The Curious Case of Corporate Tax Avoidance - Assignment Example

Analysis of Articles Your name: Institution name: Part 1 This outline is about two articles which the whole review is all about. One, article on “Brussels criticises Apple’s Irish tax deals,” and two, the article on “Curious case of corporate tax avoidance: is it socially irresponsible? In “Brussels criticises Apple’s Irish tax deals” article, the EU had released a letter to the Irish Government and its reasons why it believes Apple Inc was given special tax deal between 1991 and 2007 to reduce its tax liabilities, and this was against international standard of transfer pricing rules (Barker, 2014). The investigation by the EU was started in June, 2014, and was done into two individual tax rulings that was offered by Irish Revenue two Irish subsidiaries- Apple Operations Europe and Apple Sales International. At that time there were “serious doubts” about the compatibility of the tax deal with the European Union treaty rules on state aid (Barker, 2014). This investigation looked at the transfer of pricing arrangement that was between Irish government and Apple Inc. According to Apple’s CEO Tim Cook told a Senate Committee that was held last year is that Apple Inc had negotiated a special tax rate preference of less than two per cent with the Irish government, while the country’s tax rate is 12.5 per cent. In a 21 page document, the EU details the tax ruling that was issued by the Irish Revenue in 1991 and 2007 did not comply with the arm’s lengths principle. The EU was of opinion that through the ruling the Irish government confer an advantage on Apple Inc (Barker, 2014). And that advantage was obtained every year and was ongoing, when the annual tax liability was agreed upon by the tax authorities in view of that ruling. Netherlands and Luxembourg were also investigated for tax rulings offered to Starbucks and Fiat. In the second article, “Curious case of corporate tax avoidance: is it socially irresponsible,? The article is all about the silence of on the issue of the payment of corporate tax (Dowling, 2014). In contrast to many aspects of the social responsibility of business, scholars have been silence on the issue of the payment of corporate taxes (Dowling, 2014). This is because tax payment is often considered a fundamental and easily measured instances of a corporate’s citizenship behaviour. However, payment of taxes can be legally avoided, this activity has represented boundaries conditions for most corporate social responsibilities. There have been widespread practice of avoidance of tax among corporations and this has sat uncomfortably with much of the moral rhetoric in many code of conduct and pronouncements by advocates of social responsibility (Dowling, 2014). Many corporates have in the past proudly claimed their social responsibility yet they avoid paying their corporate taxes, and these corporations don’t see hypocrisy in their behaviours. In contrast, most corporations actively avoid tax and see this activity as part of their financial responsibility of the corporation. Part Two Taxation system differ from one country to another. Most corporates are able to exploit these differences in-order to limit their obligations with regard to paying taxes (Gurría, 2011). The practice is known as cross-border or inter-boarder tax arbitrage- involves using differences between the taxation procedures of two countries to structure a transaction with the aim of securing tax benefits that would not exist had the tax system had occurred domestically (Tanzi, 2006). The ability to engage in tax arbitrage has increased over the years with a lot of roles being played by cross-border investments and global trade (Gurría, 2011). Not only have the corporates found greater opportunities to engage in tax arbitrage, but tax lawyers have also increasingly exposed to the differences in taxation systems (Hill, 2014), allowing them to advice on the best means of paying minimal taxes. A report by Advocacy group Citizen for Tax Justice that was published in 2011 looked into tax dodging among corporation and found that 80 US’s corporations out of 300 largest corporations paid no taxes, for at least one year since 2007 (Ballr and Minor, 2012). Among the many loopholes at their disposal is the tax arbitrage. Expert of tax arbitrage have developed a lot of ways of tax avoidance, some of which involved some absurd ways. For example, ones that involves chopping of a motor vehicle in half such that they qualify as “spare parts” at the border (Owens, 2011). Upon the vehicle being cleared by the border customs, the vehicle is then joined back together and ready to be disposed having paid lower taxes than on an otherwise new, imported motor vehicle (Tanzi, 2006). As it has been noted, most corporations in the UK do their level best to keep their efforts to use tax arbitrage in order to avoid payment of tax (OECD, 2004), and therefore it’s no surprise that their tactics succeed in costing the UK’s government billions and billions of dollars, while remaining invisible. In 2012, the OECD have requested the policymakers in developed countries to limit their scope for “gaming” the arbitrage system by using multiple deductions, the development of untaxed income and other unintended consequences of tax arbitrage (Dowling, 2014). In addition, to lost in income or revenue to a country, the OECD also noted the negative impacts of “tax arbitrage on transparency, competition and fairness” in the international economy (Barker, 2014). It is for this reasons that have made the US President Obama