Two Major Techniques to Identify More Profit in Areas of Low Tax Jurisdiction
Discuss about the Taxation Law for Profit Shifting Strategies and Policies.
There is a perception that the corporate tax revenues of many countries are lost due to the international tax planning. Big companies that have branches in parts of the world should therefore developed suitable profit shifting strategies and policies that can improve the performance of the Google tax in order to provide favorable treatment to the companies and the general population (Kaminsky, Angell & Evora, 2018).
Two major techniques used to identify more profit in areas of low tax jurisdiction are use of transfer pricing and increased leveraging, predominantly of intangible assets for example technological advances, drug formulas, and trademarks. In order to shift profits by use of leveraging, companies will have to discover their debt in countries of low tax jurisdiction. The method involves both United State firms tracing their debt in US rather than participating in foreign parents of United State (Hoffman & Tan, 2015).
The Google tax code is made up of general provision that help in limiting interest deductions, prevent deductions that is more than 50% of the total income before, depreciation, interest, as well as other deductions (Balakrishnan, Blouin & Guay, 2018).
The second technique of profit is by transfer pricing techniques that help in the determination of price linked to transfer of assets and goods (Akamah, Hope & Thomas, 2018).
Google tax prevent the tax avoidance by imposing penalty on large organizations that are fond of shifting income in foreign countries through certain corporate structures and transactions. Under the law of the UKDPT, A total of twenty five percent tax is levied on profits that should be taxed and reported in the United State, but were later shifted to other countries. Under the Australian law, a penalty of 120% of essential taxes is levied on profits that should be reported in the country (Australia) but were shifted to other countries.
Google tax will benefits business owners, specifically those who are operating an online start up business and small business who are using Google and Facebook for marketing promotion and advertising, then the Google tax will be the best strategy to be used in promoting the small business (Schippers & Verhaeren, 2018).
There are various ways in which companies may shift profits to where there is lower tax jurisdiction from areas where they are generated the profit. The strategies that the companies can include the following:
Google Tax Code
These are agreements that exist between different nations to alleviate the intensity of double taxation. Before the enactment of the tax treaties, when the investments was made in foreign nations, both the nations that act as the source of income and the nation which provided the capital would entirely tax profits. The intention of the tax treaties was to reduce trade barriers by jointly reducing the necessary taxes of the residents of one country to that of the other nation. The provision of treaties may differ greatly but most of them depend on the convention of the model.
To reduce the payment of tax, companies can trace profits through various countries to obtain advantage of a particular conditions of tax treaties that are being used in those countries, a strategy that are in use is called treaty shopping. Treaty shopping is the firm’s practice not entitle to the advantages of a tax treaty in a particular nation to get these benefits through artificially creating operations in a different third nation by use of special purpose vehicle or conduit entities. The conduit tax of the entity residence that are found in the treaty nations, it seek for the advantages of the tax treaty regardless of the individuals who will receive benefit from that particular income, they should not receive any benefits. All laws, both the international and domestic, have been obeyed thus this practice cannot be regarded as the tax evasion. Companies use treaties, which are put in place to remove double taxation, by legal means to get a single taxation (Thompson, 2016).
The easiest way a company can acquire benefits of a particular tax treaty even if you are not a resident of the treaty nation is through direct conduit strategy by using SPE. Special purpose strategies such as Shell companies, holding companies and financing subsidies share similar features: They employ few employees as well as having little by way of production or operation, they are legal companies with each and every one with its residency, all their liabilities and assets are foreign investments and they are controlled and owned by nonresident (Callaghan, 2015).
To provide illustration of the conduit strategy, let use an example where a company that is located in country A obtains the income of the business from Country B that does not possess any tax treaty with the other country mentioned as A. (Bokulich et.al, 2018). The company could form conduit firm in another country known as C which benefits as a result of the tax treaties with B and A. Profits would flow from B-C and from C-A with benefits of lower or no withholding tax. The net outcome is that country B will get smaller amount of tax, country (C) which is the conduit country will get higher tax revenue and the Company will settle less tax compare to when income was transmitted directly from B-A. In this illustration it is true that country C should make use of conduit firms, to the disadvantage of country B ( Grace, Kivell & Laugesen, 2015).
