Professional Practice - Taxation

Distinctions and Overlap between Tax Evasion, Tax Planning and Tax Avoidance

As per Xynus 2011, the majority of the deals taking place is considered to have an impact on the payment of taxes. Hence, in order to foresee the same and make an attempt to reduce the tax related price of an individual is considered to be a vital component of a challenging commercial activity (Alstadsæter et al. 2018) As the payers of tax engages themselves in the process of reducing the amount of taxes, with regards to their private or even commercial resources, the distinction between the outlining of taxation, ignorance of tax payment as well as circumvention of tax related operations, exists in terms of of deals that is lawful and that which is recognized by taking fair measures for the same. But in the past 40 years the country of Australia has witnessed the fading of tax outlining, tax ignorance and tax circumventions, specifically in terms of its differences. 

The main purpose of avoiding taxation is to minimize any tax related arrears by means of implementing the norms and principles in relation to the same. On the hand the circumvention of the taxes is done with the purpose of minimizing any tax related arrears by means of executing processes that are against the law. While outlining of taxes is done with the purpose of minimizing the arrears related to taxation by means of using certain facilities and the ethics in terms of law. 

The method of tax evasion is embraced when there is a need to demonstrate a lesser amount of gain or even to eliminate any kind of tax related pressures. In this process, fake reports are shared, important documents are hidden and also it avoids managing a complete account of the deals taking place, revenues are curtained, tax related balances are overstated and even the private expenditure of a person is demonstrated as a commercial expenditure (Braithwaite et al. 2017). However, in the case of tax planning the fiscal situation is analysed in the most effective way so that the payer of the tax can enjoy the various advantages as per the law of taxation. For example, mutual funds and provident funds. While tax avoidance being a lawful procedure is still not recommended, as with this, the payers of tax take undue benefits of the drawbacks of the laws related to taxation, they determine new techniques to eliminate the payment of any taxes but staying in the boundaries of the tax regulations. 

Anytime, when a tax is made known, a tough time emerges both for the government as well as for the payer of taxes. Moreover, whatever be the case, the payer of taxes is always making an attempt to decrease the arrears on the taxes. Also they take steps, in both lawful as well as unfair means and the regulating body makes an attempt to fix the different facilities related to taxations in terms of its payers in a manner that offers very less prospects to reduce any kind of pressures for the payment of taxes (Chen et al. 2015). 

Concept of Transfer Pricing 

Transfer costing is considered to be a very significant problem in terms of global taxation. The process takes place in a situation wherein two organizations that are a component of a common global team conducts its business with one another (Cristea et al. 2016). For instance, the US oriented cooperative of the Coca-Cola company purchases something from France-based cooperatives of Coca- Cola (Serôdio et al. 2018). In this context, when both these cooperatives develop a cost for their deal, it is considered to be the process of transfer costing. 

Moreover, the process of transfer costing is not considered to be unlawful on themselves or it is not even compulsory insulting in nature. Also, it has been anticipated that 1/3rd of the global sales takes place inside these international organizations and not in between these organizations. In other words, transfer costing occurs in the event of a business taking place over different countries but within the same brand. 

In the context of the given case-study, the past few decades has seen an increase in the value of transfer costing along with economy- based developments (Davies et al. 2018). Also, the process of transfer costs, helps in an unrestricted flow of an investment as well as avoidance of tax payments. Furthermore, in terms of the modern study of accounting, transfer costing has been demonstrated as a mechanism for the purpose of distributing prices and incomes in the minimum possible way. Hence, when there is a transfer costing in a business taking place across countries, it creates a core impact on the storage of its resources which in turn will enable these organizations to ignore any payment of taxes as well as allow the enhancement of the investments. 

If two different organizations conduct business with each other, they will generate a selling price for their deal, which is known as a sale, which is within the reach of the arms and it is considered to be a commodity of authentic bargaining in the marketing environment (Davies et al. 2018). Also, this is accepted in terms of the payment of taxes. However, if two similar organizations conduct a business with one another, they can even attempt to manually damage the costing based on which the concerned deal is accounted for and this is done with the motive of reducing the complete taxation invoices. For instance, it will assist in the process of documenting its gain as much as it is feasible in case of a tax retreatment wherein the tax is either null or of a very less value. 

