Professional Practice - Taxation

1. Tax avoidance, tax planning, and tax evasion all three have been seen as important concepts that had only a blurred line of difference in the 1960s and 1970s in Australia. The Australian legal law just as the precedent-based law perceives the significant difference between people paying tax engaging in activities that comprise tax avoidance, tax planning, and tax evasion. But, for some time this difference is not been taken into much consideration as when the Australians using tax havens and also when they are being enquired under 'Project Wickenby' (McLaren, 2008).

Most economic activities have an effect on the tax. While the businessmen and entrepreneurs undertake activities to minimize the tax imposed on the economic activities conducted by them. The distinction between tax evasion, tax avoidance, and tax planning is seen in the respect of law if it is legally applicable and admissible or not. Tax planning is under the jurisdiction of the law set by the government bodies and is admissible in law- this has been deeply explained by Fisher (Fisher, 2001). In addition to this, tax avoidance transactions are also admissible in the eye of law and are not considered as an offense. But now, tax avoidance pursuits are also considered as illegal. Tax evasion is an offense in the eyes law and the person who commits it has to bear the consequences of it (Zucman et al, 2018). Over the years the definitions and boundaries of tax evasion, tax planning, and tax avoidance have constantly changed. As time passed by, the legal planning of tax which is an acceptable and unacceptable and illegal manner of tax planning has changed in the span of 40 years (Xynas, 2011).

Professor Logue in his study said that the difference in tax avoidance and tax evasion is seen as "notoriously fuzzy"(Logue, 2005). He emphasizes the views that the concept of tax evasion generally comprises in it 'element of intentionality on the part of the taxpayer'. Supporting his thought Professor Logue gave an example of a rich person who is trying to conceal his real monetary income in a foreign-based bank account which is specifically not acceptable under the US law provisions (Logue, 2005). So in the given case, the person who has to pay taxes is clearly trying to evade taxes. He also then gave the idea of tax avoidance. In this, he said that tax avoidance is a way of arranging things so as to reduce the amount of taxes an individual needs to pay which is in accordance with the laws set.

However, the laws governing the distinguishing factor between tax avoidance and tax evasion is not at all clear but is very confusing. This is leading a complication in treating minimization of tax and its avoidance as tax evasion and then treating it as an offense in the laws set by the governments. In addition to this, the statutory law does not give a clear idea of what comprises 'tax avoidance' or 'tax evasion'.

2. Transfer prices are the prices at which various bodies of a firm conduct trade with one another (Barker et al., 2017). Transfer prices are being used as a tool by business firms and organizations to avoid paying tax to the authorities and flight of capital. This has a bad implication on the development and growth of economies. In China, government officials after having an investigation on 9465 multinational companies found out that approximately 90% of the organizations used transfer pricing to exempt themselves from tax payments (Sikka and Hampton, 2005).

Many tax controversies and scandals came into limelight in the last few years involving big MNCs like Starbucks, Amazon, and Google. The big brand Starbucks had sales of around 400 million pounds in the United Kingdom in the year 2012 but did not pay any taxes in the United Kingdom that year. Google had decreased its rate of taxes by establishing its headquarters in the city of Ireland where the tax rate was very less to 12.5%. Amazon, the global brand located his head office in Luxembourg where the tax rates were very low to 6% only (BBC News, 2013). There were charges against them that these organizations that they were doing activities in order to avoid taxes by the movement of their respective profits through the transfer pricing techniques and the 'Double Irish' policy (Forbes, 2015). However, some big firms also did not pursue such activities of avoiding payment of taxes so that they do not get the attention of the government officials of taxing departments and also do not intend to come into the limelight of the public and harm their reputation and goodwill and disrupt their operations and activities of the business. This was concluded in an empirical study conducted by Kusuma and Wijaya (2017) in their study done in Indonesia.

Now, the transfer pricing is based on the regulations of the 'Arms Length Principle' as per the OCED. In the arm length principle entities conducting business should agree on the rules and terms set which should be agreed by the non related entities as well. Transfer pricing regulations and 'Arms Length Principle' first came to existence in the country of Russia (St. Petersburg Times, 2007). In Russia, the major exploitation of tax avoidance was due to a large number of loopholes in the tax system as a consequence of transfer pricing strategies done by multinational companies. When the arms length principle is violated and abused in any manner the government has the authority and jurisdiction to reconstitute the entire or some part of the transfer price to the gain's taxable respect (Merle et al., 2019). However, the use of the 'Arm Length Principle' cannot happen directly in most cases. For instance, let a firm of the US form a patent within their country and licenses the patent to their other company which is established in Ireland. In Ireland, the royalty charge is very less by the company of the US and so major part of their income goes in Ireland. The corporate tax in Ireland is quite less of 12.5% only. This type of shifting income is seen very often in multinational companies in the US. This is leading them to get exempted from high tax rates. The same thing Google did as discussed above.

