3.2 tax evasion v/s tax avoidance
Tax Avoidance
Name of Student
Table of Contents
3.6.1. Interest Limitation Rule 19
1. Introduction
The rapid growth in the globalization around the world helped in enhancing the market value and business of the organizations and corporates. Tax avoidance can be referred to the means through which the corporations legally use the tax regime within the single territory in manner to enhance the advantage by reducing the amount of the tax being paid to the government in legal manner. Tax avoidance has become the most debatable topic for the present time and it has raised the concerns among the people as, many of the big corporations have been in media regarding the tax avoidance that includes Google, Amazon, Starbucks, Cadbury Schweppes, and The double Irish with a Dutch sandwich. This raised concern of the local community as if the big companies like this are paying low taxes then why only common people have to pay the full taxes.
The many unfair practices in the market have led the big corporation to hide their taxes and pay fewer taxes through utilizing the large funds for the accomplishment of the aggressive tax planning. The practice of tax havens has been increased very drastically and the corporations have come in practice of keeping their offshore accounts such as in Ireland, Cayman Island, Bahamas, and many more.
HQ 3: Identify the thin line of difference between the tax avoidance and tax saving
This thesis will cover the chapters including the literature review on the importance of tax emphasizing on what is tax, why it is necessary to pay and how is beneficial for the companies to pay taxes, and what should they do. Followed by this, a comparison has been established between the tax avoidance and tax evasion through considering the comments and statements provided by different writers in their different papers. This thesis describes what and how the tax avoidance influences the economy and how much depth it could affect the economy. In manner to eliminate the assumptions and probabilities, five case studies have been chosen for the experiments and analyzing the impact on the tax economy. The chosen case studies are one of the giant corporations in the world and in UK including Google, Amazon, Starbucks, Cadbury, Schweppes, and the double Irish with a Dutch Sandwich. Anti- Avoidance strategies have been also proposed those could be helpful in fighting against such unethical activities in the economy. Data and information are collected and based on this findings and conclusion have been proposed in this thesis.
2. Reasons, Objectives, and Aims
To propose measures those could be utilized for fighting such unwanted events in the society
To identify the answers of the hypothesis questions listed above
3. Literature Review
3.1 Importance of Tax
3.2 Tax Evasion v/s Tax Avoidance
3.2.1 Transfer Pricing
It is a commonly practiced strategy by the corporates for avoiding the taxes that can be described as the price being set for accomplishing the transactions between the company divisions. Multinational organizations frequently comprise of a few organizations counting for instance braches, backups, offices, and additionally perpetual foundations, which thusly are administered by the parent organization (Armstrong et al. 2015). Exchange evaluating winds up applicable when these organizations enter exchanges between each other or with the parent organization itself. The exchanges may incorporate for illustration cross-fringe exchange of products, protected innovation rights as well as or administrations. At the point when the exchanges occur, it is imperative to set up the rectify exchange cost between the related gatherings.
3.2.4 Controlled foreign companies
The companies those could run at minimum tax paying can be categorized in this chapter as it is nothing but a company, which is applicable for conducting business within the different jurisdictions. Sikes and Verrechia (2016) stated that in manner to “benefit the most of controlled foreign corporations, companies tend to locate them in countries where profit shifting and the taxation is the most favorable and utilizing controlled foreign corporations may deprive the country of residence of the transferring company from taxes that otherwise would have been payable there.”
3.3 Impact of Tax on Economy
One of the most prominent factor that determines the impact of tax on an economy is the income distribution. An economy is driven by the two group of participants one who are rich, little in number and contributes hugely to the economy while, the other that are not so much capable of paying tax, large in number and contributes less than the former (Boustan et al. 2013). Depending on the above stated fact, the taxation mostly depends on the first group while the second does contribute but comparatively less than its counterpart and hence it the taxation system should be income driven. Luxuries goods and services should be imposed with high tax and necessary requirements should be provided with tax redemption. It will reduce the income inequality and allow the second group to earn stability which can prove to be a significant benefit to the economy.
Hence reviewing of the literary work on the impact of tax on the economy reveals that the impact can vary according to the tax policies (Dhaliwal et al. 2017). If devised and implemented appropriately, then the taxation can surge up the economy and in the other case can lead to the downfall of the economy.
3. 4 Tax avoidance impact and causes
The reviewing of the articles on the subject matter of tax avoidance, its impact, and causes has assisted the author to formulate an unbiased opinion towards the tax avoidance because the findings have made it evident that the payers and the collectors both are equally responsible for the tax avoidance trends (Khan, Srinivasan and Tan 2016). The developed unbiased opinion will assist the author of the proposed paper in carrying out an ethical research work. It has also assisted in formulating a plan or platform to pursue with the proposed research work that will guide the author to conclusion of the work.
3.5 Case Studies:
3.5.1 Google
Google was enlisted in one of the giant corporations those had evade billions through practicing tax avoidance. Relationship of the Google (GOOG, -0.58%) between the authorities in Europe have been tough than previous times as the Google is trying to get away from the antitrust charges from the European Commission “and none more so than when it comes to taxes”. Koester et al. (2016) reported that the Google had been moving towards twelve billion dollars or 10.7 billion euros from the Dutch arm of the Google to a Bermuda-based, and is was registered by the Irish-registered affiliate and was named as Google Ireland Holdings. This tax strategy was named as “double Irish, Dutch sandwich,” “reportedly helped its parent company Alphabet enjoy an effective tax rate of just 6% on its non-U.S. profits, since it passes through a comparatively lower Irish corporate tax rate of 12.5% and a Bermudan tax rate of zero (OECD report, 2016).” It was reported that the revenues at the Irish affiliate had been of total sum of 18 billion euros in 2014. The UK government and the Google had just agreed on an agreement for the payment settlement through the payment of $ 181 million or 130 million pound by the Google to the U.K. government n manner to settle all the tax disputes. It has also been reported that the Italy and France have been pursing “the company for hundreds of millions more in back taxes (Hasan et al 2014).”
