Impact of Tax Avoidance on Revenue Collection

Question: Discuss about the Impact of Tax Avoidance on Revenue Collection. Answer: Introduction: Tax avoidance is a common phenomena amongst people across the globe. It is basically a method adopted by the tax payers wherein they are to pay least amount of tax but staying within the legal limits. Often people confuse the term avoidance with evasion. However, the two terms are mean different i.e. the former inclines towards usage of legal means and the latter inclines towards usage of illegal means for paying tax. Avoiding or managing payment of lesser amount of tax to the government is possible only via sound financial planning (Lexicon., 2015). For example ensuring that the companys assets are sold in such a phased manner so that the maximum exemption criterion of the capital gains tax is met thus ensuring avoidance of tax legally and not evasion of the same. The topic tax avoidance is specifically being researched here so that one can know that even though it is a legal mean of saving tax, yet the government is suffering from the same. Since their revenues are getting impacted , hence it is becoming very difficult for them to work towards the prosperity of the nation due to financial constraints. Major source of tax revenue for any economy is via the corporate houses, and any kind of avoidance of tax has an impact on the national income. The question as to what lures a person to engage into the practice of tax avoidance and the degree of tax avoidance aggressiveness is of interest from the researchers point of view (Pettinger 2012). Further the impact, tax avoidance strategies have on the overall revenue collection of a countrys economy is also discussed. Purpose of the Research The impact on the economic stability is the main area which is examined in this report and along with the same depends various other factors as well such as the unemployment rate of a country or the account balance of a country. Thus it can be said that the research report takes us through examination of the economic factors which varies country wise which influences the tax avoidance forcefulness. Economies that is stable versus the unstable ones after the financial crisis of 2008 and the market-based versus the bank based countries would be discussed in lieu of tax avoidance. The next section will detail about tax avoidance as a concept thus leading towards development of a model. Lastly the economic factors related to the research topic would be further discussed. The concept of tax avoidance comes into the picture with the fact that for an economy to function well, the individuals and the corporate houses are to contribute a part of their earnings to the economy. However these individuals and corporates view the same as a burden rather than a moral responsibility. They therefore resort to various tax shelter options which helps them to avoid such a payment. The agency theory makes the concept of diverting the money from the tax authorities to the owners incomplete. Many a times these managers take undue advantage of the tax avoidance strategies in such a manner that the money saved is distributed amongst themselves rather than reaching the actual owner of the money (Zhang, 2007). Empirical evidences have proved that the stakeholders are well acquainted h such an act, thus welcome the regulatory norms so that such an event does not occur and tax aggression is kept alive. Rent diversion is one of the common ways of tax avoidance, thus by instal ling a strong corporate governance system within the corporate, the firm will perform well and the shares of the company will also be valued better (Desai, Dharmapala, 2009). It is also understood that the level of tax avoidance would differ company per se i.e. whether publicly held company or privately held company. Apparently although it would seem tat the family owned companies would benefit more from avoiding tax but the cost that they would have to incur in case the same is caught is much higher than the benefit. However the same is not higher in case of a publicly held company (Bond et.al. 2004). The fact that the true value of a taxable income is known to the person who is entitled to pay tax and the regulatory bodies have no way to find the same until and unless certain cost is incurred. Thus the spur for an increased tax aggressiveness has to be compared to the future costs. In the next stage we would discuss about the actual determinants of tax avoidance within the corporates so as to confirm the degree of assertiveness. Determinates and Method We have just discussed about the fact that there are various causes which enable a company to indulge into tax avoidance activities with aggression. Before one can establish strategies to prevent tax avoidance, understanding the ways and means of tax avoidance activities and the various methods is a must. One of the most striking example of tax avoidance is reflected in the difference between the accounting income and the taxable income. Tax avoidance tools and techniques does not create any kind of economic value. Thus if a corporate takes advantage of a particular income tax ruling simple because the wordings are unclear for availing tax benefits then the same is not illegal. There are various ways and means of avoiding taxes which are availed by the corporate houses. For example corporate expatriations via which a corporate is able to save on taxes simple by converting a subsidiary which is situated in a tax refuge into a holding company. Another way is investing into such countries where the tax rates are lower or exempt. Another very prominent method of tax avoidance is by doing off balance sheet funding wherein tax deductions are available but at the same time such funding does not put any pressure in the