Transfer Pricing Techniques
The second most essential strategy is called stepping stone strategy. As before, a company who has tax residence in country A gets income from nation B. The Company developed an SPE in country C which obtain benefits of a reduced tax regime. The Special Purpose Entity either creates loan to the company, own properties that it let to the Company in country A, Charges royalties, commission or management fees. On the other hand, Country C can experience high rate of tax in case the country prefers the activities to be perform in the SPE which will not be enough in producing a taxable presence. Profit move from country B to A but are offset because of the payments affiliate in country A-C, Which country A will be deducted. At the end, profit recorded in country A will be shifted in Nation C at low or no tax, thereby eroding tax base of country A. (Schneider, Raczkowski & Mróz, 2015).
Domestic tax laws of various Nations do not equally identify legal structures of some entities, for example limited liability Company, partnership, and trusts. Some countries may considers this type of entity as a taxable individual while other countries may considers it transparent for the purposes of tax in a way that is the same to the rule of check the box in the US. To illustrate the application of Hybrid entity strategy, take for example a company in a nation A acquire a loan from its Mother (Parent) located in country B. The payments of interest will be subtracted in nation A while country B Deliberates the Company fiscally clean for the purposes of tax as well as the receipt of income is thus not subjected to tax. This will lead to a deduction without the use of the taxable income, therefore violating the principle of reciprocity. Tax treaties are not the only factors that make the strategy to perform with a lot of ease. Frictions and gaps in domestic treaties, tax laws stays the most suitable tool to tackle the situation.
To summarize, treaty shopping is the process where an individual or Company which are not being found in any of the treaty countries creates operations in one of the treaties nations to get treaty benefits they were not receive suppose. This explanation indicates that the benefits of the negotiation of the treaties of may extend to general citizens of another nation in a method required by the countries. Tax treaties mostly involve provisions for collaboration on the avoidance of tax and sharing of information.
Benefits of Google Tax
Different countries approach this issue in different ways. United State normally contains in its tax treaties created with other nations particular rules that limit the benefits that are associated with the treaty in different circumstances. The rule is known as ‘LOB’ or ‘limitation on benefits’ provisions. Canada generally depends on their domestic law anti- treaty shopping provision and excluding it in the rules that regulate the treaty itself.
When two different organizations participate in trade, both the two parties have the duty to try reducing profits and that price on which they level at is regarded as the market price. Nevertheless, when to different subsidiaries of similar multinational involve in a trade, the profit maximization of the groups does not happen if all the parties determine the market price through negotiation. Because intra- firm trade indicates a larger proportion of multinational trade, the abuse of the transfer pricing may be the main causative of profit shifting. If the profits derived from the transactions are unrelated than if the trade is performed between different independent enterprises, the authority of the country can increase the price. The price makes use of the intra-firm trade is known as the market price. The all process is known as the arms-length principle.
When there is existence of goods that is being used to trade, the principle of the arm’s principle offer an important benchmark. For commodities where there is no market exist, nevertheless, the enforcement and application of the principles is not an easier task.
Many researches offer evidence of this kind of price manipulation `by assessing changes in the price of US exports and imports when open to changes in tax incentive (Spartà & Stabile, 2018).
The regulations mentioned four techniques for finding arms- length deliberation for intangible property transfer. They include: unspecified methods, the profit shift method, CPM (Comparable profits method), CUT (Comparable uncontrolled transaction).
Section 1.482-4(a) of income tax regulation provides that these techniques must be used in accordance with Income Tax Regulation provision, section 1.482-1.
To finance multinational operation, companies can make use of utilize equity or issue debt. Debt, can be in the form of lending of the third party (banking credit facilities, credit markets) or derived from subsidies/related (intra-firm loan), lead to the increase in interest payments which decreases the taxable amount recorded as profit Dividends are then being given to equity owner. Companies try to hold a larger part of their debts in situation of higher level of jurisdiction (Muehlbacher, Kirchler & Schwarzenberger, 2011).
Strategies That Companies May Use to Shift Profits
It is true that Companies is capable of shifting the location of profits by examining the deb: assets ratio
Federal government usually provides the domestic law that ensures increases in the profit and decrease in the tax payable. The government should initiate income tax act known as the General Anti Avoidance Rule to help control the Google tax. The Domestic tax law that covers the transfer pricing problems should be established in order to reduce the problems that most of the Multinational companies are facing due to the Google tax. Examples are the creation of income act policies can help solve most of the issues that affect trade in most of the countries. The government should also increase the amounts of the taxable income to Companies that fails to follow the policies for example the arm’s length where firms participates in transactions that do not follow the arm’s length. The penalties should also be given to those Companies that do not follow the required trading procedures (Duckworth, Gendler & Gross, 2016).
