Tax Planning vs. Tax Avoidance
Question:
Discuss About The Corporate Social Responsibility Tax Avoidance?
As a part of effective governance, the organisations would seek to reduce their tax liability with the help of tax planning via the mechanisms and tools, which the government provides particularly for this purpose. This might be in the form of deductions, allowances, rebates, exemptions and many others (Abdul Wahab 2016). Tax planning could be considered as behaviour related to taxation-law avoidance; however, there is difference between tax planning and tax avoidance. The avoidance of tax despite being legal could be viewed as aggressive at the time it involves utilising financial arrangements and instruments.
The government does not intend or anticipate them as a vehicle for tax benefit like the use of cross-border tax havens. The tax avoidance and flexible rules associated with the tax system could not be considered as illegal like tax evasion; however, it is not within the spirit of the law. Thus, the current essay would aim to discuss whether tax minimisation is ethical for the multinational organisations with special reference to the Panama Papers.
According to the review of the Panama Papers, the individuals and multinationals might open offshore accounts for various reasons, some of which are legal entirely (Harding 2016). For instance, the business organisations might not wish to fall under Islamic inheritance jurisprudence, in case of death of the owners. In addition, estate planning is another instance of legal tax avoidance. During situations, when the spending cuts of the government are having real effects on the daily lives of the individuals, it is not ethical for the multinational organisations to avoid the payment of their fair tax shares. The systematic tax avoidance on the part of the individuals and the global business organisations strikes a specifically ugly note in such straitened situations (Akhtar et al. 2017).
In UK, tax minimisation or avoidance is considered as the second largest issue in the context of the business organisations in 2012, which the British individuals wanted the government to address. In this case, tax minimisation implies avoiding a social obligation. As a result, it could make an organisation vulnerable to accusations of selfishness and greed, damaging the brand image and trust of the public (Brock, Clemons and Nowak 2017). For instance, there has been vilification and boycott of Starbucks and Amazon due to their tax policies.
The most obvious utilisation of the offshore financial centres is to avoid taxes. For instance, Oxfam is a charitable organisation that has blamed its 2016 annual report regarding income inequality for the broadening gap between the rich and the poor (Jalan and Vaidyanathan 2017). Thus, tax havens are at the heart of an international system, which enables the big entities in avoiding payment of their fair share. Paying fair amount of tax in the operating nations is viewed as socially responsible act for the organisations in order to finance public services like education, healthcare and infrastructure. These are considered as public services from which the organisation is benefitted either directly or indirectly. Hence, tax avoidance could be termed as unethical and immoral practice undermining the integrity of the tax system.
Ethics of Tax Minimization
The minimisation of tax liabilities enables to re-allocate untaxed capital, which encourages growth and investment potentially. It has been identified that an increase of 10 percentage point in the effective corporate tax rate of the first year minimises the aggregate investment to gross domestic product ratio by 2 percentage points in UK (Obermayer and Obermaier 2016). This has helped in signifying the negative correlation between lower investment and greater taxation. A firm might be equipped better to make contributions to the society with the help of their growth and formation of opportunities; however, they need to use retained earnings for this purpose.
Despite the fact that tax minimisation is legal and established, failing to involve might leave an organisation deprived of competitive supremacy (West 2017). At the time the competitors are able to use adequate amount of resources due to tax efficiency, effective management suggests adaptation of the practices enabling a competitor to obtain an advantage in order to minimise it. This is applicable in the global context as well, in which avoidance might be needed for matching simply with the compliant firms functioning out of low tax territories like Monaco. This is because the nation does not have any general corporate tax rate.
According to Elbra and Mikler (2017), the company directors often argue that they are responsible to maximise the value to be delivered to the shareholders for which the tax costs need to be minimised within the realm of legality. Besides corporation tax, it is crucial to acknowledge the business organisations for contributing to the economy in a variety of ways. In UK, the organisations are involved in paying PAYE, national insurance contributions and business rates, while in the other nations, they could contribute in the form of agreements for paying infrastructural costs.
