Research Paper on Tax Avoidance and Tax Evasion

Introduction

The payment of taxes is a critical component of corporate contribution as well as an aspect of good governance. However, corporate managers, especially in multinational corporations, have been using tax haven in their tax avoidance schemes. Understanding the difference between tax evasion and tax avoidance is critical because it can mean the difference between paying low taxes and going to prison (Yoon, 2014). Tax avoidance entails maximizing the full amount of tax credit and tax deductions that a corporation can take (Fuest and Schneider, 2011). Tax avoidance is legal and is used by accountants to reduce the amount of money paid to the government. Some of the strategies used include shifting the company headquarter from the UK to a jurisdiction with low tax brackets. Multinationals in the UK also use transfer pricing where they invoice low price in the United Kingdom and invoice high amount for the same products when shipped to affiliate company in countries with low taxes. Although the method is legal, an aggressive tax avoidance goes against corporate social responsibility (CSR) because the government is stripped of resources that it could have used to provide services to the community. Tax avoidance diminishes the business ethics by not paying their share to the community

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Tax evasion, on the other hand, is an illegal process that entails a deliberate and intentional decision taken to avoid paying taxes owed. Some of the strategies used in tax evasion include omitting to disclose the actual amount of money made or not revealing the amount earned in a savings account (Yoon Oh, 2014). Tax evasion will increase the tax liability if discovered and expose the individual responsible to fines and imprisonment. Tax evasion hurts corporate governance and ethics.

Comparison of Current Issues With Respect to Tax Avoidance and Tax Evasion

The two current issues related to tax evasion and avoidance are; the Panorama's Paradise Papers programme and the UK clampdown on Tech firms. The UK has changed the way it will be taxing technology companies. The new structures aimed at taxing the revenues made rather than the profit (Ahmed, 2018). Google made a sales revenue of $ 1.2 billion in 2016, but its pre-tax profit was $ 160 million. The company, therefore, ended up paying significantly less compared to a scenario where they could have been taxed on their total revenue. There has also been a crackdown on technology firms that shift their profits to subsidiaries in tax havens to avoid paying taxes. The move by the government is meant to ensure the companies pay their fair share of taxes.

Another current issue on tax avoidance and evasion is the Panorama paradise paper program. (Gravelle, 2009). The financial documents from a Bermuda based faced exposed the level at which multinational companies go to in their effort to practice tax avoidance. Although most of the practices were legal, the documents raised the issue of ethics and morality. Companies are taking money to offshore jurisdictions while operating in a different country and not pay their fair share to the society (Mao, 2018). The corporate social responsibility was brought to the forefront when the documents were leaked to the public.

Contrast of Current Issues Concerning Tax Avoidance and Tax Evasion

According to the Guardian newspaper, accountants and tax experts will be required to report to report aggressive tax avoidance schemes (Rankin, 2018). The new regulations seek to punish those lawyers or tax experts who will fail to comply with the law. The European Union and the UK plan to push this law to be adopted by other nations. According to the finance minister in the UK, the new law will ensure governments in the European Union and the British government can collect more revenue from companies (Rankin, 2018). Those nations that did not comply with the new regulations were blacklisted to persuade them to adopt the new rules. Others countries which did not fully comply with the new law were put in a grey area as a warning and a way of making them adhere to the lawfully.

The tax evasion current issue in the UK includes the misreporting of revenue by companies. However, the government has been enacting laws that are making people who evade paying tax to face harsh penalties. Both tax evasion and tax avoidance have had a negative effect on corporate social responsibility and governance. Companies are negating their duties to the society in pursuits for more revenue and dividends for their shareholders.

For and Against Arguments of Tax Avoidance and Evasion From Journal Articles

Tax evasion is not only illegal but immoral. An organization that is involved in tax evasion puts the company at risk while at the same time denying the government the much-needed funds required to provide services to the community (Batabyal and Beladi, 2009). However, tax avoidance is legal and can be practiced, but organizations should avoid over engaging in the practice. Companies should adhere to good corporate governance and have a social responsibility for their actions. Tax avoidance can be legal, but that does not make it ethical.

New UK Legislation and Gaar Interpretation of Tax Avoidance Schemes

The General Anti Avoidance Rule interprets tax avoidance as those legal practices that are conducted in a way that it undermined the purpose of the law (International monetary fund). The UK legislation also interprets tax avoidance as the practices that are lawful, but the taxpayer abuses such law.