Issues in Transfer Pricing 

  • There can be a difference of opinion between the departmental managers of organizations in terms of their norms and principles with regards to its costing is one of the greatest problems experienced in the process of transfer pricing. 
  • Different types of prices are supplementary connected to the process of transfer costing. Hence, in order to frame a well-established platform of accounting by adhering to the norms and principles of transfer costing will demand for a great amount of time as well as human-resources. This is the only reason to which it has a high-level of cost (Gashi et al. 2016). 
  • Also, there are problems in terms of finding out an accurate price while finding out the costing strategy in case of non-touchable provisions is considered to be a very tiresome work. 
  • Just because the purchaser as well as the traders are required to execute various kinds of operations, there are a number of issues that take place. For instance, in a few cases, there are some traders who provide or there are even some who don’t provide any type of guarantee on the commodity they are selling (Pukelienė et al. 2016). However, the gap in the cost will create an impact on the cost that the purchaser would be required to compensate for the commodity they are buying. 

Here are few issues that creates an influence on the costing of the commodities: 

  1. Dangers associated with accumulation. 
  2. Commercial dangers as well as marketing threats. 
  3. Cash and fiscal threats. 
  4. Solvency issues. 
  5. Commodity discontinuity threats. 
  • In the context of huge international organizations, the procedure of transfer costing tends to be more difficult and also occupies a huge portion of time. Furthermore, there can also be a dispute in terms of transfer costing, leading to a flawed attitude among the management of the various departments of an organization. 
  • There are times when it is not feasible to determine a non-dependent unregulated deal that was applied in terms of finding out costs within the reach of the arms. Hence, it gets realistically not possible to find out the cost within the reach of the arms (Ylönen et al. 2015). 

Social Impact on Business

In the case of transfer cost when the society-based costing becomes more than the personal expenses, it is considered to be an unfavourable periphery or even an extrinsic wastefulness. As a matter of fact, a periphery is considered to be a non-accuracy in the marketing environment, wherein no cost is provided by the market for any provision on non-provision. Moreover, such type of peripheries results in an inappropriate distribution of assets which in turn leads the development as well as the utility to degrade beyond its minimum phase. Hence it does not cause the highest possible level of social well-being (Muhammadi et al. 2016). Also, it has been determined that it is the personal interest of an organization that results in maintaining a balance between personal, society-based prices as well as profits. However, there are few commercial activities that cultivate strictness and even develop differences among the society-based costs, personal costs that in turn can be broadened by means of differences in requirements, preferences, periodic ups and downs, battle and development of latest sectors. This individual interest of the organization, will create an impact on the society as a whole, as they will be prone to its disadvantages.

Political Impact on Business 

In the case when an organization implements certain provisions in another region and sometimes even more disastrous when it executes provisions at a global level, will all of a sudden be required to comply with the difficult procedure of transfer costing. An important context in terms of transfer costing would be the existence of a purchaser and trader connection among the different departments of a particular organization (Klassen et al. 2018). The management or the director will not concentrate on a single place as the trading provision or even components to other departments of the organization. However, the different taxation regulating bodies be it on the regional level or nation- based level will think from the perspective of the location. In such a situation, an organization would be required to find out the financial worth of commodities and services and even consider that value as a trade-based income of the sales department as well as a price of the purchase department.

Another danger that an organization would like to ignore is the process of getting ripped off among the different regulating bodies of taxation in terms of two territories that are receiving its tax-related income from only one origin that is taxed in two territories due to coinciding tax related regulations. In the majority of the regions, organizations calculate their taxes by means of an allied income charges regulation along in the forms of its origination point. But in the context of finding out the portion of its total revenue in terms of taxation imposed on both regions, the concerned organization will generally imply distribution as well as sharing mechanism which again will be different for different states. This difference in the rate of taxation will tend to trouble the people living in the society as a whole.

Financial Issue 

The problem in terms of transfer costing emerges in a situation when an organization is divided and has an accountability platform functioning as planned business units. Moreover, such a condition is linked with the issue of finding out appropriate costs in the context of behind team dealings (Lee et al. 2015). Also, the issue related to transfer pricing gets more serious, wherein organizations have their franchises all over the globe mostly in those countries that have different percentages of taxations. In this type of a condition, international organizations generally make an effort to reduce their tax related arrears by moving their gains to a country that has a higher percentage of taxation to the country having a lower percentage of taxation. Furthermore, the taxation regulating bodies in most of the countries is not content with this system. This shifting of profits to regions having low rate of taxation will tend create a negative impact on the society due to its instability.

