Professional Practice - Taxation

Overlaps & Differences Between Tax Planning, Tax Avoidance & Tax Evasion

According to Held, McGrew, Goldbatt, & Perraton in the present era ideologies of free trade, deconstructing of trade barriers & exchange controls & making short-term financial gains are being done under the guise of globalization. However in this changing time, individuals are being treated as mere source of securing private profits. This never ending walk of global free markets & privatization will keep on contributing to the fraudulent practices to happen. 

Tax Planning

Tax planning or tax effective investing is all together a same terminology. Arranging the financial affairs in such a way where tax liability goes down is referred as tax planning. Tax planning ought to be carried out within the tax laws and rules.

Tax Avoidance

While beside tax planning tax minimization option or schemes which are not falling in the legal context pulls the individual more. However such schemes are considered as tax avoidance. Tax avoidance schemes ruins the legal procedure and norms by knowingly. An individual gets attracted towards these schemes very easily. Nevertheless indulging oneself in such schemes can hamper the current investment very worst & this may lead to incur penalties, interests & pay back tax.

Tax Evasion

However tax evasion refers to the illegal practices done by the person to neglect the tax liabilities. Tax evasion is the result of either dodge of tax payments or dodge of assessment of tax liability. For instance – if an individual works part time in an organization and gets the payment for work done in cash, then it would be considered as a tax evasion reason being an individual is trying to escape him from paying tax liability deliberately.

Overlapping Among Tax Planning, Tax Avoidance & Tax Evasion

Under the guise of tax planning wealthy elites are pursuing tax avoidance practices where the organizations follow the schemes and arrangements to minimize their tax liabilities where such schemes does not even fall in legitimate context and meanwhile later on it hampers the original investment of the individual as well. Tax avoidance can become tax evasion gradually, if an individual tries to save the amount of tax payable by doing misconduct. No doubt that all the three terminologies have different meanings but along with the fact, these are overlapping each other as well. Among all the three the common aim is to save the amount from the tax liabilities. 

Difference

Tax planning & tax avoidance is legal in nature while tax evasion is illegal in nature. Another difference is based on the attribute where tax planning is moral, tax avoidance is immoral & tax evasion is illegal. Tax planning is a procedure of saving tax, while tax avoidance is neglecting the tax liabilities; lastly tax evasion is an activity where the individual tries to conceal tax liability. Tax planning and tax avoidance are allowable while on the contrary tax evasion is not allowable conduct.

Concept of Transfer Pricing & the Relation of Transfer Pricing with Tax Planning, Tax Avoidance & Tax Evasion

Meaning of Transfer Pricing

The value which is associated with goods or services and transferred between the respective parties can be considered as transfer pricing. Transfer pricing is the price which is rewarded for the good and services transferred from one division of the company to another divisions which are situated in multiple nations. Transfer of pricing happens because of numerous typical transactions, such as: purchase of raw material, sale or purchase of intangibles, sale or purchase of machinery, sales of finished goods, loans received or paid, reimbursement of expenses either paid or received, IT enabled services, management fees, software development fees, technical service fees and so on. The main purpose behind the transfer pricing are managing profits separately for different divisions & evaluating performances of multiple divisions’ separately which are situated worldwide. Transfer of pricing is a technique for allocating costs, revenues among subsidiaries & joint ventures within a group related organizations optimally. Such method of transfer pricing contributes in dodge taxes and facilitate more capital for the company. Transfer pricing practice also contributes to opportunities for bringing out values for increasing profits, will help in improvising social factor and so on.

Transfer pricing is important for the purpose management accounting & reporting, distributing the profits and expenses to the different divisions situated in worldwide. Sometimes subsidiary of an organization is bifurcated into numerous segments or accounted as standalone business. Transfer pricing serves in allocating revenue and expenses to the different entities in an appropriate way. The profitability of the subsidiary company relies on the price on which the transaction is taking place. Transfer pricing technique also affects the shareholder’s wealth reason being they rely on company’s decisions.

Challenges or Risks Associated in Transfer Pricing

There are numerous challenges which are associated with transfer pricing. Such are:

  • There may be differences regarding the opinions between subsidiaries divisional mangers with respect to setting the transfer price.
  • Extra manpower, costs, & time will be required for designing the transfer prices & creating the accounting systems to meet the standard transfer price.
  • Transfer pricing issue in MNCs is a challenging task for the management
  • Transfer pricing is also challenging for some departments, for example- particular retail store don’t work as expected reason being such business do not provide the same platform to evaluate and assess the profits.
  • Transfer pricing would cause maladjusted behavior among the managers of the organizations.

Benefits of Transfer Pricing

Since every coin has two side “head” & “tail”, similarly everything has two side pros and cons. Below are the benefits of transfer pricing,

  • Transfer pricing supports in declining the duty costs by on board goods into high tariff nations at minimal transfer price in order to do the transactions at low duty base.
  • Transfer pricing also assist in decreasing income taxes in high tax countries by overcharging on goods that are being transferred to different divisions in such countries where the tax rate is comparatively less by providing them a high profit margins.

Relation Between Transfer Pricing & Tax Planning/ Tax Avoidance/ Tax Evasion

The survey on “Transfer pricing: Strategies, Practices & Tax Minimization” was conducted by Kenneth Klassen, Petro Lisowsky, & Devan Mescall in 2014. The survey was conducted on tax executives of 219 MNCs where it has been depicted that transfer prices is an aid to minimize tax liability of an individual or a company. However the other side shown that MNCs are persistent tax avoiders and it has been detected in a survey those MNCs focuses on transfer pricing tactics on tax compliances rather than trying to decrease cash taxes paid. An experienced tax director, & large tax budgets & tax planners from renowned companies who transfer pricing are linked to lesser ETRs. All in all, the survey had shown the distinctiveness in transfer pricing tactics & practices which are being carried out for aid in tax reduction.

