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Tax Minimization Strategies and Practices

Question:

The Panama Papers exposed the use of tax havens by many Multinational Corporations (MNCs). Is MNC Tax Minimisation unethical, an issue that governments should be taking action on, or legitimate conduct? Critically discuss.

MNC Tax Minimization is unethical and a very major issue that the government should take action on. Taxes are minimized by making an investments that easily postpones the amounts payable and assets investments which have relatively very low tax rates, income that is divided into spouse or children and the changes that take place in the nature of income or the way the business is managed and organized. One can save minimize or save taxes by controlling investment, employment income, and bonuses very carefully but it is considered to be unethical (Empirical, 2016).

As a part of a better governance, there are several multi-national companies that seeks to reduce or minimize their tax liability through “tax planning “which helps to make most of the tools and mechanisms in the organization and the government makes these tax available for some specific purposes like allowances, deductions, rebates, exemptions, and many more. Tax planning is nothing but a behavior that is compliant in nature but still there is a grey area between this and “tax avoidance”. Avoiding tax includes financial and other instruments and arrangements tax evasion is defined as the illegal payment of tax which is unethical too. Bending the rules and regulation of the tax is not ethical and perhaps also not the spirit of the law too. A company or any business must comply with the law and minimize the tax to be paid to the government but when it comes to ethics, it is unethical (Eikenberry, 2016).


When government started spending cuts, then it had a major impact on the lives of people in the daily basis. A company cannot minimize or avoid to pay their fair shares of taxes because it will create a discrimination for those who pays taxes and for those who don’t (Wealth management advisors, 2015).

In 2012, a survey was carried out by Ipsos MORI in IBE. According to this survey, tax minimization was one of the second most important ethical issue that every business need to address. Minimizing tax is minimizing social obligation. Tax minimization helps a company to act as vulnerably and create greed and selfishness and also creates the damage in the reputation and decrement in the public trust (Edmond, 2014).Employees and the cust0oemrs will gradually loose the interest in the company because there will exist the selfish nature behind every mission and vision set by the company. A company will set the desired objectives with the view to fulfil the personal motive rather than focusing on the overall performance of the company. For example, Starbucks and Amazon have faced several issue regarding the tax policies and were boycotted and vilified. They were not capable to create transparency and accuracy for the transaction of all the activities that were carried out by them (Hill, 2013).

The Difference between Tax Planning and Tax Avoidance

When a company starts paying a fair amount of tax to the place where they actually operate is very social and responsible task. It includes generating funds for the public services like education sector, infrastructure, and health care management. These all comes under the public services which helps the company to generate benefits either directly or indirectly. Avoiding tax or minimizing it has been strongly branded by many immoral and unethical practices which undermines the integrity of the tax system (Harvey, 2012).  Companies argue that the responsibility to maximize the value that the company deliver to their shareholders like keeping tax costs minimum is legal but the way they minimize the tax is not ethical. Today company have started using several unethical ways to minimize the forms of taxes that needs to be paid to the government. Apart from the corporation tax, businesses must be praised and acknowledged for contributing to the economy because paying tax to the government will automatically boost the economic condition of the country and also helps the country to increase its national income. In the country like UK, people pay PAYE, i.e. national insurance contributions and business rates and in other countries, people contribute through the way of agreements in order to pay infrastructure costs (Klassen, 2017).

Today several multinational companies are operating successfully in the UK, are not paying corporation tax which is illegal as well as unethical too. Corporation tax is defined as the tax which are payable on profits. So that makes clear that if a company does not make any profits, it should not have to pay any corporation tax and similarly if a company earns profits, it must be liable to pay the corporation tax. The main issue regarding corporate tax is whether the profit calculated is done with accuracy and transparency or not (Neuman, 2014). It must be calculated properly. It is quite plausible that when a company is highly involved in high sales but does not bother to pay any tax, it can be stated that the company may not be making any profits. But it is very important to know how a company calculates the profits in order to pay taxes. According to HMRC, tax gap figure is estimated. Tax gap figure is the amount of difference corporation tax collected actually and the amount that should be collected if the companies is compiled with the spirit of law. . According to a 2011 Action Aid report, 98 of FTSE100 companies use tax havens to reduce their corporate tax bills. The citizens in the country expects that the business must pay the fair share of tax but the fair amount of tax is still a subjective because it is very difficult what amount of fair tax a business needs to pay. Fair amount of tax differs from the company to company and country to country as well (Fair share, 2017). One company may feel the particular amount of tax paid to be fair while the same may not be considered to be fair for other companies. So what matters is the amount paid must be ethical. In 2008, HMRC stated that “we want to make sure that the burden of tax does not fall unfairly on taxpayers who play by the rules and pay their fair share". But still the definition of fair is not defined well.

Negative Impacts of Tax Minimization on Society and Public Trust

In UK, GAAR was proposed and introduced (General Anti-Avoidance Rule). It was introduced to provide clarity on the definition of tax avoidance which includes the clarity of what is acceptable and what not. Several tax schemes that is abusive and morally wrong must be prevented by the companies. Every businesses knows about their tax bills that they need to pay and then they plan their strategies and make investments accordingly (Farok, 2016).


