Taxation Law Case Study Assessment
Question
Task:
“[T]he last 40 years in Australia has seen a blurring of the three categories (between tax planning, tax avoidance and tax evasion), in particular, the distinction between [what constitutes] tax avoidance and tax evasion” (Xynas, 2011). Alongside economic globalization, the recent decades have witnessed the rise of transfer pricing that facilitates the free movement of capital and tax avoidance (Hampton & Sikka, 2005; Sikka, 2017). In conventional accounting literature, transfer pricing is portrayed as a technique for optimal allocation of costs and revenues… Such representations… simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the light of capital” (Sikka & Willmot, 2010, p.342).
Required:
- Discuss the overlaps and distinctions among tax planning, tax avoidance, and tax evasion, with particular reference (but not limited) to Xynas (2011).
- Explain and evaluate the concept of transfer pricing and how it relates to the above quotes. You should address the issues including (but not limited to) the social, political, financial and ethical implications on business and broader society.
Answer
Discussion Of The Overlaps And Distinctions Among Tax Planning, Tax Avoidance, And Tax Evasion, With Particular Reference To Xynas (2011)
As per the given taxation law case study, majority of the transactions indeed have a tax effect. For anticipation of the same and reducing an individual’s taxation costs is an element of competent business. In accordance with this, tax minimization is not considered as prima facie illicit. Furthermore, businesses and taxpayers can involve in tax minimization in a situation where it does not subject to a contravention of the common law anti-avoidance rules or the GAAR11. Of course, taxpayers are not willing to make payment of extra taxes than their obligations allow, at the same time taxpayers participate in quest of individual or business affluence. Further, the readings of the taxation law case study signifies that the distinction between tax planning, avoidance and evasion practices is totally based on what is acceptable on legal terms and what is taken into account as unacceptable or unlawful. On the other hand, in the last four decades, Australia has been considering a blurring of these three classifications, especially the dissimilarity between tax avoidance and tax evasion (Lee, 2018).
In simple terms, it can be stated in the taxation law case study analysis that tax planning is a true approach of implementing the provisions which emerge in the taxation law framework. Furthermore, the acceptable tax planning is the legal exploitation of the common business framework and the legislated tax incentives that can lead to retention of a positive tax result for the taxpayer. An acceptable yet efficient tax planning is referred as delaying taxes from the existing period into latter period, arbitraging throughout different various stream of income experiencing distinct treatment of tax and transfer of income from larger tax brackets to lesser.
On the other hand, until lately, tax avoidance was also not considered as legal, as in the former period, the term was employed to define that taxpayers has used legal methods to reduce their liabilities. The popular saying of Lord Tomlin in IRC v Duke of Westminster [1936] considered in the taxation law case study asserted each person is allowed if they can to arrange their affairs so that tax involved as per the suitable act is lower than otherwise it would be. However, now recent Australian tax law states that tax minimization, although comes into question when the arrangement is conducted merely for the main aim of preventing tax payment and result into law infringement (Braithwaite, 2017).
This might allow taxpayer to engage in some schemes of tax avoidance where the tax minimization is attained via albeit legalized mechanism, however they are contrive and artificial in nature and have no reason, besides acquiring a benefit on tax.
However, tax evasion activities are seen as the illegal misrepresentation as a mechanism of minimizing tax. According to law, this practice is highly unacceptable, and this can take place when individual use fraud methods for the evasion of the tax payment (Arcos Holzinger and Biddle, 2016). The main distinction is that tax avoidance engages employing or trying to employ legal mechanism to decrease compulsion of tax, however, the tax evasion makes use of criminal mechanism to avoid payment of tax, therefore tax avoidance is legal and tax evasion is illegal. It has been evident in the taxation law case study that tax evasion as well as avoidance are not viewed as chargeable practice; as the taxation system is owned by the individuals and entire community suffer if certain members falsely or deceitfully evade changing their true contribution to retain a civilized community.
Evaluation Of The Concept Of Transfer Pricing And Addressing The Issues Related With Social, Policies, Financial, Ethical And Broader Society
Transfer pricing is considered as the transaction came into effect between associated parties which is paid for products/services. There are various global transactions which are directed and controlled by Transfer Pricing Rules inclusive of support services, sale or purchase of fixed assets, sale or purchase of intangible assets, information technology services, obtaining raw material or fixed assets, finished goods sales and so forth. When implemented, transfer pricing rules enables tax authorities to make adjustment in prices for majority of the cross-border intragroup transactions inclusive of transferring of tangible or intangible assets, loans, property and services (Li and Paisey, 2019). It can be stated in the taxation law case study that, MNCs establish subsidiaries in several parts of the world for gaining effectiveness, economies of scale and for leveraging the distinctions between nationwide rates of tax, and this is referred as transfer pricing.