Firms can also combat treaty shopping by developing anti abuse provisions that deals with the laws relating to tax. The main advantages that are associated with addressing the issues of treaty shopping is that the process can be completed in a shorter time and it require less resources for it accomplishments (Anders, 2016). The anti- avoidance rules should be used by the two trading partner (Drucker, 2010).The domestic tax laws should be consistently and simultaneously applied to all the trading partners, even nations that receive benefits from profit shifting should not oppose the creation of the anti-erosion clause (Awang, Abdullah, Tahir & Rahim, 2018). The GAAP rule should be created with the objective of reducing the problems that deal with the tax avoidance. The general rule should be less complex and should lead to more uncertainty to the taxpayers who are trying to optimize its processes and for the authorities who wanted to make decision on things that deal with the tax avoidance. GAAP should not be the only tool to be used in controlling treaty shopping. More specific rules with objective and quantifiable test must be added to GAAP. These rules will indirectly control treaty shopping by prohibiting benefits based on residency and ownership criteria. To counter the application of conduit firms, the policy should add different clause to tax treaties in order to prevent benefits in case the organization is not owned, through different companies, by individuals who are not residing in other treaty nation (Carter, Christian, Hobbs & Campbell, 2011). This approach is called look through approach. This type of the approach is more important to solve cases that deal with treaty shopping in countries where the firms has very little or no business activity. The limitation of this approach is that it does not allow benefits to Companies with non-tax avoidance, legitimate reasons for organizing their affairs through different countries (Goltz & Mayo, 2018).
Treaty Shopping
Countries should enact different rules to prevent the deduction of interest that is being paid to related parties. Rules that are based on the firm’s balance sheet, for example the Capitalization rules of the Canada, are the simplest to enforce and administer. Simplicity can also act as the weakness of the rules because most of the big Companies can easily estimate their debt as well as reducing their intra company profit shifting while staying just under 2 debts to offset the limit of the equity (Aalbers, 2018).
Earning stripping rule will prevent companies to forecast on the measures of the income statement. This will inhibit different Organizations from increasing their profit shifting by use of the intra- company loans. Earnings stripping rules are difficult to administer.
The rules discussed above only take into consideration the interest on debt for the Companies that are involved in the transaction process. Before making decision on whether to limit leverage of debt from the other third parties, Companies or the government must understand whether the multinational maintain a higher leveraged affiliate in countries that has high rate of tax. Companies mostly have higher leverage since the costs of debt after tax is lower in countries with high tax, thus they mostly put their effort on the debt of related party (Cawley, Willage & Frisvold, 2018).
Conclusion
This paper has examine a new type of the Google tax and how it affect the performance of the organizatuio.it also examine the role of the multinational of shifting profit to low tax jurisdictions. The Google has more problems than the benefits which it offers to most of the countries (McClure, Lanis & Govendir, 2017). This is because the policy erodes universal tax treaty conventions as well as disrupting universal coordination on issues that deals with tax. It is therefore essential for Policymakers to come up with new intervention on how to improve the performance of the Google tax in most of the countries. The Google tax should be incorporated with other Multinational Anti- avoidance law to enable the policy to be more effective in controlling tax avoidance by different Nations in the world. The big companies should make use of the Google tax to help combat the problems of tax avoidance. The largest facilitators of profit shifting are the rules that relate to transfer pricing, specifically its use of the one- sided tests. The one sided test apportioned the total profits to the parties that are untested, thereby lowering the jurisdiction of tax. Google tax is more important because it allows different companies to engage and participates in trade from different regions. To ensure that it is properly used, organizations should combine with the government with the aim of developing important policies and strategies that will guide the working of the approach. Companies should ensure that the implementation of the Google tax is done with the help of suitable experts that are well conversant with the approach. From the paper, we find that proper coordination between the trading Companies that are doing business together is core for the success of the profit shifting. Therefore different Organization should work together to ensure that Google tax benefits the all organization.
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