Barack announcing his intention for his government closing these tax loopholes on foreign investments (OECD, 2004), just weeks before the French government and other EU government declared an end to tax havens during the G20 Summit in Cannes. With public debt on the global stage, the strong posture of the OECD towards corporate tax avoidance has been seen by many as a step in the right direction (Owens, 2011). Although, the world’s debt problems will not come to an end by increasing measures to prevent non-payment of tax loopholes (OECD, 2004). As former OECD’s official, Owens Jeffrey puts it, tax is not among factor that contributed to financial crisis (Hill, 2014), but inappropriate tax measures have indirect impact on financial instability by encouraging greater risk-taking, greater leveraging and less transparency. Most Europeans countries are in agreement that improved accountability and transparency in the international financial system can slow down aggressive tax planning (Gurría, 2011). For example, a 2010 report by Global Financial Integrity, stated that as much as 10 trillion dollars have been starched away in offshore tax havens countries and secrecy jurisdictions located across most countries (OECD, 2004). Moreover, over the past three years alone, cracking down on financial institutions secrecy has brought most governments in the EU nearly 30 billion dollars in additional income (Hill, 2014), this is according to the figures that were published by the OECD in November, 2011. In conclusion, tackling aggressive tax planning have been seen to be a powerful weapon against debt burden that was created by most EU nations as well the US (Hill, 2014). Therefore, people are counting on the leadership of OECD’s in closing those loopholes that appears in the system in order to get out of a much bigger one (Tanzi, 2006). That’s why the UK government has welcomed the emphasis on transparency in the plan which picks up the proposals that was passed in recent G8 summit to require corporations to report their revenues on country-to-country basis to relevant country’s tax authorities. Part 3: Those policies and regulations that encourages businesses to increase investment and employment through tax credits, or other preferential treatment constitute a major category of tax exemptions. Numerous studies have investigated whether tax incentives influence state economic activity and location decisions. Preferential tax treatment intends to retain or expand economic activities. Tax exemptions economically has been noted to benefit businesses and is aimed to increase business investment or employment or improving a business ability to compete with out of state corporations (Ballr and Minor, 2012). One common goal for economic development tax exemptions is to decrease unemployment and increase employment in a country (Gurría, 2011). Two different research studies have estimated that those government policies that increase jobs in an area will ultimately lead to filling 50 per cent of all new opportunities by in-migrants (Owens, 2011). But if rising employment opportunities does lead to substantial immigration, then preferential treatment on tax that lead to increased economic activity will still minimal impact on the local unemployment rate of current country citizens (Barker, 2014). But even if majority of new employment are filled by immigrants in the long-term, those policies such as tax exceptions will lead to some new jobs for local resident’s at-least in the near-term (OECD, 2004). These new jobs have been found to give local people skills and job experiences that would not otherwise receive, improving earnings prospects and long-term employment. The present UK’s tax system gives advantages to international corporations over local companies and small businesses (Hill, 2014). Local companies are required to compete on an uneven playing ground with international companies that control the system, move their revenue overseas, and pay little corporate income tax towards the education system, public infrastructure and other social investments that the public depend upon. The UK’s tax system offers incentives to extractive industries such as natural gas and oil than for activities that conserve the natural environment, care for the earth, and catalyze new green enterprises (Tanzi, 2006). The present tax system on multinational companies have been found not to reflect the widely held view and values of the society as a whole. Rather, they reflect the designs and worldview of wealthy individuals and powerful global corporations (Owens, 2011). Tax preferential system has been found to benefit the corporations and this is a huge impediment to progress (Ballr and Minor, 2012). The current tax system freeze us into the economy of the past, rather than help the society make a transition to a new economy that is rooted in good jobs, ecological sustainability, and greater social equality (Hill, 2014). Some people have argued that government should not be in the business of “picking winners” the economy. But the reality is, the current tax preferential to the corporates is picking winners every day. These tax rules have been rigged to benefit global corporations at the expenses of everyone else (Owens, 2011). For instance, in early 1950s, corporations paid significantly more taxes than they did today, but since 1990s there have been a “great tax shift,” as the government has moved tax obligations off the corporations onto low and middle income taxpayers. The amount of tax a corporation should pay ought to be determined by whether or not it is