However, this practice has turned out to be a tax problem if the tax authorities began to discover that MNCs are considering the manipulation of transfer pricing for taking benefit of lower liability (Karpenko, 2018). Therefore, transfer pricing is a concept employed by business entities to attain the valuable purpose of profit maximization, on the other hand, this might be damaging to the nation that has experienced a loss in termed of possible tax revenue.
It can be reflected in this aspect of taxation law case study that, tax avoidance has gained utmost amount of limelight, and has attracted media, public, and parliament to the huge extent. Furthermore, the major actors concerned are the revenue authorities, taxpayers as well as advisors in a complicated national and international tax setting that give birth to risk and uncertainties, varying understanding over tax provisions, along with exploitations of the tax system loopholes at local and global front (Ying and Yuan, 2017). There are several methods for evaluation of transfer pricing namely;, resale price method, cost plus method and comparable uncontrolled price method.
From the taxation law case study, it has been assumed that transfer pricing is seen as morally wrong, it is because it damages the society at huge extent. In this way, transfer pricing is observed as a legal opportunity for business by worldwide entities, however it is employed to do misinterpretation of evasion of taxes and financial success (Andrus and Collier, 2017). As a result, the pursuit of economy opportunity by developing countries has someway sacrificed ethical concepts in business, as transfer pricing is resulting into economic suffering and raiding of resources in host nations, thus causing unsustainable growth.
Given in the taxation law case study that, costs as well as overhead allocations tools are extremely subjective and companies tale benefit of immense discretion in the allocation of same to specified goods/services as well as geographical jurisdictions. To this note, this discretion can allow them to reduce taxes and thus pull off profits by making sure that, majority of the profits are positioned in low tax or risk jurisdictions (Calder, 2016).
In the similar note, transfer pricing can enable corporations to prevent double taxation, however it also open the doors of abuse. It can be utilized to shifts profits on an artificial basis from a large to lower tax jurisdiction, by maximization of expenditures in the previous and income in the future (Syromyatnikov, Dolgova and Demin, 2020). By considering this aspect based on the given taxation law case study, it can be articulated that, transfer pricing is highly complex and time-consuming method, it gets complicated to establish prices for intangible assets like services delivered. In this aspect, sellers and customer conduct various functions and therefore make assumptions of various types of related risks. For example, the seller may avoid offering a product warranty (MENCONI, 2017).
In regards with the transfer pricing, the taxation authorities held themselves in an odd situation, without global agreements on the information exchange they each have only a partial view, limited to the subsidiary under their jurisdiction, of the faithful and actual economic position of MNCs. To the degree that its skills and resources allow, every authority would at least try to end multinational consideration tapping off its fiscal substance of nation for the advantage of jurisdictions with highly lenient tax regimes (Smolarski, Wilner and Vega, 2019). By this aspect, some authorities, especially those with light and moderate tax regimes, might actually motivate multinationals to higher the amount of added value they announce to them above the threshold. Therefore, as per the given taxation law case study, the interests of the different national authorities are not inevitably the same. Furthermore, this subjects firms to the scale of regulatory uncertainties which might risk their operating outcomes and thereby their organizational activities and policies.
No nation, weak, developing or rich, wants its base of tax to suffer due to transfer pricing. While they assist companies to prevent double taxation, they also assist tax authorities to gain a truthful tax base share of multinational entities. However, the transfer pricing abuse might be a specified issue of developing nations, it is because nations might benefit of it to gain round exchange controls and to send back profits in a tax free way (Beebeejaun, 2018). Moreover, the practices of transfer pricing are responsive towards opportunities for identifying values in manner that are substantial for improvising private gains, and thereof contributing to comparative social hardship, by preventing the public tax payment. It is very apparent that businesses majorly uphold the major principle ‘acquiring maximum profit by reducing capital and investments. In context with the same, the term capital or investment in that principle is not only described as pre corporate wealth contribution but also the wealth of the company which is needed to operate the business. Thus, the findings obtained in this section of taxation law case study assessment signifies that it is not always possible that undertakings developed in their individual ways increase profit by preventing taxes. Although, the avoiding of tax is not against the law, but in some situations it can highly damage the revenue of government, affect society as a large and disgrace ethics (Davies and et al. 2018).
