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A Critical Discussion on Evasion and Avoidance of Tax

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COURSEWORK IN TAXATION PRICIPLES AND PRACTICE IN Msc FINANCE & ACCOUNTING

TOPIC

A CRITICAL DISCUSSION ON EVASION AND AVOIDANCE OF TAX

Submitted to: KUMARI JUDDOO

Submitted by: Anthony Emeka Chukwumah

W1629498

2017/18

Word count: 2793


                                                   OVERVIEW

Tax is an approved means of government intervention in the economy of a country to improve performance. It is a compulsory contribution levied on workers and business profits by government. The multinational companies are corporations with large multiple operations in different countries in the world where it operates, attempts in different forms or ways in functions to avoid or evade the payment of tax. This has detrimental impact on the nation revenue, thereby effects the provision of infrastructures, public services and utilities to the citizens. A fair tax system in any nation is the key to building in fairer society.

Shareholders high demand to earnings and pursue higher profits to enrich multinational companies globally has led into dynamic development of complex structures to exploit the uncertainties in tax laws thereby avoid or evade tax payments. The multinational companies has therefore created a tax heaven an avenue shaped by globalisations to facilitate the anti-social tax practice.

TAX EVASION

Evasion of tax payment is the difference between the amount of income expected to be reported and the amount reported to tax authority which is an unlawful practice.  This is using illegal methods to lower the amount of tax due to the government.

According to argument from Ballas & Tsoukas, [1998], with Preobragenskay and McGee, [1998 & 2004], “that government has no good mechanism to collect taxes hence the evasion”. Also, “that the government does not deserve workers portion of income as tax”. Dafinone, 2005; Aloba, 2002 and Spicer, 1975, says that evasion and avoidance of tax results in a loss of tax revenues, decay the opportunities of realising the sharing or equity goal of taxations and if predominant, more taxpayers may join the other tax evaders because of loss of faith in the tax administration system.

TAX AVOIDANCE

When a multinational corporation under the canopy of a legality prepares its financial affairs to minimize tax liability within the ambit of the law is avoidance of tax. Farock [      ], states that it is a techniques by multinational corporation to lower, exempt or defer tax with the system of another country operations that don’t tax profits of companies foreign affiliated.

Barkre, 2007, further emphasis that the professional accounting technologies, against the public interest they claim to protect structure the financial gains with the aid of accounting firms, as their clients, prepares and structure the financial report to the detriment of the public interest.

Walter Block, William kordsmeier and Joseph Horton argues that the MNC hang on government inequality in social distributions as measured by the population to avoid tax.

MEASURES BY MULTINATIONAL CORPORATIONS AVOID OR MINIMISE TAXES

The competitive nature between companies that operates in lower-tax and higher-tax nations means that a multinational company that operates in a higher-tax nation has less profit and shareholders dividends are reduced. This further means that less is reinvested into research and development that governs the effectiveness of firms in a global competition.

The multinational corporations therefore filled its financial reporting in tax heavens as in countries where laws allow for secrecy surrounding legal entities permit for low or even zero tax rate for non-residents companies, making them more desirable.

Lenin argued that “the growth of capital that cannot be invested at home for profit are now circulated in the finance capitalism and industry in Western countries”. Therefore, capitals are invested outside the domain into the subsidiary non-industrial nations to sustain its own growth, [Loomba, 1998].

[A] TRANSFER PRICING

This measure by multinational companies is the use of invoice values for goods and services shipped as export. The multinational companies decides the unit value which are usually unfair by tax considerations. The idea to pay higher amount to the affiliate company where tax are lower and show lower values where tax tariff are higher.

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Figure 1. Country A & B transactions with tax rates

Before Change in Transfer Price

(Export Shipment Invoiced at  £1.30 E ach)  

After Change in Transfer Price  

(Export Shipment Invoiced at  £1.50 E ach)  

 

Firm A

Firm B  

Firm A  

Firm B  

 

Tax Rate 15%  

Tax Rate 30%  

Tax Rate 15%  

Tax Rate 30%  

Pre-tax Profit  

£1,000  

£2,000  

£1,500  

£1,500  

Tax  

£150  

£600  

£225  

£450  

After-tax Profit  

£850  

£1,400  

£1,275  

£1,050  

Total MNC Profit  

£850 + £1,400 = £2,250  

£1,275 + £1,050 = £2,325  

 

The above transactions are commonly used when the exporter and importer are sister multinational companies and decisions are internally taken depending on tax differences between nations they operates. It is seen as under value of products to reduce its tax tariff liability.

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