Describe about the Taxation PhD research topic in tax avoidance and then write the proposal.
A number of direct and indirect tax liabilities upon individuals and corporations attribute developed countries. In contrast to this, developing countries encounter various political, administration and social difficulties while establishing a sound public finance system. As a result, these countries become vulnerable to huge tax avoidance and evasion activities by individuals and corporations. This has become one of the major reasons of differences between developed and developing countries in relation with mobilization of one’s own resources. Although tax revenues of most countries amounts much of the gross national income, it cannot be assume that this is because of an enhancement in taxation system of such countries. According to various studies, the increment of tax revenues in countries is mostly due to natural resource taxes like income from royalty and production sharing etc. Considering the taxation policies of UK, it can be seen that the UK tax law is very complex but with days passing by, these complexities have also significantly increased, leading to an increase in business compliance cost too (Gammie, 2008). This is the main reason why tax avoidance has increased. Furthermore, taxation policies of various countries characterized by those tax structures that do not align with international standards by low level of compliances and absence of proper tax policy management. However, it has been observed that many developing countries portray a trend towards prevalence of indirect taxes and many even rely upon such indirect taxes like VAT (Value-Added Tax) with indirect taxes amounting to more than two-third of total revenue from taxes. Tax avoidance and evasion are such phenomena’s that exist from the origination of taxation itself. Whenever and wherever authorities levy taxes, the corporations and individuals find ways to avoid it. Though this problem exists from a very long time, it becomes more disturbing in this era of globalization as it diversifies the extent of opportunities to avoid taxes while significantly minimizing chances of being caught (Bair, 2005). Hence, tax avoidance, as a matter of fact is highly subjective in nature and distinguishing between tax evasion and avoidance has no significance taking into consideration the circumstances prevailing in the current scenario. Hence, avoidance of tax is a prime factor that has created loopholes in the taxation policies and developed a gap between what is collected in revenue by the authorities and what they forecast why it must be collected.
Statement of the problem
The prosperity of any country rests on the resources that are available and present. Tax revenues assume a place of special importance because it is the backbone of the economy. The tax gap of UK is estimate to be around £122 billion a year that has increased since 2010. This can be cited due to tax avoidance and evasion that rests on collectibles. Tax avoidance, as well as evasion are antisocial in nature and degrade the government hence, hindering the overall progress of the economy. This has seen immense debate and various reforms program has been structured to eliminate the problem. Tax avoidance and evasion has reduced the revenue for the government and the regulations must be tightening to check the process.
Aims and objectives
The research here aims at evaluation of tax avoidance and the negative impact it have on the economy as a whole. Encountering such tax avoidance has become very necessary and with the help of this assignment, a particular research topic in tax avoidance selected together with its proposals, so that the cause of avoidance can be identified and precisely dealt with. Further, the aim of this is to stress upon the issue tax avoidance is an ethical issue and fuels global inequality. To ensure a correct presentation both the method that is qualitative, as well as quantitative used in this research.
The following questions structured to ensure the objective of the study:
- Why and in what manner do the individuals, as well as multinationals avoid taxes in UK
- What are the impact of tax avoidance and tax evasion on the economy?
- What are the reasons for tax avoidance
- How the process of tax avoidance and evasion is controlled and defeated?
In this scenario, a design that is non-experimental in nature is use to collect, as well as evaluate data. A standard questionnaire will be structure to extract information from various officials, consultants, and taxpayers. A qualitative, as well as quantitative research utilized to shed light on the behavior of the taxpayers. Moreover, the opinions and views of the tax consultants will be use to comment on the avoidance and evasion process. The questionnaire will be prepared in a manner that will stress on the critical part and enhances the prospect of the research. Moreover, researches carried out by scholars will be referring to gather relevant information.
A research is formal and systematic in nature where numbers are use to provide relevant information. This method helps to provide relevant information on variables that examines the links between variables and ascertain the cause and effect of such issues. The quantitative part of this research includes the questionnaires administration to provide relevant findings on the influence of tax evasion on the economy.
This research aims at studying of the natural settings that aims to predict and clear the terms. This research aims to penetrate to the greater value that describes the topic. It takes concern of the interpretative approach and provides strong priority to the data contribution. The view of the respondent based on the beliefs utilized to come to a decision that will have a strong bearing on tax evasion and avoidance.
