Changing tax laws to reduce tax avoidance through the use of partnerships - Research Paper Example

Changing tax laws to reduce tax avoidance through the use of partnerships College Avoiding paying taxes is a scheme of actions used by individuals as well as companies to avoid paying taxes (Rice, 1953). This skill is however a legal and cheaper way to circumvent authorities responsible for collecting (Desai, Foley, &Hines, 2006). However many governments continually lose billions of revenue through such increasing trend of avoiding remittance of taxes. According to Feldstein (1999), this legality of tax avoidance could reach a point that it will turn out to be an illegality.

If any government were to seal or curb these tax avoidance loopholes then it would have to change various laws that encourage the practice (Chirelstein, 1986). Lipatov, (2011) argued that it is unfair for a common man earning a meager income that is just enough to sustain themselves to be charged every penny of his revenue whereas big companies and wealthy people are exempted through avoidance of taxation. Non-remittance does not only reduces government revenue but also brings the taxation system into disrepute therefore authorities charged with taxation needs to prevent avoiding tax or keep it within check (Desai & Dharmapala, 2006).

According to PWC (2012), Majority of those involved in tax avoidance usually invoke section 88 and section 100 of the income tax act in order to shield themselves. Section 88 have therefore been barred from being referred to when the gain from the interest of partnership far exceeds the cost of the asset fair market value (Government of Canada, 2012). The budget proposals have also propose for the application of section 100 up to the point of sale of partnership interest to the person who is not a resident of the place in reference, this will however be an exception in a situation whereby is carrying out its activities through a permanent establishment (Mullainathan, Schwartz stein, & Congdon, 2012).

A Partner should also be able to waive on behalf of all his partners within a three year limit for making a determination (2012 Federal Budget Commentary).The law should be clear enough according to Rosenberg (1989) because this will stop the taxpayer`s personal exertion income being taken as being income of the partnership and later being diverted as the companies` loss under the agency and management agreements. Reason being surpluses or net profits from those monies will be forwarded from that partnership daily to the group finance companies (Batt, 2012).

The partnership acts should introduce various amendments to the taxes acts, that is according to the Blundell (2011) view. These amendments should be intended to make sure that incase a partnership carries a view of making profit then its members will be treated as for the purposes of income tax, co-operation tax and capital gains tax as though they were partners carrying on business in partnerships (Andersen, 2012). That is to say the partnership will be seen as transparent for tax purposes and every member will be looked into according to their share partnership gains as explained in (Bach, Corneo, & Steiner, 2012).

Creedy & Gemmell (2012) demonstrate that in certain foreign countries, limited liability partnership (LLP) may still be taxed as a corporate entity even though within the country LLP remains a body corporate. The authorities that deal with revenue collection should find a way with the foreign tax authorities on how to determine the LLP and its partners should be taxed (Weisbach, 2002). when LLP is made up of two members only and one member collapsed for example, a new membership must be appointed within a period of six months or the LLP be dissolved as a result of tax consequences (Gunn, 1978).

ReferencesGunn, A. (1978). Tax avoidance. Michigan Law Review. Vol. 76, No. 5. Weisbach, D.A. (2002). An Economic Analysis of Anti‐Tax‐Avoidance Doctrines. American Law and Economics Review. 4(1), 88-115Creedy, J & Gemmell, N. (2012). Measuring revenue responses to tax rate changes in multi-rate Income tax systems: behavioral and structural factors. International Tax and Public Finance. Andersen, J. (2012). Costs of taxation and the size of government. Public Choice. 153 (2), 83-115 Rosenberg, J. (1989). Tax avoidance and income measurement.

Michigan Law Review. Desai, M.A & Dharmapala, D. (2006).Corporate tax avoidance and high-powered incentives. Journal of Financial Economics. 79(1), 145–179 Chirelstein, M. (1968). Learned Hands Contribution to the Law of Tax Avoidance. The Yale Law Journal. 77(3) Feldstein, M. (1999). Tax Avoidance and the Deadweight Loss of the Income Tax. The review of economics and statistics. Harvard: Harvard University Desai, M.A, Foley, F & Hines, R. (2006). The demand for tax haven operations. Journal of Public Economics.

Harvard: Harvard Business School. 90 (3). Rice, R. (1953). Judicial techniques in combating tax avoidance. Combating tax avoidance. Michigan: Michigan Law Review. 51(7) Blundell, R. (2011) Viewpoint: Empirical evidence and tax policy design: lessons from the Mirrlees Review. Canadian Journal of Economics/Revue canadienne déconomique. (44)4, 1106-1137 Bach S, Corneo, G & Steiner, V. (2012). Optimal top marginal tax rates under income splitting for couples. European Economic ReviewMullainathan S, Schwartz stein J, & Congdon, W. (2012) a Reduced-Form Approach to Behavioral Public Finance.

Annual Review of Economics. 4(1), 511-540 Lipatov, V. (2011). Corporate Tax Evasion: the Case for Specialists. Journal of Economic Behavior & OrganizationBatt, W. (2012). Development and Wealth: A Georgist Perspective. American Journal of Economics and Sociology. 71(4), 1004-1046 Government of Canada. (2012). Annex 4: Tax Measures: Supplementary Information, Notices of Ways and Means Motions and Draft Amendments to Various GST/HST Regulations. Budget 2012. Accessed on 30/11/2012 on http://www.budget.gc.

ca/2012/plan/anx4-eng.html#BITM52012 Federal Budget Commentary: Jobs, Growth and Long-Term Prosperity. Collins barrow. Accessed on 30/11/2012 on http://www.collinsbarrow.com/news_showArticle.asp?articleID=535 PWC. 2012. 2012 Federal Budget. Accessed on 30/11/2012 on http://www.pwc.com/ca/en/tax/budgets/2012/federal.jhtml