Tax policy and administration related with global transactions, aggressive tax planning as well as tax avoidance have turned out a big issue of widespread national and global debate in both developed and developing nations alike. In the similar context of taxation law case study, on an historical basis, the transfer pricing is a matter of restricted specialist interest, which has gained name recognition amid a wider international audience that is concerned with reasonable fiscal policy and sustainable development (Tavares, 2016). Above all, abusive transfer pricing practices are viewed to pose significant risk to the direct base of tax for majority of countries, and specifically developing countries are more subjected as corporate tax seems to account for huge share of their revenue.
Henceforth, in the view of global and at time the controversial transfer pricing nature, it is significant to establish internationally shared principles to assist each country fight against the abusive transferring of profits abroad and simultaneously restricting the risks of profit’s double taxation. In a nutshell, transfer pricing do offers tax benefits for multinational company but generally or unregulated authorities tends to employ it for tax avoidance. Moreover, with the help of transfer pricing companies can ensure better profits for products as well as services in various countries which have reduced tax rate (Forstater, 2018). By considering the overall facts presented in the taxation law case study, it can be concluded that, indeed transfer pricing is important, its major objective is to ensure that the transactions helps between related entities emerge at a price as if the transactions was emerging between unrelated parties. By making use of transfer pricing rules, the companies would be capable to manage their business framework in a more flexible and effective manner. It is also evident in this taxation law case study analysis that transfer pricing assist in making reduction in costs by shipping products into nations with huge tariffs rates at minimum transfer prices so that the base of duty of the concerned transactions are quite low. However, other hand its advantages, it also has several series of limitations and risk for countries and multinational companies, as it engages various additionally associated costs, and for developing an effective accounting system in adherence with transfer pricing, it demand for extensive time and human resources. In case of big multinationals, the procedure of transfer pricing turned out only extremely complicated but also consumes more time, and because of conflict regarding transfer pricing there can be presence of dysfunctional conduct between organization unit managers. The concept of transfer pricing also carries a set of ethical dilemmas and societal issues, as it can hinder government of their reasonable tax shares from international companies and subject MNCs to potential double taxation (Cristea and Nguyen, 2016). It can be stated in the taxation law case study that unethical behavior of transfer pricing can create daunting impacts such as higher consumption of scarce resources, causing costs but not creating value.
References
Andrus, J.L. and Collier, R., 2017. Transfer Pricing and the Arm's Length Principle After BEPS. Taxation law case study Oxford University Press.
Arcos Holzinger, L. and Biddle, N., 2016. Behavioural insights of tax compliance: An overview of recent conceptual and empirical approaches. Tax and Transfer Policy Institute-Working Paper, 8.
Beebeejaun, A., 2018. The efficiency of transfer pricing rules as a corrective mechanism of income tax avoidance. Journal of Civil Legal Sciences, 7(1), pp.1-9.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Calder, J., 2016. 4 Transfer pricing–special extractive industry issues. International Taxation and the Extractive Industries: Resources without Borders, p.79.
Cristea, A.D. and Nguyen, D.X., 2016. Transfer pricing by multinational firms: New evidence from foreign firm ownerships. American Economic Journal: Economic Policy, 8(3), pp.170-202.
Davies, R.B., Martin, J., Parenti, M. and Toubal, F., 2018. Knocking on tax haven’s door: Multinational firms and transfer pricing. Review of Economics and Statistics, 100(1), pp.120-134.
Forstater, M., 2018. Illicit financial flows, trade misinvoicing, and multinational tax avoidance: the same or different?. CGD policy paper, 123, p.29.
Karpenko, I., 2018. Comparability Analysis in Transfer Pricing. Accounting and Finance, taxation law case study (1), pp.87-92.
Lee, J., 2018. The Effectiveness of Part IVA of the Income Tax Assessment Act 1936 (CTH): Time for a Not Merely Incidental'Purpose Test. J. Austl. Tax'n, 20, p.1.
Li, J. and Paisey, A., 2019. The Concept of Transfer Pricing. In Transfer Pricing in China (pp. 7-13). Palgrave Macmillan, Singapore.
MENCONI, C., 2017. TROUBLE WITH TRANSFER PRICING. Strategic Finance.
Smolarski, J.M., Wilner, N. and Vega, J.G., 2019. Dynamic transfer pricing under conditions of uncertainty–the use of real options. Journal of Accounting & Organizational Change.
Syromyatnikov, D., Dolgova, M. and Demin, S., 2020. Transfer Pricing In Emerging Markets. ELIT–Economic Laboratory for Transition Research Dz. Washingtona 4/5, 16(2), pp.203-218.
Tavares, E.M., 2016. Multinational transfer pricing: a new documentation paradigm (Doctoral dissertation).
Ying, J.L. and Yuan, Y.S., 2017. Related parties as used in transfer pricing. Taxation law case study Singapore Management University School of Accountancy Research, 5(2).