Due to the less tax rate in Ireland, there were many practices done by companies to avoid paying the tax revenues with the help of transfer pricing and also with the research and development of the intangible assets. To stop this, Ireland recently took a decision to put a full stop to the loopholes in the policies which allowed the companies to take advantage and do tax avoidance. This decision of Ireland was taken due to the pressure and influence by the OCED, the European Commission, and the United States. Ireland decided on the eradication of the 'Double Irish' policy. But, with the suspension of that, it came up with a new policy for the multinational corporations which also allowed them to reduce their tax payments which were quite equivalent to the earlier policy (Barker et al., 2017). Except for this time, they could reduce their taxes on the gains which they had received on the intellectual property. Critics and experts were of the opinion that this new policy was a 'development box' which did not do any good to the government but helped the corporations in a far better manner.

Another thing which transfer pricing helps in avoiding is the feigned localization of outcomes and expenditures in order to decrease the expenses which come out from the taxes. Big multinational companies dominate the modern environment of most countries by having an influence on the economic, social, and political dynamics. With the transfer pricing technique, the big firms and corporations are increasing the shareholder value due to low tax rates and giving a high rate of returns to their respective shareholders (Sikka and Willmott, 2010). As a result, due to low taxation, the total payable amount of tax is relying on the 'costs' and ‘income’; the firms are concentrated on 'transfer pricing' policies only. The corporations were gaining highly due to transfer pricing as their profits were getting maximized even after paying off the taxes and they were expanding their scope of activities and business dimensions widely.

The opposite was the case of the governments involved in various nations of the world. The governments were getting impacted in a very critical manner. Since most of the revenue of these nations was coming as part of taxes which as a result of transfer pricing was coming substantially less. They were getting most impacted in carrying out the welfare activities for the state due to a shortage of revenues. Taylor, Richardson, and Lanis (2015), in their study of 203 firms in Australia found out those organizations were avoiding payment of taxes by a number of combinations of techniques. Chinese tax officials stated that they had almost had to bear losses of an estimate of about $4billion in a year in their revenues derived from taxes due to tax avoidance measures and another reason was due to transfer pricing tools used by firms (Bradley, 2015). Transfer pricing and other methods used in avoiding taxes are acting as forces which are 'fiscal termites' that are gradually eating away the foundations of the international tax structures and the setup of accountability and reshaping the global economies entirely (Sikka and Willmott, 2010). In addition to this, Papua New Guinea in the year 1999 approximately lost revenues between 9 to 17 million$ in the business of forestry only as a result of the transfer pricing methods used by the different multinational corporations. Recently, the government lost an estimate of 100million$ in the revenues generated by tax in a single year due to worldwide international wood companies.

In continuation with the ongoing theme, transfer pricing also poses a danger to developed economies as well. Due to it in 2001 the United States had to suffer and bear the losses of up to 53.1$ billion of the revenues obtained via taxes which were levied on the companies (Dudar et al., 2015). With regard to developing countries transfer pricing pose a bigger threat. In a study of Global Financial Integrity in the year 2008, it calculated that an approximate loss of revenues generated via the taxes was of around 98-106 billion $ from the years 2002-2006. This was equal to around 4.4% of the entire world revenues which was a huge loss to the governments of various countries (Global Financial Integrity, 2008). It had much worse effects after there was a huge increase in international foreign direct investments (FDI) which was roughly about 1.8trillion$ in the year 2015. A study done by United Nations University World Institute for Development Economics Research (UNUWIDER) in the year 2017 said that worldwide loss due to shifting of profits by the companies was around 500billion$ in a year (Beebeejaun, 2018).

To overcome the threat of revenues availed from taxation as a result of the transfer pricing techniques various countries entered into different multilateral and bilateral agreements and contracts so as to improvise the rules and regulations (OECD, 2017). Now, the tax officials can make adjustments to the transfer prices done by the corporation's only if the authorities levy tax on their corporate profits which they have mined and also when the authorities had the necessary enforcement and legislative resources. The main issue faced with such contracts and agreements was during the lack of an active and vibrant market scenario, the prices were not effortlessly definite and measurable (Gravelle, 2010). This mostly happened in case of where the organizations made use of various logos, patents, trademarks, etc or in the case when the firms possessed with them a large number of particular intangible assets.