a “fair share.” Most corporations have exploited these preferential tax regimen to minimise their liabilities, but politicians have condemn these tax avoidance as immoral”, and fall over themselves to bash the big corporations (Ballr and Minor, 2012). In 2009, the Observer Newspaper published the headline: “Avoiding tax robs our public services declares minister” The paper reported that the government was planning to say tax is a "moral issue" and that it was "determined to end avoidance and evasion." Recently, increase attention has moved beyond responsible tax to the main issue of ‘fairness’” (Owens, 2011): are corporation paying their fair share of tax in times of economic crisis. Arguably, this has deepen and more complex issue than defining what is responsible (Hill, 2014). Therefore, it is for corporations to decide whether or not their policies should include any notion of ‘fairness’ in how they take their tax decisions, but the issue of tax and fairly sharing the burden has been playing out in the court of public opinion rather than in court of law. Part 4: In recent years, new technologies, innovation and the effect of globalization have changed the way in which businesses are operated. Global trade has grown sharply, and many people consider that global tax rules are not up-to-date with the realities of doing business in an international stage. Nowadays, corporations have been found to create new challenges for country’s tax authorities all around the world (Gurría, 2011). Therefore, there is the need for more international coordination to combat tax avoidance by Multinational corporations. Coordination of sharing of information has been expanding at European and International levels and this has become a new norm when it comes to exchanging financial information between governments (Tanzi, 2006). In this respect, the drafting of a new OECD standard on the automatic exchange of financial account information has been underway (Owens, 2011). Under this standards, member states will be able to receive automatically exchanged information that have been obtained from their financial institutions and banks on a yearly basis. As stated by Gurria Angel, the commitment by many jurisdictions and countries to implement the OECD’s global standard on the basis of a specific and ambitious timetable is good news for everyone who want to see a transparent and fair global tax system (Dowling, 2014). The rapidity with which the new standards are being agreed and developed has shown that the momentum for reform is now inventible, and adopting these standards will not be just a question of establishing cooperation between nations; it is also about restoring the trust of people in government. Although moving of profit from high-tax to low-tax jurisdiction through offshore companies and subsidiaries using complex transactions including royalties, payment of interest, fees and patents; such strategies are usually legal (Ballr and Minor, 2012). But after global financial crisis there has been a clear recognition by the U.S and in other countries that corporation tax planning is distorting the global economy (OECD, 2004). Furthermore, the standards governing international tax affairs, that was created in 1920s is out of touch when Apple, Google or Walmart move billions and billions of dollars of revenue from one nation to another at the click of a button (Owens, 2011). In addition, there is greater concern in developing nations which are more dependent on taxes than developed nations, and which lack the cadre of skilled experts to untangle corporate profit shifting structures. The risk of political violence- such as terrorism- financing lies in the danger that corporations profit will be used to finance terrorism, i.e. some legal relationship, product or transaction will be used indirectly or directly for this purpose (Hill, 2014). Unlike money laundering which may be financed by unlawful activity, terrorism may be financed from revenues of legal activities (Dowling, 2014). This makes detections of terrorism money very difficult to detect (OECD, 2004). Therefore there is a greater need for the coordination of tax avoidance. Also from a global perspective, taxation policies can also contribute to important factors in advancing international initiatives. This is at two levels. At first level, taxation can generate valuable resources to support the financial of international public goods” (Ballr and Minor, 2012). At second level, targeted taxation can help discipline the production of ‘’global public bads’’such as environmental pollution (Ballr and Minor, 2012). Achieving these objectives will require high level of financial system coordination and political commitment by governments. Reference List Ballr, D and Minor, M. 2012. (13th edition) International Business: The Challenge of Global Competition. McGraw Hill. Barker, A. 2014. Brussels criticises Apple’s Irish tax deals. Financial Times. 30th September 2014. Dowling, G. 2014. The Curious Case of Corporate Tax Avoidance: Is it Socially Irresponsible? Journal of Business Ethics. 124:173–184. Hill, C.W. 2014 International Business: Competing in the Global Marketplace. 10E. Global Edition. McGraw Hill. Gurría, A.2011. “Challenges in designing competitive tax systems”, Remarks, 30 June, see www.oecd.org/speeches Tanzi, V. 2006. Globalization, tax competition and the future of tax systems, IMF Working Paper WP/96/141. OECD. 2004. Harmful tax competition: an emerging global issue, Paris. Owens, J.2011. “Options for financial sector taxation following the crisis”, Remarks, 28 March. Read More