income statement. Thus it evident that the method of avoiding the payment of taxes is numerous and corporates who are involved in high rate of tax aggression are more prone towards transfer pricing. Former Treasurer, Wayne Swan accused BHP of indulging into aggressive transfer pricing activities thus avoiding a payment of A$5.7 billion of tax (Mangan, 2016). The corporates use this formula as a means to safeguard themselves from the consequences of tax avoidance in case of detection. But it is also equally important to appraise the fact that tax avoiding activities does not necessarily is done in lieu of saving upon taxes but also many a times it is due to a consequence of decisions which are taken for the development of the company. For example the accounting for depreciation, the same is calculated differently in both the accounting and the taxable forum but the same is a necessity and not by any malafide intention. The options available are numerous through deferred taxes to keeping of low debt for avoidance of tax. The regulators are inclined in taking reactive position than a preventive one. Just as methods of avoiding tax is important, similarly the causes and the basic drivers which steering the companies to become aggressive is important. The managers become over confident and too positive towards their decisions thus impacting the level of tax avoidance. Further the fees that the directors get from saving the taxes of the company is also one of the main drivers (Slemrod, 2004). Thus the trade off between the possible impacts of detection of tax avoidance and the benefit that the company had earned from saving tax is analysed. Economics Factors Avoidance of tax is nothing more than exploitation of the economy of the country in which the corporate house resides. A country with a strong governance rules is exposed to less exploitation as compared to a country with a weaker governance rule. Tax avoidance aggression is not the only factor responsible for the stability or instability of an economy. The ruling government is equally responsible. Further the financial crisis has led the economies more prone towards finding ways and means of avoiding tax. Further given the fact that the protection and safeguard of the stakeholders are more in common law countries as compared to the civil law countries, thus avoidance of tax in the civil law countries are more. Another method is basis the bank based or market based. Countries wherein the Common law rules, market based financial structure is more prevalent and those which use Civil law, bank based financial system is more acceptable in such countries. The main difference between th two is the method by which the organizations obtain funds. Wherein in the market based they obtain funds via selling shares in the market and shareholder investment and in the bank based they obtain funds via taking loans (Levine, 2002). Thus in a market based financial system, tax avoidance is more since the value of the stakeholders is a direct case of tax avoidance. Therefore it can be rightly said that the rule of law as well as the kind of financial system prevailing is also responsible for the level of tax avoidance aggression within the corporates. On analysing the various impacts and methods of tax avoidance as well as the level of aggression, research has proved that country which does not protect its shareholders well and the legal enforcement is also weak, shareholders may not give their consent when the companies avoid the payment of taxes, simply because diverted taxes will be eaten up by the managers (Beyer.2014). General anti-avoidance rules (GAARs) play a very important role across the globe to safeguard against the malicious intentions of the tax avoiders. In the year 2013, a plan was laid down to handle the tax avoidance strategies taken up by the various MNCs by the G20 summit specially in Europe and Australia, due to the lower taxes paid by bigger corporates. Further with the introduction of OECDs Base Erosion and Profit Shifting project and the desire of the government to curb the tax avoidance, GAAR is expected to play a more crucial role in ensuring curbing on the tax avoidance (Pwc.com. 2016). Web based entities were a new rage in this segment and the OECD had to lay a dedicated task force to examine the business models used by them thus probing into the fact that how these companies are ruling in different countries without paying taxes. Due to this in the year 2014, plan was rolled out restore taxation in those countries where these internet based companies conduct sales . This was a step towards protecting the economy against the low tax payments by these internet companies. Conclusion Thus the said research details about the concept with regards tax avoidance, the degree of the aggressiveness and the reasons behind the same. Further, it has been proved that countries with a stable economy, an honest government and stringent corporate governance rules are less prone to tax avoidance situations. Increasing tax avoidance has led to development of a more complicated tax codes in lieu of safeguarding the tax avoidance strategies. Since the year 2006, around 4500 Federal tax codes have been altered simply to cope up with the tax avoidance provisions. Transfer pricing is the most effective weapons used by the corporates to evade taxes thus defeating the very purpose of the said concept. The citizens and the corporates fail to understand that by avoiding taxes they are harming the revenues of the government which would indirectly have a negative impact on them. Thus even though steps are being taken for preventing and curbing the tax avoidance aggression, yet those with a n intention of not to pay find their way out in saving taxes. 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