 In the present era, MNCs conduct different tax objectives with their transfer pricing plan & it had been depicted that organization’s primary goal is to reduce or neglect tax liabilities with transfer pricing conduct. However cross border transfer pricing is carried out in such a way where the MNCs serve to political factor, social factor, financial factor which affects the business. Media also strengthen this perception & condemn the strategy of transfer pricing for the less amount of tax being paid by the big giants or profitable companies, such as Starbucks, Google, & eBay. Global tax authorities had also shown the concern regarding the loss of tax revenues that was certainly because of the aggressive transfer pricing strategy.

The study on an accounting and economics literature also kingpin the creation of MNCs tax departments to justify the connection tax outcomes & transfer pricing. The survey was conducted on 219 tax directors who were associated in multiple companies, the aim of the study was to detect and assess their transfer pricing tactics based on tax compliance. The result of the study was correlated to company’s financial reporting factor, demographic factor which comprises of their tax reserves (unknown tax benefits) and effective tax rates will also lay out a big picture of the changes in transfer pricing tactics and corporate taxes outcomes. However it was seen that maximum organizations evaluates their transfer pricing strategies based on tax minimization measures while on the other side the misconducts in transfer pricing by MNCs aids in reducing their tax burdens.

In the final scrutiny of the study, it has been found that cash tax goals & compliance goals can create tax avoidance, as it is operated in tax heaven jurisdiction which declines the entire transfer pricing risk link to company’s non-tax haven operations. However, cash tax goals companies which do not benefit from tax heaven operations results in marginal lesser tax.

The European countries find themselves in grapples to discover the resources needed to close their budget deficits & faced challenges to cut their expenses. Tax avoidance is presented ubiquitously even in the TNCs like Amazon, Google, Microsoft, and Starbucks and so on. Joint ventures of TNCs can play with their intra company transaction accounts by offering each other at more or less price based on the situations of the economy. One company of a particular nation can transfer its profit to another company of another nation with less corporate taxes. However this practice of the countries impacts the government revenues adversely. That is why companies like Google, Amazon & Microsoft are generating abnormal profits and making billions of dollars in revenue aspect. These companies with paying minimal or negligible tax or no corporate tax in European countries by giving out their earning to different tax jurisdictions. They pursue misconduct & detect loopholes in different countries jurisdictions to save tax liabilities.

The British parliament also condemns US companies for their consistent tax avoidance practices. The report generated by British Parliament emphasizes on companies like Google, Amazon which uses lower tax jurisdiction in European countries like Switzerland & Ireland to record revenues which is earned in France and Germany. It had been found that Starbucks, who made revenue of $ 398 million, paid no tax in Britain. Starbucks was allocating its revenue or taxable income in Britain by funneling its earning through its subsidiaries companies. Another example of tax avoidance had seen Google where the customers of Google situated in Europe, signed the contract with its subsidiary in Ireland. Another classic example of tax avoidance is Amazon where the fiscal authorities of France imposed a penalty of $ 252 million for putting the income in other nation’s jurisdictions. In the year 2011, Amazon recorded $ 11.6 billion revenue in Europe but it reported after tax profit $ 20 million & paid only $ 8 million as a corporate tax.

In Denmark the concern regarding the transfer pricing got raised in the year 2010, where the revolution was depicted regarding tax avoidance by the MNCs, it’s been found that half of the organizations were not paying corporate taxes in the last one year & 28% of companies didn’t paid taxes for last three years.

These were the classic instances of tax avoidance by the companies. Moreover the story is still yet not ended. It has become a trend now. Even developed nations like United States, United Kingdom have been indulged in such practice. Manipulative transfer pricing by the MNCs of nation has become a tendency, the motive behind the tax avoidance and tax evasion is to maximize the private gains. The fiscal authorities of developed nations are inkling their scrutiny on the multinational companies in order to safeguard their revenues.

References for Professional Practice - Taxation

Cobham, A., 2005. Tax evasion, tax avoidance and development finance. Queen Elizabeth House, Série documents de travail, 129, pp.1-20.

Jenkins, R. and Newell, P., 2013. CSR, tax and development. Third World Quarterly, 34(3), pp.378-396.

Forstater, M., 2018. Illicit financial flows, trade misinvoicing, and multinational tax avoidance: the same or different?. CGD policy paper, 123, p.29.

Cobham, A. and Janský, P., 2018. Global distribution of revenue loss from corporate tax avoidance: re‐estimation and country results. Journal of International Development, 30(2), pp.206-232.

Hampton, M.P. and Sikka, P., 2005, September. Tax avoidance and global development. In Accounting Forum (Vol. 29, No. 3, pp. 245-248). Taylor & Francis.

Solilova, V. and Nerudova, D., 2013. Transfer pricing: general model for tax planning. Ekonomický časopis (Journal of Economics), 6(61), pp.597-617.

Tang, R.Y., 1992. Transfer pricing in the 1990s. Strategic Finance, 73(8), p.22.

Overesch, M., 2006. Transfer pricing of intrafirm sales as a profit shifting channel-Evidence from German firm data. ZEW-Centre for European Economic Research Discussion Paper, (06-084).

Cools, M., Emmanuel, C. and Jorissen, A., 2008. Management control in the transfer pricing tax compliant multinational enterprise. Accounting, Organizations and Society, 33(6), pp.603-628.

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.

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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