Compare and Contrast Essay on Tax Avoidance vs Tax Evasion

Introduction

Tax avoidance is where an organization or individuals minimize their tax bills using legal means and rules. Tax avoidance depends on the tax laws and regulations placed in each country. Tax evasion, on the other hand, is the illegal payment of less tax than expected. Tax is important in that it helps the government to function. Tax avoidance is seen as corporate social responsibility (CSR) issue. CSR is defined as the obligation of an organization to meet their responsibilities to the society in their business responsibility. To do this, they should check consumer needs, human rights, ethical, and environmental needs (European Commission 2011, p. 6). CSR organizations are deemed to generate profits, abide by the law, have ethics, and be a good organization to the society. (Carroll 2006:22). Tax avoidance is also seen as running away from your social obligation. This may lead a company to be accused of selfishness and greed destroying its reputation and trust from the public. Paying tax is a social responsibility as it helps the government to conduct its obligation to the citizens. Companies in the UK pay little or no tax because payment of tax depends on the profit they make. If no profit is made no tax is paid. With corporate governance, reduction in tax planning will, in turn, reduce management deviation (Desai and Dharmapala 2006). Poorly managed organizations invest less in tax avoidance as compared to well-managed organizations.

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Tax avoidance and evasion have cost the UK government over the years at an estimated amount of PS34 billion each year. HMRC however, estimated during the year 2013 and 2014, through tax avoidance, PS2.7 billion was lost and PS4.4 billion through tax evasion.

From the CSR point of view, tax avoidance is similar to tax evasion in that both lead to a loss in revenue by the tax authority (Visser 2015). Tax avoidance gives a firm a legal right to reduce tax charged which provides loopholes which a firm can explore to avoid paying tax. With tax evasion, a firm illegally evades paying taxes. Tax avoidance and evasion are also viewed as unethical. Tax evasion is illegal hence unethical while with tax avoidance, some firms tend to misuse the term "legal" and end up not paying their deemed amount of tax making it unethical. Multinational companies in the UK like Starbuck, the Amazon, and Google were requested to disclose their taxable profits. Starbuck failed to record 14 out 15 years of their taxable profits. Amazon failed to share the firm's sale for one year, and Google paid taxes but not their fair share of tax. Multi companies in the UK are seen to evade and avoid tax which is unethical.

One of the major differences between tax evasion and avoidance is legality. Tax avoidance is viewed as a legal means to reduce tax paid while tax evasion is seen as an illegal mean to evade paying taxes. Tax avoidance is seen as immoral whereas tax evasion is seen as both unlawful and immoral. A good example is the owner of Arcadia Group, Sir Philip Green. The firm is run by his wife who does not pay tax and lives in Monaco. He used an offshore account to channel PS1.2 billion that ended up in his wife`s account in 2005 all as a way to evade taxes.

Strasburg, the author of Wall Street, looked into a strategy used in London whereby a bank transfers the shares ownership temporarily, to a client to lower their tax usually when the client was about to collect shares dividend (Strasburg 2014). This strategy was called dividend arbitrage. The client would split the dividend with the bank. The strategy led to a tax decrease from 50% to 10% and even at some times would lead to total tax avoidance. Though this strategy may raise many questions, is seen as legal. A firm's tax planning is what determines whether this method is tax avoidance or evasion. Tax planning is coming up with a financial plan that is tax-efficient. If the tax plan of this strategy is to lower tax, then it is seen as tax avoidance, but if one fully escapes tax, then it's seen as tax evasion. Another journal, the ethics of tax planning, reviewed how the Europeans perform tax planning. The author illustrated tax planning as a line between tax evasion and avoidance. The author viewed tax evasion as illegal and unethical and tax avoidance as legal and ethical (Stainer 1997). The author also states that tax planning has led to the loss in revenue to the tax authority and the society (Stainer 1997). The author in the book, An Introduction to Business Ethics, states that loopholes in tax avoidance should be closed by legislation as firms and individuals may take advantage of them to avoid tax (Jackson 1996).

There are several companies that have gained huge losses due to tax evasion and avoidance. One of them is Caffe Nero. The firm has not been paying corporate tax and has been making consistent losses. Its sales are PS274 million and the losses PS24.2 million which is almost ten percent of their sales. They have used means like having a lot of loans from a bank as a way to avoid tax but had led them to a loss of PS25 million in 2016. Another company is Vodafone that makes sales of about PS6.7 billion but gains losses of up to PS486 million. It still pays little or no corporate tax. In 2010, it had to make a deal of over PS1.2 billion with HMRC for Luxembourg arm.

There some regulations used by the UK by tax regulation and evasion. In market tax avoidance, penalties will be given to those coming up with schemes to avoid tax. The government introduced regulations such as General Anti-Abuse Rule (GAAR) in the Financial Act 2013, powers to act against Promoters of Tax Avoidance Schemes (POTAS) in the Finance Act 2014, Disclosure of Tax Avoidance Schemes (DOTAS) regime in the Finance Act 2015. Penalties were also provided to those entering tax avoiding schemes (STAR) in the Financial Act 2016. With offshore tax evasion, the UK government has issued information sharing on offshore deals and penalties to encourage compliance. The OECD together with the UK government has worked together to create common reporting standards to allow them to gain information on offshore accounts. Penalties will be given to those evading offshore tax by Financial Act 2015 and 2016.

Conclusion

Challenges that arise from tax evasion and avoidance is that businesses are making huge losses of up to 10% of their earnings as they evade and avoid tax as seen with Caffe Nero. The government loses revenues of up to PS16bn a year hence not able to conduct its functions fully. Social amenities are not improved when the tax is not paid, and hence the society suffers. Limitations of tax regulation in respect to evasion and avoidance are the loopholes in tax avoidance that can be exploited and provide means to evade tax. Some of these loopholes are legal hence no penalties can be given. Some include duty-free shopping, cross-border shopping and many more.

Bibliography

Back, P. 2013. Avoiding tax may be legal, but can it ever be ethical?

Jackson, J. C. 1996. An Introduction to Business Ethics. Oxford: Blackwell, 156-57.

Retrieved from http://www.theguardian.com/sustainable-business/avoiding-tax-legal-but-ever-ethical.Stainer, A., Stainer, L. & Segal, A. 1997. The ethics of tax planning. Business Ethics: A. European Review, Vol. 6, No. 4, pp. 213-219.

Strasburg, J. 2014, September, 28. Fed questions bank maneuver to reduce hedge funds' dividend taxes. The Wall Street Journal. Retrieved October 10, 2014, from https://www.wsj.com/europe

The big firms are still getting away with murder with tax. (2017, March 21). Retrieved from http://www.dailymail.co.uk/news/article-4303030/The-major-firms-avoiding-corporation-tax.html