Essay: Tax Avoidance's Impact On Governments And Ethics Of Multinational Corps.

The List of Tax Havens Worldwide

Question:

Discuss about the Methods of Tax avoidance by multinational companies.

Gathering tax is one of the key means by which governments can address destitution. Large corporations are indulging in the practice of tax avoidance which in turn is depriving the governments of the funds it requires to develop infrastructure and address the needs of the people. (Armstrong et al. 2015). The full rundown of the world's most exceedingly terrible tax havens are:  Bermuda,Netherlands, Switzerland, the Cayman Islands, Ireland, the British Virgin Islands, Switzerland, Luxembourg, Singapore,Curaçao,  Hong Kong,  Cyprus, Barbados, Bahamas, Jersey, and Mauritius (Garside 2018) . The UK does not include on the rundown, but rather four domains that the United Kingdom is eventually in charge of do show up: the Cayman Islands, the British Virgin Islands, Jersey and Bermuda,. Many other nations have been enlisted in the list of tax havens. For instance, Ireland hit the headlines over a tax dealing with Apple that empowered the worldwide tech goliath to pay a 0.005 percent corporate expense rate in the nation. The British Virgin Islands is home to the greater part of the 200,000 seaward organizations set up by Mossack Fonseca - the law office at the core of the Panama Papers outrage.

It is to be mentioned that companies all over the world irrespective of their size generally tend to minimize their liability to pay taxes by the process of tax planning. It is to be said that tax planning involves the usage of the tools and mechanisms which the government specifically has designed for the purpose. Allowances, exemptions, rebates and deductions are provided to the companies for the purpose of reducing the burden of taxation (Braithwaite 2017). However, it can be said that tax planning can be defined as tax compliant behavior. However a grey area exists between tax planning and tax avoidance.

It is to be mentioned that that Tax avoidance although is legitimate, however can be considered to be illegitimate when such tax avoidance involves the usage of all those financial arrangements and instruments which are not intended or anticipated  to be used for the same purpose by the governments. The most appropriate example of tax avoidance is the use of tax havens to store the wealth of companies which would be exempted from taxes (McGuire, Wang and Wilson 2014). It is to be mentioned that the act of stacking wealth in tax havens in abroad nations is not prima facie illegal as it cannot be called tax evasion, however such practice is unethical. Such practice is although not in violation of the law literally but violation of it in spirit.

It is to be stated that the governments of countries impose tax burdens on the residents of the countries in order to for a reserve which is expected to have real impacts on the lives of people therefore the exempting multinational companies from paying taxes can be considered to be unethical (Contractor 2016). Tax avoiding is basically getting away from a social commitment. Tax evasion can make a business organization helpless against accusations of covetousness and narrow-mindedness, harming its notoriety and devastating people in general's trust. Multinational companies like Amazon and Starbucks have been boycotted and vilified by the public for their policies of tax avoidance (the Guardian 2018).

Tax Planning: Usage of Government-Designed Tools and Mechanisms for Tax Minimization

It is to be further mentioned according to the result of the IBE survey conducted in 2012 by IpsosMori that the practice of tax evasion has been perceived as the ethical issue of utmost importance that business and companies need to directly address. Paying taxes in countries in which the companies primarily conduct their operations and business can be regarded as the social obligation and responsibility of the companies. Other social responsibilities of companies include maintaining and funds for public services such as infrastructure, education and healthcare (Lanis and Richardson 2015). It can be stated that the process of tax avoidance has been regarded as an extremely unethical practice that has a negative impact on the image and integrity of a company. It is to be mentioned that it is generally argued by the company directors that it is their duty to maximize the output of the company while keeping the cost incurred for maximizing the output at a bare minimum as it is in the best interest of the shareholders of the company (West 2017).

It is also the duty of the directors to comply with legal standards while deciding the course of action of the companies.  It can be said that businesses are expected to contribute to the economy of the nations where they are operational in addition to paying corporation tax. In the United Kingdom companies pay taxes through the Pay As You Earn (PAYE) system. In other countries companies can contribute to the economy of such countries by entering into agreements to pay infrastructure costs.

It is to be mentioned that multinational companies that are operational and quite successful are paying very less as corporation tax. Corporation tax is tax that is paid on the profits made by the companies (Windsor 2015). Therefore it can be said that companies are not bound to pay taxes if the same makes no profits as per the rule of calculating corporation tax. However, companies operate primarily for the purpose of earning profits. Thus the issue that is underlying in this situation is that whether the profits earned by the company are being properly calculated and revealed. Thus it can be said that a company is not bound to pay tax in spite of having high sales just for the reason of not making profits. According to the estimate as provided by the HMRC there exists a huge gap between the sum of corporation tax as paid by the firms and the amount of money that would have actually been paid as corporation tax if all multinational companies complied with the ethical standards and the spirit of the law. According to the 2011ActionAidreport it has been pointed out that 98 of the top 100 FTSE companies have been reported to reduce their taxation liabilities by the use of tax havens. The people and the governments expect the multinational companies to pay a fair share of taxes however the term fair share is itself subjective. It has been declared by the HMRC in the year 2008 that it wants to make sure that the burden of unreasonable taxes does not fall unfairly on the tax payers who are innocent and abide the laws (the Guardian 2018). However, it has failed to provide a specific definition to the term unfair in context of tax avoidance.

