Business Ethics And Sustainability Global Income Tax Avoidance

Question: Discuss about the Global Tax Avoidance. Answer: Introduction The U.S federal government reports being losing both corporate and individual tax revenue from the movement of profits and income into tax heavens. The loss of revenue from tax avoidance have been estimated to hit a staggering $100 billion every year. This is according to a report released in 2008 by the U.S Senate Subcommittee on Investigations on Tax avoidance ad abuse. The report further posits that this amount includes all the offshore tax abuses that are practiced by individuals and corporates who do not want to pay their tax in entirety. The biggest category of those who avoid taxes include wealthy investors and large global corporations Global tax avoidance Global tax avoidance refers to the legal usage of the tax regime to ones own advantage in order to reduce the amount of tax one is supposed to pay. Interesting to note, this is usually done in a manner that is within the law. This is different to tax evasion where the process is considered illegal. One of the main ways in which individuals and multinational companies avoid payment of tax is through use of tax heavens Methods of tax evasion and avoidance by corporations and individuals Multinational companies Multinational companies are considered the biggest tax dodgers when it comes to evading tax liability Profit shifting One of the ways multinational corporations avoid payment of taxes is by shifting their profits from high tax areas to regions with low tax jurisdictions. They do this by using a variety of techniques one of them being shifting their debts to low tax jurisdiction. For instance, a multinational company based in the U.S will borrow more in their home country where the tax jurisdiction is higher and less in a country with low tax jurisdiction. The catch here is that the owners of the corporations can do this within the confines of the law and furthermore this doesnt change the debt exposure of the firm. This in other situations is usually is usually referred to us earnings stripping where the debt owned by the firm is not subject to taxation (OECD,2010b) Deferral of income Income of foreign earnings usually differs until these proceeds are repatriated back to the U.S. This means that these global corporations can avoid paying tax to the U.S government as long as this income are not paid back to the U.S as dividends. In summary, very little tax is accounted for on foreign source income by the U.S government as reports show that avoidance of tax payment in U.S alone exceeds $100 billion annually. Transfer of pricing This is another technique used by multinational organizations to avoid paying taxes, especially when operating in areas that have a higher tax jurisdiction. What happens is that organizations always lower the prices of goods sold by their affiliates firms in regions with higher tax jurisdiction. They then hike the prices of the same goods and services in regions with lower tax jurisdictions. By doing so they can shift profits from regions with high tax jurisdiction to low thereby avoiding paying the required amount of taxes that they were supposed to pay. Cross Crediting. Income sourced from a country considered as a tax haven received in the home country of the multinational company can escape being taxed due to cross-crediting. Cross-crediting simply refers to the use of excess taxes paid in one jurisdiction to offset the home country tax that will be pending on other foreign income. This has been made worse by the possibility of this corporation having the leeway of choosing when to repatriate the income to their headquarters located in regions with high tax jurisdiction Individual taxes Individuals can also avoid paying taxes on passive income they accrue from businesses abroad. This passive income may be informed of dividends, capital gains, and interests. Because this interest paid from foreign entities is not taxed, individuals can avoid paying taxes in their home countries. Another way in this individuals avoid paying taxes include coming up with shell corporations in foreign havens where they channel their earnings thus avoiding tax payment in their home countries(Friedrich, 2007) Tax evasion and avoidance by individuals have further been worsened by the ease of making financial transactions through the internet. By just the click of a button, individuals can invest and purchase foreign stocks and offshore bonds and not report income realized from this investment to their home country. Tax havens There is no perfect definition for tax heaven, but the Organization for Economic Development and Cooperation (OECD) based in U.S highlights characteristics of those countries that have been referred to as tax heavens. Some of the features of countries referred to as tax heavens include; They have zero or no tax policies They lack transparency They lack effective exchange of information They do not have any requirement for one to run any activity According to Tax Justice Network (2012) there exist more than 70 tax havens in the globe. This tax haven is believed to harbor approximately over $ 20 billion belonging to multinational corporations and individuals. This figure is high due to the illegal activities involved with the money trickling into this coffers. The source of this money range from activities such as money laundering, arms trade dealings, corruption to other