The population of the research work will contain of the tax consultants and taxpayers. The research conducted at the filing centers and offices. Moreover, taxpayer from various organizations will be included. The entire population of UK cannot be studied, as the population size is huge. Sampling technique is utilized because cost is less, collection of data is fast, and the data set is less. This leads to homogeneity and enhances the accuracy, as well as the quality of data. The sample size of 60 will be random in nature and taken into assumption that all are well verse with the knowledge of tax.
Data Gathering process
This research work includes the following question to gather data:
There were two sections. Section A comprises of four question that attempts to gather relevant information about the respondents, as well as the organization. The first question of section B strives the respondent category while the other 19 aims to extract basic information relating to tax avoidance.
Methods of tax avoidance
The utilization of legal loopholes or legal privileges that is providing to a citizen or company by their government called tax avoidance. It is the legal right of a person given by the government in order to minimize the tax burden and level of tax evasion but it takes place usually in contrast to the purpose of tax laws. For example, strategic planning where arrangement of financial affairs take place in such a way so that tax liabilities can be minimized like taking benefits from tax credits or employing tax deductions (Baldacchino & Mertram, 2009). Other methods employed by companies and individuals of United Kingdom are:
Tax avoidance through change of country and DTAA
In order to minimize tax burden, individuals constantly travel to different countries or shifts permanently to countries having lower or no taxation policies. Such a country is referring as tax havens. However, in the current scenario, countries like UK have realized the significant loss of revenue through such method and as a result; they are taxing companies and individuals on every income earned by them throughout the whole world. A policy where companies and individuals are tax by the country of their origin and country of their residence called double taxation. Countries like UK have initiated taxes on earned income or income realized within the country irrespective of the country of the firm has or individual is residence. Although this policy has been adopted by many countries, there are countries who neglect such treaties with other countries especially tax havens (Forbes, 2005).
Manipulation of transfer price
The act of pricing goods, services and intangibles when the same provided for consumption to a related party like subsidiary. This can either be market-based that is equal to what is charged in the markets for similar goods or it can also be non-market based. There can be both external and internal reasons for transfer pricing (Emmanuel & Mehafdi, 1994). External reasons include tariffs and taxes while internal reason includes performance monitoring and motivating managers. Transfer pricing has become one of the main weapons used by UK companies and it depicts a manipulation idea that exists between the enterprises that are related to each other. In UK, transfer pricing takes place between related enterprises like parent companies and their subsidiaries or between same parent companies (Muchlinski, 1999). According to studies, transfer pricing in UK happen between parent companies and foreign affiliates. The manipulation of transfer pricing is mainly done to eliminate before tax profit and increase after tax profit of MNE. It helps to transfer funds to such an entity that is lacking in liquidity. In the case of Valium and Librium in UK, the mechanism of transfer pricing was used when their prices were high. When a parent company namely Hoffman-La-Roche was established, prices were manipulated on specifically those transactions where products of Roche were ordered. Due to this, the prices of Valium were slashed by 26% and Librium by 40% respectively.
Shell Holding Companies
These can be found in such places where an enlarged network of tax is present and which provides a low rate of capital gain and dividend. This is one of the major methods adopted by companies of UK to avoid tax (Cooper, 1993). The holding company can be a shell company that is associated with other operations rather than real production or trading.