Thus, the transfer pricing as discussed above is hampering the society and government at a larger extent as due to shortage of revenues the governments is lacking funds to conduct welfare activities for the society. The business companies are on the other hand enjoying and mining big profits due to less payment of taxes. The infrastructural activities, welfare schemes for the old age people and children are not getting much attention due to less revenue generation all over the world but mostly in Australia.

References for Professional Practice - Taxation

Barker, J., Asare, K. and Brickman, S. 2017. Transfer pricing as a vehicle in corporate tax avoidance. The Journal of Applied Business Research, 33(1), 9-16.

BBC News. 2013. Google, amazon, starbucks: The rise of ‘tax shaming’. Online Available at: www.bbc.com/news/magazine-20560359 [Accessed on: June 30th, 2020]

Beebeejaun, A. 2018. The efficiency of transfer pricing rules as a corrective mechanism of income tax avoidance. Journal of Civil and Legal Sciences, 7(1), 237-238, https://doi.org/10.4172/2169-0170.1000237

Bradley, W. 2015. Transfer pricing: Increasing tension between multinational firms and tax authorities. Accounting and Taxation, 7(2), 65-73.

Dudar, O., Spengel, C. and Voget, J. 2015. The impact of taxes on bilateral royalty flows. ZEW-Centre for European Economic Research, 7, 15-052, https://dx.doi.org/10.2139/ssrn.2641756

Fisher, R. 2001. Making tax laws work for you: A simple guide to tax planning. Mc-Graw Hill Publications.

Forbes. 2015. Ireland Declares ‘Double Irish’ Tax Scheme Dead. Online Available at: http://www.forbes.com/sites/kellyphillipserb/2014/10/15/ireland-declares-double-irish-tax-scheme-dead/ [Accessed on: June 30th, 2020]

Global Financial Integrity. 2008. The implied tax revenue loss from trade mispricing. Online Available at: https://gfintegrity.org/storage/gfip/documents/reports/implied%20tax%20revenue%20loss%20report_final.pdf [Accessed on: June 30th, 2020]

Gravelle. 2010. Tax havens: International tax avoidance. Diane Publishing.

Hampton, M.P. and Sikka, P. 2005. Tax avoidance and global development. Accounting Forum, 41(4), 245-248.

Kusuma, H. and Wijaya, B. 2017. Drivers of the intensity of transfer pricing: An Indonesian evidence. In Proceedings of the Faculty of Commerce Conference.7. 28-30, http://erepository.cu.edu.eg/index.php/COMM-Conf/article/view/7416/7267

Logue, K.D. 2005. Tax law uncertainty and the role of tax insurance. Virginia Tax Review, 25(2), 339-414.

McLaren, J. 2008. The distinction between tax avoidance and tax evasion has become blurred in Australia: why has it happened? Journal of the Australasian Tax Teachers Association, 3 (2), 141-163.

Merle, R., Al-Gamrh, B. and Ahsan, T. 2019. Tax havens and transfer pricing intensity: Evidence from the french CAC-40 listed firms. CogentBusiness and Management. 6(1), 164-166. 

Organisation for Economic Co-operation and Development. 2017. Transfer pricing guidelines for multinational enterprises and tax administrations 2017. Online Available at: https://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm [Accessed on: June 30th, 2020]

Sikka, P. and Willmott, H. 2010. The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness. Critical Perspectives on Accounting, 20(4), 342-356.

St. Petersburg Times. 2007. Transfer Pricing. Online Available at: http://www.sptimes.ru/index.php?action_id=2&story_id=21057; accessed on 31 March 2009. [Accessed on: June 30th, 2020]

Taylor, G., Richardson, G. and Lanis, R. 2015. Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, 14(1), 25-57.

Xynas, L. 2010. Tax planning, avoidance and evasion in australia 1970-2010: The regulatory responses and taxpayer compliance. Revenue Law Journal, 20(1), 2 http://epublications.bond.edu.au/rlj/vol20/iss1/2?utm_source=epublications.bond.edu.au%2Frlj%2Fvol20%2Fiss1%2F2&utm_medium=PDF&utm_campaign=PDFCoverPages.

Zucman, G, Johannesen, N. and Alstadseter, A. 2018. Tax evasion and tax avoidance. National Tax Journal, 42(1), 15-27.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Taxation Assignment Help

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