Ethical Issue 

Transfer costing that will not be the same as the market price, will prove to be beneficial for one organization but it will also decrease the amount of gain of the other organization. Moreover, international organizations can even play with the transfer cost with an attempt to move their level of gain to those states that are having to pay a lesser percentage of taxes (Lyal, 2015). Such an operation is constantly proving to be a significant reason for mis-management among different international organizations such as taxation regulating bodies like that of the IRS ( Internal Revenue Service). Also, different tax-regulating bodies frame its objectives to enhance the amount of taxation payable in their area, but the organizations have an objective to minimize the total amount of taxes they would be required to compensate. This is creating a negative influence on the ethical value of the society as a whole.

If the transfer cost is not different, then one of the involved organizations will be at a loss while the other organization would be enjoying its benefits. 

References for Professional Practice - Taxation

Alstadsæter, A., Johannesen, N. and Zucman, G., 2018. Tax Evasion and Tax Avoidance. NBER working paper, 23772. Retrieved from https://www.nielsjohannesen.net/wp-content/uploads/Avoidance_FullPaper.pdf 

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge. Retrieved from https://books.google.co.in/books?hl=en&lr=&id=Ea1BDgAAQBAJ&oi=fnd&pg=PT8&dq=tax+evasion+and+avoidance&ots=_ubTbP5jkN&sig=PA8GadhRsbA0ZMlX_JkzqM6DC70&redir_esc=y#v=onepage&q=tax%20evasion%20and%20avoidance&f=false 

Chen, C.X., Chen, S., Pan, F. and Wang, Y., 2015. Determinants and consequences of transfer pricing autonomy: An empirical investigation. Journal of Management Accounting Research, 27(2), pp.225-259. Retrieved from https://meridian.allenpress.com/jmar/article-abstract/27/2/225/131530 

Cristea, A.D. and Nguyen, D.X., 2016. Transfer pricing by multinational firms: New evidence from foreign firm ownerships. American Economic Journal: Economic Policy, 8(3), pp.170-202. Retrieved from https://www.aeaweb.org/articles?id=10.1257/pol.20130407 

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. Retrieved from https://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00673 

Gashi, M. and Kukaj, H., 2016. The effect of tax rates on fiscal evasion and avoidance. European Journal of Sustainable Development, 5(1), pp.31-31. Retrieved from www.ecsdev.org/ojs/index.php/ejsd/article/view/300 

Klassen, K.J., Lisowsky, P. and Mescall, D., 2017. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research, 34(1), pp.455-493. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12239 

Lee, B.B., Dobiyanski, A. and Minton, S., 2015. Theories and Empirical Proxies for Corporate Tax Avoidance. Journal of Applied Business & Economics, 17(3). Retrieved from http://digitalcommons.www.na-businesspress.com/JABE/LeeBB_Web17_3_.pdf 

Lyal, R. (2015). Transfer pricing rules and state aid. Fordham Int'l LJ, 38, 1017. Retrieved from https://heinonline.org/HOL/LandingPage?handle=hein.journals/frdint38&div=30&id=&page= 

Muhammadi, A.H., Ahmed, Z. and Habib, A., 2016. Multinational transfer pricing of intangible assets: Indonesian tax auditors’ perspectives. Asian Review of Accounting. Retrieved from https://www.emerald.com/insight/content/doi/10.1108/ARA-10-2014-0112/full/html 

Pukelienė, V. and Kažemekaitytė, A., 2016. Tax behaviour: Assessment of tax compliance in European Union countries. Ekonomika (Economics), 95(2), pp.30-56. Retrieved from https://content.sciendo.com/view/journals/ekon/95/2/article-p30.xml 

Serôdio, P.M., McKee, M. and Stuckler, D., 2018. Coca-Cola–a model of transparency in research partnerships? A network analysis of Coca-Cola’s research funding (2008–2016). Public health nutrition, 21(9), pp.1594-1607. Retrieved from https://www.cambridge.org/core/journals/public-health-nutrition/article/cocacola-a-model-of-transparency-in-research-partnerships-a-network-analysis-of-cocacolas-research-funding-20082016/D73D7B77A29BFED193858AE79780B703

Ylönen, M. and Laine, M., 2015. For logistical reasons only? A case study of tax planning and corporate social responsibility reporting. Critical Perspectives on Accounting, 33, pp.5-23. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S1045235414001270 

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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