Although the matter of tax avoidance represents a huge problem for developing and developed countries like UK, data and literature related to this matter are very limited. This can be partly because the extent of tax avoidance is very hard to be predicting because phenomena’s are difficult to observe and thus precise data is missing (Castells, 2000). Therefore, there are no empirical findings that portray a clearer picture on the size of this problem and importance of several kinds of tax avoidance as discussed above. However, government analysts who work with HMRC produce a tax gap of UK in line with protocols, principles, and values. These analysts to obtain annual estimates that are revised as soon as fresh data flashes use various analytical methods and range of external and internal data. The tax gap of UK is estimated to be around £122 billion a year that has increased since 2010. The amount of loss per year estimated that time was £95 billion with £25 billion of taxes owed at any particular time. In the current scenario, this annual loss estimated to increase to a total of £122 billion. This gap is very important because £122 billion in a year is just less than the annual budget for NHS. In other words, it is significant enough to cover total cost of education in UK with more than £20 billion still left over. This tax gap is the difference between tax amount that must be paid in UK and tax amount that is originally paid. It comprises of tax evasion and avoidance that is known to be owed but is paid late or never paid. Studies estimate that this avoidance of tax can cause cost of £19 billion in a year to UK and unpaid taxes can collectively result in loss of revenues upto £18billion in a year. Estimates on loss on revenue in developing countries due to profit shift can vary between US$34 billion and US$160 billion in a single year. According to GFI (Global Financial Integrity), developing countries can lose between US$858 billion to US$1.05 trillion in a year due to flow of illicit finance, that is money illegally transferred, utilized or earned. Furthermore, there are several renowned companies who have come under the observation of tax authorities taking into consideration their level of corporate tax (Moffett et. al, 2011). These companies are namely:
Taking into consideration, the research conducted for the purpose of measurement of avoidance of tax, it was observe that very little Amazon was paying amount of tax for the year between 2009 and 2011. Amazon came under the observation of tax authorities because it had huge sales of £3.35 billion in the year 2011 but still the tax paid by it was only £1.8 million. Amazon UK employs staff of more than 15000 people and is highly recognized for its service to the Luxembourg Company.
The UK unit of Google paid around £6 million to the treasury in the year 2011 but it had a turnover of £395 million that attracted the attention of authorities. Even in 2009, it had a tax rate of 2.5% on the non-US gains but most of these non-US sales of Google were billed in Ireland (Dharmapala & Hines, 2009). For example, Google Ireland paid for various services provided by the staff of 1300 people in UK but most of the sales (£3.2 billion) in UK was scattered through Ireland.
In 2011, Starbucks obtained massive sales of £400 million in UK but it paid no corporation tax. According to the researches, Starbucks transferred some amount of its money to a Dutch sister company through payments in royalty and bought coffee beans from Switzerland. Furthermore, it paid high rates of interest to borrow from other parts of the business (Christian, 2013).
According to the reports, Apple furnished an effective tax rate of around 2.5% on its non-US gains that is approximately 60% of the total gains. It also had its sales scattered through subsidiaries of Ireland. An investigation by a US Senate stated that the arrangements of tax made my apple do not reflect its business operations (Baldacchino & Bertmen, 2009).
This measurement portrays a clearer picture on the diversification of the problem not only in UK but also throughout the whole world. It must however be noted that underlying assumptions and estimates can vary widely and hence they are neither comparable nor reliable. Altogether, it must not be ignored that avoidance of tax has surely furnished a major problem that is slowly spreading and destroying every economy (Christian, 2013). Encountering such tax gap can never be possible but with political support, serious and authentic steps initiated to address the issues.
Reasons for tax avoidance and ethical issues
There are numerous reasons regarding tax avoidance and evasion. Understanding of these reasons is vital because it helps to develop effective proposals that can encounter such tax issues. These reasons can be divided into two parts. The first part consists of matters that can negatively affect taxpayer’s compliance with taxation policies while the second part consists of reasons for ineffective capacities of fiscal courts and tax administration in order to enforce tax policies (Murphy, 2008).
Low level of compliance
- Low qualities of service in return for the taxes paid
Citizens of not only UK but also every other country expect that some kind of benefit can be obtained in return for the taxes they have paid. Nevertheless, if the authorities fail to provide or provides insufficiently even the basic amenities to them, they will hesitate to pay taxes and tax avoidance or evasion may be the outcome (Gammie, 2008). Lack of accountability and transparency in use of public resources leads to distrust within the public with respect to government as well as the tax system. Thus, it also increases the willingness to avoid taxes (Murphy, 2008). Because of high corruption levels, corporations and individuals become uncertain whether the taxes paid by them are employed for financing public goods and services or not, thereby leading to tax avoidance (Blyar, 2005) Powerful fiscal courts are important to safeguard the rights of taxpayers but if the legal jurisdiction itself does not operate according to the law, citizens start fearing of discrimination, arbitrariness etc. Furthermore, lack of law minimizes the transparency level of public action and initiates distrust among people (Dalsgaard, 2005).
Enforcement of weak tax laws
- Ineffectiveness in tax collection
Many developing countries face complexities with regard to tax collection. Although with due passage of time, some progress made but still proper functioning of taxation policies pose an acute difficulty in these countries. Problems regarding ineffectiveness of tax collection also arise from the organizational system of tax administration and its association with finance ministry (Murphy, 2008).
