The effects of tax avoidance has always been in the news. HSBC happens to be the most recent company accused of engaging in an unacceptable tax planning scheme that has made the company pay little tax in the UK where most of its operations are run from.
No one will be happy if what belongs to him or her is given to another without proper arrangement. Same applies in the world of taxation. You can’t make money in country A, shift it to country B using an out of shelf tax planning product that is now been aggressively marketed by major accountancy firms.
EFFECTS OF TAX AVOIDANCE
The effects of tax avoidance and tax planning on the society has been a controversial issue for a long time yet the government still fail to address the issue. It all started from the beginning when business charters are written by the government to favour their pals that are in business. This cannot be stopped. After all, how else will politicians repay business moguls that sponsored them financially during their campaign?
But, wait a minute. Blocking the loopholes in tax laws that are being exploited by companies in a bid to legally avoid paying tax in the countries where profits are made is easier said than done so the government are not entirely at fault.
Think of the horrible effects of double or even triple taxation on globalization. We all enjoy most of the good things in life that we now have is hugely due to globalization. Should regulatory bodies make it impossible for corporations to legally use tax planning to move profits to tax haven?
Well, in my opinion, this is the right thing to do but how? Scrap double taxation treaties? Not a good idea.
Dissertation for my Master’s degree from the University of Glasgow was on the implications of tax avoidance and how multinational companies use transfer pricing to avoid tax on a large scale that it becomes worrying.
During that research, I had a taste of what the regulatory body are going through just to make sure that businesses are checkmate on transfer pricing and foreign tax policies.
We all see companies as being evil when they exploit loopholes in fiscal policies of many countries doing what their shareholders want them to do which is to maximize their wealth. Well, in my opinion, companies are just doing what they are created to do. Google for example have bettered lives of many through job creation and some philanthropic gestures but yet still under the scrutiny of tax authority of many countries.
Okay, let me have my say on transfer pricing and tax planning
Part of the problem that Greece is having today is because business leaders chose to exploit the loopholes in the VAT ecosystem of Greece. But, is there any country in the world where people are not constantly looking for loopholes in the tax ecosystem?
In as much as there are many people that abuse and misuse the cool tool called transfer pricing for the pure purpose of tax planning. We still need to view transfer pricing and tax planning from some sort of positive angle.
At the end of the day, it is down to government of every country to keep patching the holes and creating another. That is what they are paid to do. Without this rat-race kinda relationship between businesses and government there won’t be many things to be excited about in this world.
You have to be aware that tax avoidance is an intelligent manipulation of tax laws in order to save on tax is legit as opposed to tax evasion which is to deliberately refuse paying your due taxes.
I will this section of the article to make suggestions on what can be done to dis-entice multinationals from aggressively pursuing tax planning.
Name and shame:
A lot of people will be dissuaded from engaging in industrial scale tax planning that uses transfer as its major component if the companies are named and shamed in the media.
Stock market response:
This is self explanatory. The stock markets have a role to play in helping government of different countries fight tax avoidance. The concept of ethical and responsible investing should not be limited only to the goods and services offered by the company but by their impact on the society that the businesses operate in. The stock market should react to reflect sharp practices in the share price of any company that have been named and shamed as aggressively using tax planning tool to avoid unacceptable taxes.
This is a harsh recommendation but possible. Companies will not want to risk mob action when they realise that this is now possible. The public should use their social media power to discourage their network from patronising any multinational company found to be engaging in an unaccepted tax planning practice.
Companies acting responsibly
Companies and their owners know the predicament faced by government of many countries that are stopping them from fighting transfer prices which are used to avoid tax. It is difficult for tax authorities to use iron fist in their bid to stop multinationals from exploiting the tax ecosystem.
What this means is that moral and ethical values from business leaders are the best that we can hope for until a sort of agreement is reached. OECD should push more in this direction. Though they are doing fantastic job but more is needed in persuading CEOs and other decision makers to act responsibly.
Imagine what it feels like when noise is created in your environment by a company only to then transfer most of the resources to another jurisdiction through transfer pricing and then realise the profit there thereby paying little tax.
Unification of tax rates:
Economists long ago found solution to the dilemma of exchange and interest rate prediction. Various theories like Fisher’s theory are used by economist as an acceptable tool to managing foreign exchange risk.
This same principle can be used to set a global tax rate that will ensure that no company will beat the tax system simply by setting up a shell corporation in one of the tax havens. The major problem with this proposal is that the sovereignty of countries will be jeopardised. But, it can be done.
Using BigMac index for example, tax authorities of different countries can easily set up a scaling taxing system that factors the origin of the proceed. VATs on goods and services that come from XYZ country can be set at the equivalent of what should have been paid from the originating country. This should apply only at the corporate level.
Managers and business leaders should focus on improving core business competences rather than spending huge amount of money buying tax planning programmes that will end up bring negative press. I also made some theoretical and practical suggestions that can help reduce the incident of industrial tax avoidance. And finally, tax planning is a vital business management tool that is used by all.