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The Impact Of Tax Avoidance On The UK Economy

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Question: Describe about the Taxation PhD research topic in tax avoidance and then write the proposal.     Answer: Background 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?   Methodology Research Design 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. Quantitative method 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. Qualitative method 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. Research Population 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. Literature Analysis 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 i

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