3.5.2 Apple
3.5.3 Amazon
3.5.4 Starbucks
It was pronounced by the European Commission in October that the Netherlands had "conceded particular assessment favorable circumstances" to Starbucks (SBUX, +0.33%) in 2008, and requested the nation to recuperate back charges that added up to somewhere close to 20 million and 30 million euros. Examinations uncovered that Starbucks had supposedly cut its taxation rate by up to 30 million euros since 2008, paying the Netherlands 2.6 million euros in corporate expense on a pre-charge benefit of 407 million euros, a rate of under 1% (Huseynov, Sardarli and Zhang 2017). The Netherlands has requested and tested the discoveries of the commission, and Starbucks said they bolstered the administration's endeavors.
3.5.5 Cadbury Schweppes
A standout amongst the most critical Union cases identifying with assess arranging is the Cadbury Schweppes case (Cadbury's Schweppes, 2005). The case concerned UK's controlled outside organizations rules set down to keep organizations from setting up auxiliaries in states where the tax assessment was more good. The general thought was that UK parent organizations were not subject to controlled outside organizations rules, where they would have been burdened on non-inhabitant auxiliaries' profits(Barnard, 2013, p. 353). In the Cadbury case a UK parent organization tried to set up two auxiliaries to Ireland. The reason for the backups was to profit by the Irish expense and therefore keep away from higher charges that they would somehow or another have been liable to in the UK (Cadbury's Schweppes, 2005, paras. 17-18).
3.6 Anti-Tax Avoidance Strategy
3.6.1. Interest Limitation Rule
The principle worry of the arrangement is to constrain the deductibility of interests. As indicated by the preliminary work such restrictions are essential because of expanded commitment of companies in unnecessary intrigue installments (Council Directive setting down tenets against charge evasion rehearses that straightforwardly influence the working of the interior market, 2016). Such interests 27 ordinarily happen in thin capitalization plans (Helminen, 2013, pp. 304-305). A definitive motivation behind this arrangement is to hence relieve the distinction on charge treatment of the obligation which as an instrument creates deductible installments, and value that is for the most part non-deductible as to the installments.
3.6.2 Exit Taxation
Exit tax assessment comes down to the condition of takeoff exhausting the EU citizen when the citizen moves home or resources from one purview to another. This is because of hidden increases that could some way or another be totally impose excluded in the condition of takeoff. As indicated by the preliminary work of the ATAD it is basic that the cases in which citizens are liable to leave impose rules and in truth burdened on hidden capital increases, which have aggregated in their exchanged resources (Directive 2016/1164). To expand on this one may envision there is an IT organization set up in state A, since state A offers an perfect condition for an IT startup to work amid its first operational year. In any case, the CIT in state A is moderately high, and the organization chooses to move its hidden resources for a PE in another Member State or exchange. Its expense home to state B with altogether good expense administration, despite the fact that the financial estimation of the capital increases were made in the region of express A however had not understood at the season of the exit
3.6.3 General Anti-Abuse Rule
4. Findings
5. Conclusion
6. References
Andersen, J. and Tveiten, A.H., 2017. The effect of corporate tax avoidance on investments, and its relationship to firm liquidity (Master's thesis, BI Norwegian Business School).
Armstrong, C., Glaeser, S. and Kepler, J.D., 2016. Strategic reactions in corporate tax avoidance
Camille Allain, J. F. A.-G. M., 2016, Facing tax fraud in the European Union - Challenges and perspectives. Themis competition.
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.
Council Directive (EU) 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation
Demere, P., Donohoe, M.P. and Lisowsky, P., 2017. The economic effects of special purpose entities on corporate tax avoidance.
Francis, B.B., Ren, N. and Wu, Q., 2017. Banking deregulation and corporate tax avoidance. China Journal of Accounting Research, 10(2), pp.87-104.
Gaertner, F.B., 2014. CEO After‐Tax compensation incentives and corporate tax avoidance. Contemporary Accounting Research, 31(4), pp.1077-1102.
Huang, H.H., Lobo, G.J., Wang, C. and Xie, H., 2016. Customer concentration and corporate tax avoidance. Journal of Banking & Finance, 72, pp.184-200
Huseynov, F., Sardarli, S. and Zhang, W., 2017. Does index addition affect corporate tax avoidance?. Journal of Corporate Finance, 43, pp.241-259.
McClure, R., Lanis, R., Wells, P. and Govendir, B., 2018. The impact of dividend imputation on corporate tax avoidance: The case of shareholder value. Journal of Corporate Finance, 48, pp.492-514.
OECD, 2015. Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report. Paris: OECD Publishing.
Shevlin, T.J., Shivakumar, L. and Urcan, O., 2017. Macroeconomic effects of aggregate corporate tax avoidance: A cross-country analysis.
Sikes, S.A. and Verrecchia, R., 2016. Aggregate corporate tax avoidance and cost of capital. Work in progress, University of Pennsylvania.