How the government deals with tax avoidance schemes that corporations use

The UK government under Her Majesty's Revenue and Customs (HMRC) have introduced measures that have made it hard for companies to hide their money abroad. The UK government is also in the forefront of pushing for transparency in financial reporting beyond its borders (Gravelle, 2009). The governments also aim at reducing tax avoidance by promoting a standard reporting stands globally.

How the government recover money from tax evasion

The government can recover money from tax evasion through a direct recovery of the debt or by taking control of a person's goods and selling them. The direct debt recovery involves withdrawing money from the bank and paying the tax due.

Companies that were majorly impacted or influenced by tax avoidance and tax evasion (regarding CSR, Corporate Governance, Business ethics and Corporate failure)

Caffe Nero is one of the companies that has been practicing tax avoidance in the UK. Despite making 247 Million euros in 2016, it went on and reported a loss of 24 million euros. The company, therefore, ended up paying no tax. However, the new regulations meant that companies would have a hard time transferring their money to tax havens and reduce the circumventing schemes being used.

Google is one of the companies that has been avoiding tax payments by moving its revenues to tax heaven. However, a crackdown on such companies saw google agreeing to pay 130 million pounds to pay the tax dispute.

Regulation Framework (UK)

The UK regulation on tax avoidance and evasion is anchored around ensuring there is more transparency in financial reporting. Accountants are also required to report companies that engage in aggressive tax avoidance schemes. Additionally, the government has engaged in a vigorous campaign of prosecuting those that break the law. However, the HMRC has provided an opportunity for people to declare what they owe. Finally, the government has invested In technology to detect and deal with tax evasion and avoidance. The UK regulation is critical to improving the business practice and governance (Stephenson & Vracheva, 2015).The government is also able to track the events of tax evasion or avoidance and come up with solutions

Implications and Challenges

The challenges faced by the government and the society is the group of individuals who do not want to pay their fair share. Tax avoidance and evasion, therefore, leads to negative consequences for the government, the society, and the businesses.

The limitation of such regulation is lack of enough workforce and poor coordination among countries and companies to curb tax evasion and avoidance.

References

Ahmed, K. (2018). Tech giants face new UK tax clampdown. [online] BBC News. Available at: http://www.bbc.com/news/business-43161736 [Accessed 20 Mar. 2018].

Batabyal, A. and Beladi, H. (2009). A Theoretical Analysis of Income Tax Evasion, Optimal Auditing, and Credibility in Developing Countries. SSRN Electronic Journal.

Fuest, C. and Schneider, F. (2011). Tax evasion, tax avoidance and shadow economy: introduction. International Tax and Public Finance, 19(1), pp.1-4.

Gravelle, J. (2009). Tax Havens: International Tax Avoidance and Evasion. National Tax Journal, 62(4), pp.727-753.

IMF. (2018). Introducing a General Anti-Avoidance Rule (GAAR) : Ensuring That a GAAR Achieves Its Purpose. [online] Available at: https://www.imf.org/en/Publications/Tax-Law-Technical-Note/Issues/2016/12/31/Introducing-a-General-Anti-Avoidance-Rule-GAAR-Ensuring-That-a-GAAR-Achieves-Its-Purpose-43662 [Accessed 20 Mar. 2018].

Lorenz, J. and Diller, M. (2015). The Epidemiology of Tax Avoidance and Tax Evasion. SSRN Electronic Journal.

Mao, C. (2018). Effect of corporate social responsibility on corporate tax avoidance: evidence from a matching approach. Quality & Quantity.

Rankin, J. (2018). Accountants and lawyers 'must report' aggressive tax avoidance schemes. [online] the Guardian. Available at: https://www.theguardian.com/world/2018/mar/13/accountants-and-lawyers-must-report-aggressive-tax-avoidance-schemes [Accessed 20 Mar. 2018].

Slemrod, J. and Yitzhaki, S. (2000). Tax Avoidance, Evasion, and Administration. Cambridge, Mass: National Bureau of Economic Research.

Stephenson, D. and Vracheva, V. (2015). Corporate Social Responsibility and Tax Avoidance: A Literature Review and Directions for Future Research. SSRN Electronic Journal.

Yoon Oh (2014). Tax Avoidance and tax evasion through tax haven entities. Journal of IFA, Korea, 30(1), pp.137-177.