Tax Avoidance: Legitimate but Unethical Practice

Tax haven isn't a characterize term, yet in most utilization, it alludes to a nation – much of the time little ones – where non-inhabitants can spare taxes by leading different ventures, exchanges, and exercises. Characteristics that make a nation a tax haven comprise low or non-existent tax rules which are pertinent to foreigners; strict money related secrecy and bank laws; and a properly developed legal, financial and communication structure (Zucman 2015). Numerous tax haven nations are little island countries, for example, Bermuda, the British Virgin Islands, and the Cayman Islands. Focal component of a tax haven is its laws and different procedures that can be utilized to dodge or keep away from the tax laws or controls of different purviews (West 2017). Minimization of tax is the primary essential element of these tax havens.

The OECD 1998 report characterizes a tax haven as a purview which has no or just ostensible taxes and bids itself as a place to be utilized by non-occupants to escape tax in their nation of living arrangement; absence of transparence; laws or managerial practices which keep the powerful trade of major data with changed governments on taxpayer profiting from the low or no tax locale. It can be stated that Tax Havens can cause distortions in the economy of a county as well as the global economy due creation of discrepancy between real economic activity and economic activity that seems only apparent in the tax haven. The main factor that contributes to the discrepancy is that the much of the economic activity that seems to be happening in the tax havens actually occur at a different place (Lanis and Richardson 2015). For instance much of the income of the U.S. subsidiaries in tax havens has their economic locations either in the United States or in any other foreign country. The techniques which the companies use to shift their income to tax havens for the purpose of tax avoidance include manipulation of the of transfer prices and re-structuring of intra-firm lending (Payne and Raiborn2018).. The firms’ ability to divert incomes to countries which have low tax rates has tax implications on the original location of the investment.

It can be said that the term secrecy jurisdictions can also be used to describe tax havens, international centers of finance and offshore financial centers (Gumpert, Hines and Schnitzer 2016). However it is to be added that secrecy jurisdictions can be described in three segments. Firstly Secrecy jurisdictions can be defined as those places which have been intentionally created for providing benefits to the non-residents of the geographic domain (Windsor 2015). Secondly it can be said that secrecy jurisdictions are created for the purpose of designing regulation to be used by non-residents in their territories which would ultimately aim to undermine legislation or regulation of another jurisdiction. Thirdly these secrecy jurisdictions are created as legally backed veil in order to ensure that the nonresidents who make use of the legislations and regulations of these secrecy jurisdictions are not identified. Thus it can be said that the secrecy jurisdictions encourage people living outside their territory to make use of their regulations and legislations for breaking the law and remain unidentified while doing so.

Impact of Tax Avoidance on Governments

In the year 2003 the General Anti-avoidance Rule (GAAR) was implemented in the public interest for the purpose of stopping tax evasion and avoidance. It can be stated that GAAR was implemented as evidence relating to large scale tax avoidance by companies and individuals operational in the finance and other sectors surfaced. In the 1990s New Labour in the United Kingdom proposed the formation of General Anti-avoidance Rule for taxation. It is to be said that GAAR was designed primarily for the purpose of shedding light on the issue of tax avoidance and providing insight about what measures of tax avoidance opted by the companies are acceptable and the measures that are not acceptable (Gov.uk 2018). It also intends to prevent the tax schemes which are presumed by the government to be morally wrong and abusive. However, the idea of what is considered to reasonable is still subjective and is not defined by legislation. 

Tax planning industry in Australia is required to get a permit and clearance for the implementation of any tax avoiding scheme. Tax policies in Australia must be in compliance with the principles of ethics such as consistency, transparency and accountability. It is to be mentioned that arrangements of tax planning that are beyond law’s intent would be considered to be unethical and involving the intention to exploit the tax system.

Conclusion

Thus in conclusion it can be said that tax avoidance is a process of avoiding tax liability by resorting to unethical means. Although tax avoidance is nor unlawful but is however unethical as the tax avoidance increases the burden of taxation of the taxpayers who abide by the law both literally and in spirit of it. Many Multinational companies in the recent years have been exposed to be indulging in the process of tax avoidance to reduce their tax liabilities. However, according to the directors of the companies it can be said that the practice of tax avoidance is in the best interest of the shareholders of the company. Tax avoidance as we know it is different from tax evasion which is illegal. The use of tax havens and secrecy jurisdictions are done by many individuals and companies alike for the purpose of reducing tax liabilities. It can be said that tax avoidance is a great concern for the governments and several steps have been taken to ensure that the business organizations pay their reasonable share of taxes.

Reference list:

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Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

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Gumpert, A., Hines Jr, J.R. and Schnitzer, M., 2016.Multinational firms and tax havens. Review of Economics and Statistics, 98(4), pp.713-727.

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McGuire, S.T., Wang, D. and Wilson, R.J., 2014. Dual class ownership and tax avoidance. The Accounting Review, 89(4), pp.1487-1516.

Payne, D.M. and Raiborn, C.A., 2018. Aggressive tax avoidance: A conundrum for stakeholders, governments, and morality. Journal of Business Ethics, 147(3), pp.469-487.

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West, A., 2017. Multinational tax avoidance: Virtue ethics and the role of accountants. Journal of Business Ethics, pp.1-14.

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Zucman, G., 2015. The hidden wealth of nations: The scourge of tax havens. University of Chicago Press.