criminal activities. Tax heavens as mentioned above operate under a different set of universal rules. Also, foreigners and internal corporations are lured to this countries due to the special privileges they enjoy one of them being able to violate certain laws (Oxfam, 2000). Different tax havens come with different features. There are those who offer watertight banking secrecy while others specialize in offering low levels of taxation to foreigners and multinational corporations Some of the countries that are considered to be tax heaven for individuals and global corporations include; Costa Rica, Panama, Bermuda, Bahrain, Jordan, Lebanon, Samoa among others. Tax anti-avoidance measures One of the stringent measure that would curb the issue of tax avoidance would be changing tax laws in home countries to address issues of profit shifting by individual and multinational companies. The law would also purpose to address the following issues that tend to give leeway to tax evaders (Evan, 2002) Limiting deferral of passive income Creating policies that will deal with the issue of having foreign tax credit offsetting income. For instance in U.S new policies have been introduced that would see to it individual do not evade payment of taxes. Some of the provisions to curb individual tax evasion include increased penalties to individual practicing tax avoidance, increased enforcement, and stringent information reporting by individuals with foreign business entities. One such policy has been the enactment of Foreign Account Tax Compliance Act (FATCA) which requires offshore financial institutions give a detailed report on asset holders considered foreigners ( Phyllis , L 2003). One of the approaches that have been adopted to mitigate the issue of profit shifting has been the repeal for deferral. This means that by instituting a worldwide taxation system that will cover foreign sources income, issues price shifting can be a problem of the past. Restricting taxation to countries referred to as tax havens would also address some of the tax avoidance issues that are being experienced in the global economy. Issues of leveraging and pricing transfer will always be there unless regulations that cover countries branded as tax havens are adopted (Friedrich, 2005) At individual level information sharing between nations can go a long way in dealing with tax avoidance problems. Information reporting can include bilateral efforts and enforcement of trade treaties that will ensure agreements between the host nation and foreign countries adhere to agreed tax policies (Mann,.2004). One of the stringent measures that have been proposed to deal with the issue of tax evasion and avoidance has been the proposal of sanction of countries highlighted as tax havens. Proponents of this argue countries noted as tax havens and are non-cooperative when it comes to bilateral agreements should be denied benefits that are accrued from interest exemptions. Moreover, stiff penalties are to be imposed on those countries receiving proceeds from money laundering activities and terrorist financing (Pashev,2005) Conclusion In conclusion, it is evidence that weak capacity in investigating and prosecuting tax evaders has fuelled the issue of tax evasion globally thus a well-equipped international body concerned with dealing with tax evasion should be formed. Moreover, developing countries appear to be more vulnerable to tax evasion techniques such as profit shifting by multinational enterprises and the improper use of available tax incentives meant to attract foreign investment (Antony,.2004) As a result, increased international cooperation and collaboration is imperative because these ties have been seen to strengthen the parties that are involved. These collaborations create an opportunity for socialization on tax procedures and reforms and best methods of fighting avoidance and tax evasion in the region. Finally strengthening tax policies and restrictions especially in tax havens may also go a long way in ending this vice References Antony,L.2004 ,Developing capacity for tax administration The Rwanda Revenue Authority,European Centre for Development Policy Management Discussion Paper No. 57D. Evan, L 2002, Taxation Data as Indicators of State-Society Relations: Possibilities and Pitfalls in Cross-National Research, Studies of Comparative International Development 36(1), pp. 89-115. Mann, J.2004, Are semi-autonomous revenue authorities the answer to tax administration problems in developing countries? A practical guide. Phyllis , L 2003, Tax avoidance and anti-avoidance measures in major developing economies, Westport. OECD 2010b, Promoting Transparency and Exchange of information for tax purposes Oxfam 2000, Tax havens: releasing the hidden billions for poverty eradication, Oxfam GB Policy Paper. Pashev, K.2005. Tax Compliance of Small Business in Transition Economies: Lessons from Bulgaria. Working paper 05-10. Andrew Young School of Policy Studies. Atlanta Georgia. SBP 2005: Counting the cost of red tape for business in South Africa. Friedrich, S 2005, Shadow Economies of 145 countries all over the world: What do we really know? Mimeo, University of Linz. Friedrich, S 2007, Shadow Economies and Corruption all over the World: new estimates for 145 countries, Economics, The Open Access, Open Assessment e-Journal, No. 2007-9,. Tax Justice Network, 2012 U.S. Senate Subcommittee on Investigations, 2008. Staff Report on Dividend Tax Abuse