The Panama Papers have stated that in July 2015, the profit shift of the multinational organisations has cost the developing nations around $213,000 billion in a year, which is nearly 2% of their overall national income (Holtzblatt, Geekie and Tschakert 2015). In addition, the global shell companies have played an important role in bigger money laundering activities and they are used as a medium for transferring bribe money. There are many multinational organisations operating successfully in the global regions and it could be observed that they are incurring nominal corporation tax. Corporation tax is a tax charged on profit; hence, if an organisation makes no profit, it need not have to pay any corporation tax (Field 2017).
Impact of Tax Minimization on Developing Countries
The main issue is to ascertain the accuracy of profit calculation and there is considerable amount of confusion between the two. It is reasonable that an organisation having greater sales with no tax payment might not be making any profit, although it is questionable about the way of computing the profits. For instance, in the last updated estimate of HMRC, the tax gap figure has been calculated through the difference between the corporation tax collected and amount to be accumulated with proper maintenance of the spirit of law. This amount stands at £4.1 billion in 2011 (Joseph, O’Brien and Correa 2017). Furthermore, it has been found that 98 of FTSE 100 organisations utilise tax havens for minimising their corporate tax bills. It is expected from the multinational organisations to pay their fair share of tax; however, the thing that comprises of a fair amount is subjective. Thus, it is necessary for all the global regulatory bodies to ensure that the tax burden does not fall unfairly on the taxpayers complying with all the mandatory laws and legislations (Morgan 2016).
In case of London real estate, the housing prices have increased highly by 50% from 2007 to 2016 and the overseas investors frequently purchase them. It has been found in 2015 that the laundered money has skewed the property market of London. The overseas criminals have driven the prices for sequestering their assets in UK. The Panama Papers even found out that almost three quarters of the people living in London below 35 could not afford to purchase a home. In UK, the proposed initiation of a “General Anti-Avoidance Rule (GAAR)” is formulated in providing little clarity regarding tax avoidance, which is acceptable or not. It is aimed to restrict such tax schemes that the government considers as abusive and morally wrong (Stephenson and Vracheva 2015). However, the legislation relying on ideas regarding reasonable behaviour is subjective and complex to define. Most of the global business organisations need certainty out of tax system, as they intend to gain an insight about their tax bills for planning their investments and strategies accordingly.
In case of Australia, the tax planning sector is required to obtain clearance for any new scheme of tax in advance. This would enable in providing clarification regarding the fairness. The guiding ethical doctrines of accounting, consistency and transparency would be needed for underpinning the tax policies (Vlcek 2017). The arrangements of tax planning going beyond the policy intent of the law along with involving deliberate approaches of exploiting the tax system are unethical. However, it could be criticised that the organisations are piggy in the middle. In case, the organisations take into account as their fiduciary duty of maximising profits for the institutional investors comprising of savings accounts and pension funds and shareholders, it would be beneficial for the overall society.
Fair Share of Tax
It is perhaps the time of starting to pay greater attention to the area of investment. Majority of the investment firms with a socially accountable mandate demand that they consider of the tax practices of the organisations at the time of deciding the area of investment; however, some screen out the organisations over tax issues. The FTSE Group stated that it has been looking to not include the organisations having overly aggressive tax minimisation policies from the group of ethical index. Recently, the group has not made any move; however, the stance of FTSE might signify a future trend.
Instead of hiding behind the business case for avoidance of tax, the business organisations are required to be transparent regarding their tax planning. Both the governments and organisations are required to pay adequate attention in order to communicate and their interpretation regarding the law and above all, they are needed to be open regarding the same. This would enable in gaining public trust along with bringing greater certainty for the business organisations.
Thus, it could be stated corporate tax avoidance occupies increasingly prominent role in the public debate. In the context of minimising public expenditure, higher scrutiny has paved the path to negative public perceptions, which are expressed in the form of opinion polls, choices of ethical consumption and tax shaming. The negative influence on public revenue is formulated despite the disruption of this extent. There are certain genuine causes of minimising tax receipts. Despite the declining issue of double taxation, it remains applicable and it provides advantage to the competitors legally avoiding taxation. Although these issues are minimal compared to the long-term effect that tax minimisation has on businesses and societies, tax revenues constitute of the governance fabric needed to provide the services from which the stakeholders are benefitted. A broadening tax gap, increasing public opposition and the potential related to corruption reduces these services along with democracy (Vlcek 2017).