In Australia, the tax industry must have a clear view when introducing new tax avoidance scheme because this makes a clear representation and clarification of what is fair and what is unfair. Every tax policies that is implemented must be underpinned by the ethical principles of accountability, accuracy and transparency. All the arrangement regarding tax planning which goes beyond the policy intent of the laws and are highly involved to eradicate and exploit the tax system are not ethical at all. But it can be strongly argued that corporations are piggy here. If a company start maximizing their profits for shareholders and other institutional investors then it will automatically benefit the society and the country as well (Lugna, 2013).

In Britain, 70% of the people living there don’t want that there money should be invested in such business which is unethical and 65% of them think and state that corporate tax avoidance is unethical and the government must take strict action on it. Corporate tax minimization is an unethical investment platform and the government must impose penalties on those multinational companies (Koh, 2016).

It is time to start paying more attention towards the place where the money is invested. Several investment firms who are highly involved in social responsibilities state that they do not refer nay account of companies’ tax practices when they decide to invest (Miller, 2014).The companies who pay more tax but government must make sure that all the contributions must give the fair return to society. Instead of hiding the business case for tax avoidance, a business must be transparent about the planning regarding taxes. Every companies and government must pay more attentions in order to communicate their positions on the issue and the interpretation of the law. This will create and generate public trust and bring more flexibility, accuracy, transparency and certainty for business (Lord, 2017).

There are several tax avoidance methods which are legal but unethical. They are legal only because of the provisions used by them and the loopholes granted by their respective countries.

The Need for Clarity in Tax Laws and Policies

Many nations that are advanced and are typically tax multinational home-country operations, basically do not additionally tax profits of the company’s foreign affiliates. While other countries including the US, treat the worldwide income of multinationals as taxable. US tax on US multinationals’ foreign affiliate profits can be deferred indefinitely (perhaps forever) by the simple expedient of not remitting those profits back to the US.

Bermuda, is a low tax country can be used to incorporate shell companies. Those companies basically serve two major functions: They can hold the patent and brand right of the MNC’s and they can serve as a licensor in order to collect the royalties that are charged to other affiliates globally. It aims at reducing the taxes because each and every affiliate will claim a deduction in their country for the royalties paid while the royalties collect tax free in the tax haven.

Thus, it can be clearly stated from the above statements that minimization of tax in the MNC is legal but unethical. There are several ways by which tax can be minimized but it should be done with accuracy and transparency. A company must show all the activities that it is involved in and all the activities further must be analyzed accordingly.

References

Edmond Financial group, 2014, Tax Minimization Strategies, viewed on 7th February, 2018. Available at: https://www.efgi.com/personal/tax/art.html

Eikenberry, 2016, Tax Minimization Planning, viewed on 7th February, 2018. Available at: https://www.eikenberryretirement.com/tax-minimization-planning.html

Empirical wealth management, 2016, Tax Planning and Minimization Strategies, viewed on 7th February, 2018. Available at: https://www.empirical.net/tax-minimization/

Fair share, 2017, Corporate tax dodging, viewed on 7th February, 2018. Available at: https://www.fairshareonline.org/make-corporations-pay-their-fair-share

Farok. J, 2016, Tax Avoidance by Multinational Companies: Methods, Policies, and Ethics, viewed on 7th February, 2018. Available at: https://globalbusiness.blog/2016/05/05/tax-avoidance-by-multinational-companies-methods-policies-and-ethics/

Harvey .C, 2012, Fair rate of return, viewed on 7th February, 2018. Available at: https://financial-dictionary.thefreedictionary.com/Fair+Return

Hill, M.D., Kubick, T.R., Lockhart, G.B. and Wan, H., 2013. The effectiveness and valuation of political tax minimization. Journal of Banking & Finance, 37(8), pp.2836-2849.

Klassen, K.J., Lisowsky, P. and Mescall, D., 2017. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research, 34(1), pp.455-493.

Koh. S, 2016, paying your “fair share” of taxes: Prof Ho on what “fair” means, viewed on 7th February, 2018. Available at: https://www.nerdwallet.com/blog/finance/prof/paying-fair-share-taxes-prof-ho-fair-means/

Lord. N, 2017, Tax avoidance might be legal but it’s time we seriously questioned its ethics, viewed on 7th February, 2018. Available at: https://theconversation.com/tax-avoidance-might-be-legal-but-its-time-we-seriously-questioned-its-ethics-87133

Lugna, 2013, avoiding tax may be legal, but can it ever be ethical? , viewed on 7th February, 2018. Available at: https://www.theguardian.com/sustainable-business/avoiding-tax-legal-but-ever-ethical

Miller. A, 2014, Are the rich paying their fair share of taxes, viewed on 7th February, 2018. Available at: https://www.ifs.org.uk/uploads/Presentations/HM%20Presentation%20241017.pdf

Neuman, S., 2014. Effective Tax Strategies: It's Not Just Minimization.

Wealth management advisors, 2015, tax minimization strategies, viewed on 7th February, 2018. Available at: https://www.wmallc.com/what/tax-minimization/

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