appropriate deal. Capital control is a factor that contravenes property rights. The concept of transfer pricing helps to move capital and lessens the amount of property right contraventions. This helps the country in becoming an appropriate place with respect to work, investment lives. Transfer pricing contradicts various issues in terms of ethical, social, financial, political implications on business and broader society. There are various problems or challenges of transfer pricing. Such as interpersonal disputes, performance problems, demand fluctuations, product pricing. The transfer pricing dispute came into existence because performance evaluations of managers are influenced by price. To set transfer prices, internal accounting data are used even when superficial or external market prices are available. To minimise the transfer pricing disputes the firm can combine interconnected segments. Different countries can acquire different rules regarding transfer pricing, the countries can also favourable tax system which attracts the multinationals to locate in their locality ( Rohde, C., 2017).

Transfer pricing is a concept followed by the multinational to avoid tax or to minimise tax liability. And if multinationals are adopting transfer pricing policy they are liable to pay little profit tax in some regions in terms os income tax or some other taxes. They can contribute in the economy for its well-being through the method of transfer pricing the multinationals consolidates their tax liabilities and try to avoid double tax when they have businesses in more than one country (Schjelderup, G., 2018). But transfer pricing has some negative impact as well on the country somehow the multinationals are trying to take money from their country illegally which is a wrong practice. And the economy can have a huge loss due the this transfer pricing practice. Transfer pricing can have negative impact on employment, investment, the global economic activity of a country, which creates a ethical, social, financial, and many other issues on business and social environment. Because if multinationals will avoid these taxes then the government needs to raise some other taxes which is not beneficial for a country.

References for Tax Avoidance and Tax Evasion

Ilyasa, R.M.A. and Arifin, R., 2019. TRANSAKSI BITCOIN DALAM PERSPEKTIF HUKUM ISLAM DAN HUKUM POSITIF INDONESIA. Mahkamah: Jurnal Kajian Hukum Islam, 4(1), pp.26-35.

Chen, S., Huang, Y., Li, N. and Shevlin, T., 2019. How does quasi-indexer ownership affect corporate tax planning?. Journal of Accounting and Economics, 67(2-3), pp.278-296.

Heitzman, S.M. and Ogneva, M., 2019. Industry tax planning and stock returns. The Accounting Review, 94(5), pp.219-246.

Dyreng, S.D., Hanlon, M. and Maydew, E.L., 2019. When does tax avoidance result in tax uncertainty?. The Accounting Review, 94(2), pp.179-203.

Cen, L., Maydew, E.L., Zhang, L. and Zuo, L., 2017. Customer–supplier relationships and corporate tax avoidance. Journal of Financial Economics, 123(2), pp.377-394.

Guenther, D.A., Matsunaga, S.R. and Williams, B.M., 2017. Is tax avoidance related to firm risk?. The Accounting Review, 92(1), pp.115-136.

Balakrishnan, K., Blouin, J.L. and Guay, W.R., 2019. Tax aggressiveness and corporate transparency. The Accounting Review, 94(1), pp.45-69.

Davies, R.B., Martin, J., Parenti, M. and Toubal, F., 2018. Knocking on tax haven’s door: Multinational firms and transfer pricing. Review of Economics and Statistics, 100(1), pp.120-134.

Klassen, K.J., Lisowsky, P. and Mescall, D., 2017. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research, 34(1), pp.455-493.

Juranek, S., Schindler, D. and Schjelderup, G., 2018. Transfer pricing regulation and taxation of royalty payments. Journal of Public Economic Theory, 20(1), pp.67-84.

Rossing, C.P., Cools, M. and Rohde, C., 2017. International transfer pricing in multinational enterprises. Journal of Accounting Education, 39, pp.55-67.

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