The governments could use the existing policy levels in a better fashion. The simplification of tax and minimising complexities would eliminate the loopholes along with the potential related to creative accounting. Working in partnership with the other jurisdictions, which is the case with double taxation, could reduce the scope for companies to manoeuvre income only for avoidance. Hence, enforcement of the current laws along with undertaking decisive action in contrast to schemes of avoidance would deter the overall system abuse.
Transparency in Tax Planning
The multinational firms could play their part by promoting and practicing acquiescent behaviour of tax. The corporate social responsibility adds weight to the notion that the modern organisations have additional sense of their societal role, apply ethical procedures and core economic activities along with benefitting the stakeholders beyond a transactional association. As a result, this leads to contradiction within the organisations avoiding taxation. If a firm is eager of encouraging ethical behaviour and tax compliance, it could be seen as the final form of corporate social responsibility.
However, it is up to the multinational companies in deciding their tax approach. There might be a comparison among compliant behaviour, technically operating within law and avoidance. In countries where it is not a legal distinction, it is on the governments of removing the areas containing ambiguity. Hence, it could be inferred that the tax decisions undertaken stay an ethical question in the context of the global business organisations. Based on the above evaluation, it is feasible to say that tax minimisation has several negative repercussions on the overall community, which need to be reduced in order to maintain the overall ethical integrity. Thus, it is necessary for all the global regulatory bodies to ensure that the tax burden does not fall unfairly on the taxpayers complying with all the mandatory laws and legislations.
References:
Abdul Wahab, N.S., 2016. Malaysian multinational companies (MNC): Permanent and temporary nature of tax planning. Cogent Business & Management, 3(1), p.1248644.
Akhtar, S., Akhtar, F., John, K. and Wong, S.W., 2017. Multinationals’ tax evasion: A financial and governance perspective. Journal of Corporate Finance.
Brock, N.P., Clemons, R. and Nowak, A., 2017. A Reexamination of US Corporate Tax Avoidance Over the Past Twenty-Five Years: Estimating Corporate Tax Avoidance with Accounting-Based Measures.
Elbra, A. and Mikler, J., 2017. Paying a ‘Fair Share’: Multinational Corporations’ Perspectives on Taxation. Global Policy, 8(2), pp.181-190.
Field, H.M., 2017. Aggressive Tax Planning & the Ethical Tax Lawyer. Va. Tax Rev., 36, p.261.
Harding, L., 2016. What are the Panama Papers? A guide to history’s biggest data leak. The Guardian, 5.
Holtzblatt, M.A., Geekie, J. and Tschakert, N., 2015. Should US and Global Regulators Take a Bigger Tax Bite Out of Technology Companies? A Case on Apple’s International Tax Minimization and Reporting Strategies. Issues in Accounting Education, 31(1), pp.133-148.
Jalan, A. and Vaidyanathan, R., 2017. Tax havens: conduits for corporate tax malfeasance. Journal of Financial Regulation and Compliance, 25(1), pp.86-104.
Joseph, K., O’Brien, T. and Correa, H., 2017. Tax strategies and organisational communication in MNC supply chains: case studies. International Journal of Logistics Research and Applications, 20(2), pp.105-128.
Morgan, J., 2016. Corporation tax as a problem of MNC organisational circuits: The case for unitary taxation. The British Journal of Politics and International Relations, 18(2), pp.463-481.
Obermayer, B. and Obermaier, F., 2016. The Panama papers: breaking the story of how the rich and powerful hide their money. Oneworld Publications.
Stephenson, D. and Vracheva, V., 2015. Corporate Social Responsibility and Tax Avoidance: A Literature Review and Directions for Future Research.
Vlcek, W., 2017. Global Tax Governance and the Tax Nomad. In Offshore Finance and Global Governance (pp. 129-153). Palgrave Macmillan, London.
Vlcek, W., 2017. Tax Nomads Versus the State. In Offshore Finance and Global Governance (pp. 155-173). Palgrave Macmillan, London.
West, A., 2017. Multinational tax avoidance: Virtue ethics and the role of accountants. Journal of Business Ethics, pp.1-14.
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