- Inefficiency in prosecuting and detecting unfair tax practices
An appropriate body of tax investigation is required for prosecuting and detecting cases of unfair tax practices. Lack of efficient abilities in administration of tax minimizes the probability of tax detection that again induces the decision of taxpayers, whether to avoid tax or not (Castells, 2011).
Proposal or strategies to prevent tax avoidance
Few strategies can be employed against the tax avoidance practice. The following proposals employed by every country. These include:
- Providing opportunities to taxpayers to declare what they owe
In relation to the UK government, campaigns operated to tell people that they must inform HMRC of what they accurately owe atleast before they come under observation. So far, HMRC has raised £611 million from voluntary disclosures and around £395 million from huge number of follow-up operations (Murphy, 2012).
HMRC has been taking strict legal actions against those who do not come forward and disclose their income. Enhanced allocation of resources is being done so that the speed and number of cases related to tax avoidance and evasion can be brought up before the civil and criminal courts. Even local task forces are being set up that purposes to deal with tax frauds using both civil and criminal powers (Murphy, 2012). With due passage of time, more people are prosecuted who avoid tax.
- Prevention of avoidance mainly by MNC’s
Few multinational companies like Google, Amazon etc have avoid paying taxes by shifting gains away from the place where business activities created such profits. This process is called BEPS (base erosion and profit shifting). International tax standards have not been altered since many years and it is high time to update such standards so that tax avoidance can be prevented Fuest et. al, 2007). Even more people must be recruited by HMRC to recognize risks associated with large businesses.
- Use of data and new technology
Investment must be done in new data and innovative technologies so that avoidance risks and frauds can successfully be recognized (Avi, 1995). For example, UK had gained an extra £1.4 billion of tax after investing £45 million in these operations.
- Dealing with tax avoidance schemes
Legislation must be design so that the scope for tax avoidance minimized. In UK, government has initiated a GAAR (General Anti-Abuse Rule) which purposes to prevent abusive and artificial tax avoidance schemes. New measures are framed so that tax advisers who sell aggressive and contrived tax avoidance schemes can be dealt (Avery, 1999). Even settlement opportunities introduced so that taxpayers can be encouraged to agree their tax position with the government.
Other relevant proposals include investigation of the determinants of tax payments made by individual taxpayers by using micro data. Secondly, the availability of household data is less and this attempt can be benefitting for firms. For instance, various national databases can provide significant details on the operations of MNC’s in developing countries (Fuest et. al, 2007).
After a deep analysis and research on tax avoidance in the form of interviews, literature review and other resources, it can be said that taxation is essential for the progress of the entire country. A careful evaluation projects that majority of the tax payers are well known to the system of tax. The presence of qualified tax consultants makes the work easier and hence, the tax evasion is high. Corporations, as well as individuals indulge in tax evasion to have less burden of debt. From the research, it can be said that a strong grasp of the regulators are needed and awareness should be done at the optimum level to ensure that the citizens are aware of the ill effects and do not indulge in any activity that harm the economy as a whole.
There remains no doubt that tax avoidance is widespread and it can provide several problems to those related with public finance issues. There are few evidences that aggressive retail marketing of tax avoidance goods have significantly increased in these years but as a matter of fact, avoidance activities are by their nature ad-hoc and opportunistic. Simply enhancing the price of avoidance by increased regulation or through effective containment cannot choke off demand (Christian, 2008). Even though the problems created by tax, avoidance and evasion are so wide, yet there remains very less data and literature concerning the topic. Furthermore, the strategies and proposals suggested through this assignment is relevant but is practiced by developed countries. Developing and underdeveloped countries lack reluctance to take such steps. Tax evasion is a big problem and indicates that the tax system has loopholes that are allowing such acts. It is a big issue and has led to severe problems (Adam & Graham, 1999). Tax avoidance and tax evasion proves to be a major problem to the developed and developing countries and there is little data on such topic. However, it needs to be noted that the problem of tax avoidance and evasion is impossible to consider because of the lack of data. Until now, hardly any empirical findings provide a proper frame of various kinds of evasion and avoidance. The problem of tax evasion depends on the combination of certain factors (Aaronson, 2011). It is important to have a particular one-size fits all plan for considering the tax evasion and avoidance in the developing world. It is important that actions are needed at the national and international level and can be implemented when the measurements are done at the international level.
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