International Tax Evasion and International Tax Avoidance - Coursework Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Distinction of Tax Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2010 International tax evasion and international tax avoidance Introduction Tax avoidance is the legitimate use of a tax regime to an individual’s advantage, which entails reducing the amount of tax that one is legible to pay by utilizing the various ways that are legitimate within the prevailing law concerning taxation. On the other hand tax evasion is used to describe the illegal ways that corporations and individuals utilize with the aim of not paying taxes. They would to evade taxes completely. According to Farmer and Lyal (2004), tax mitigation is used interchangeably with tax avoidance and they mean the same thing. International tax avoidance is tax avoidance, which is analyzed on the international scene. Tax avoidance can happen in the following ways: Legal entities By avoiding the change of residence, personal taxation may be legitimately done away with by enacting a separate legal entity in which donations of one’s property is made. The legal entity may be in the form of foundation, trust, or company. The company or trust receives assets transferred to it so that profits are recorded. The income is reflected as being earned by the new entity as opposed to the former. If the assets are reversed back to the individual, all profit will be subjected to capital gains taxes. The formed entity can avoid corporate taxation if is formed in offshore jurisdiction. Salary or dividend will attract income tax. The trust settler will not be permitted to be a beneficiary or trustee and may lose management of the asset transferred or may be draw benefits from it. Legal entities that are formed this way are a form of tax avoidance (Lan Mo, 2006). Double taxation Majority of nations place taxes on profits or returns earned overlooking the residence of the firm or person. Majority of countries have signed double taxation bilateral treaties with other countries in order in an effort of avoiding those who are not residents twice-that is the country of residence and where the income is earned. Few taxation treaties have been enacted. Moving one’s assets to a tax haven in itself is not sufficient to guarantee avoidance of tax, the person may also have to relocate to the tax haven. Loopholes in this create a chance for tax avoidance. Legal vagueness The result of tax is dependent on legal terms definitions which are more often than not vague. Differentiation between personal expenses and business expenses raises some vagueness that has been troubling the tax authorities and taxpayers. Vague penumbra in many tax law terms and it is a potential origin of tax avoidance cases (Pasquale, 2002). Country of residence Another form in which a person can underrate or undervalue taxes that he owes to the relevant authorities by transferring to a tax haven his tax residence or being always on transit. A haven is a country where the tax rate imposed on assets, or tax for carrying out business is very little therefore making those who would want to avoid high taxation in their own countries to transfer there. A number of countries impose taxes permanent residents, companies and citizens on their worldwide income. This has an impact to the extent that is not easy to avoid tax in that particular country. A very good example of such a country is the United States of America. Permanent residents and citizens alike are subject to federal income tax levied by the United State of America. Consequently simply moving abroad or just relocating one’s asset cannot accomplish taxation avoidance. This culture in the United States of America has prompted, according to reports by some news agencies, to relinquish their American citizenship in favour of the other country that may seem to be a tax haven. This is after discovering that they cannot simply avoid tax by only emigrating. Nevertheless, United States citizens may succeed in excluding some of their salaried income obtained overseas from their total income and therefore end up with a lesser figure when computing the United States of America federal regime tax. However, there is a ceiling to how much should be excluded (Farmer & Lyal 2004). National and international measures adopted to counter tax avoidance and tax evasion Tax agents have legal and professional responsibilities of remaining consistent and straight forward since they have a mandate of getting the best possible results when it comes to tax collection. Many countries lose a lot of revenue in terms of tax due to fraudulence propagated by the means of tax evasion and tax avoidance both nationally and internationally. Regional trading blocs have come together to combat tax avoidance and tax evasion (Terra & Wattèl, 2001). Over a number of years also, many governments have enacted anti-avoidance legislation to counter the latest tax evasion or tax avoidance by including legislation targeting specifically schemes used to accomplish the mission of the propagators of tax avoidance and tax evasion. For instance The European Union through the Eurofisc Anti Tax Fraud Strategy has come up with specific measures targeting tax evasion and tax mechanism measures. This has been prompted by violating the doctrine or principle of fairly taxing and huge budget losses. Moreover, it is a cause for distortions or disruption of the ground of competition and capital movement. According to Lan Mo (2006) combating these two vices requires cordial cooperation among the individual member states within by the means of their competent authorities. For instance, tax harmonization measures have been to bring to completion the internal market including establishing between the Member states a universal system of cooperation in relation to exchange of information. Competent authorities within the within the member states have the responsibility of assisting and cooperate within the mandate of the Commission in an effort of ensuring the proper use of VAT on supply of services of goods and services plus importation of goods and intra-community acquisition of goods. Moreover, administrative cooperation should not be translated to undeserving shift of burdens of administration among the member states. The European Union member states for the goal of collecting tax owed, they should be cooperating in ensuring that VAT assessment is correct. Apart from monitoring their own territories and the relevant tax owed to them, they should also accord help where necessary to other to other Member States to ensure the ideal and correct tax application in relation to the activity happening in their own territory but owed in the next or any other member state. In cross-border circumstances, it is useful to point out the obligation expected from each member state resulting into effective and close monitoring in the jurisdiction of the member state in which the tax is owed. Transmission and storage of electronic data for controlling VAT are crucial for the appropriate functioning of the competent VAT system. Automated accessibility to information is enhanced and expedient information exchange, which fortifies the fight against tax fraud that includes tax evasion and tax avoidance. It can be accomplished by the enhancement of databases on personal VAT-taxable situations and the corresponding transactions within the community by means of including a variety of information on transactions and taxable persons relating to them. Reliability of information is ensured through correct application of procedures with the aim of updating the information, making it to be of good quality and comparable (Thuronyi, 1998). Thuronyi (1998) argues that data, which is electronically stored, must be defined clearly. Besides, voluntary provision of information is encouraged. The affected member state should not request for information so that it is given, the information should be supplied in advance. Feedback system has also been incorporated in the information exchange system. By this means, also continuous assessment of the information system is enhanced basing on the results obtained. The authenticity of numbers of VAT identification is also a means that is being used by operators to combat tax avoidance and tax evasion. Automated confirmation of the validity of numbers of VAT identification provide to the operators appropriate information. Many countries, in an effort of ensuring maximum tax collection have gone ahead to develop tax compliance programs aimed at enhancing effective collection of tax and voluntary payment of the same tax such as: Tax education and assistance programs This is aimed at helping advisors and taxpayers to comprehend their responsibility and what they are entitled to. The taxpayers will not easily comply or abide by the rules of tax laws and procedures if they do not understand the whole concept of paying and remittance of their taxes on time (Terra & Wattèl 2001). Simple laws and procedures This is the effort of making it easy and non-expensive for taxpayers to abide by their obligations and access effortlessly to what they are entitled to. Voluntary compliance to tax system cannot be encouraged if the tax system being applied is very difficult or somehow expensive for them to meet their tax obligations. Risk-based verification programs This involves creation of a downside to poor compliance behaviour by deterring and detecting noncompliance by means of approaches of risk management. Taxpayers are very likely to comply with their tax obligation if they have a perception that there is a high chance of detection and see non-compliers being prosecuted. The essence of a taxpayer compliance program is purposely to respond to after identification of significant risks that are present in a tax system by a means of measures targeted at pointing out the causes of noncompliant behaviour. Some of the methods that have been used in combating tax avoidance and tax evasion are yielding fruits while others are still facing implementation challenges Bibliography Lan Mo, P., 2006, Tax avoidance and anti-avoidance measures in major developing economies. Greenwood Publishing Group, New York. Thuronyi V., 1998, Tax law design and drafting, Volume 2. International Monetary Fund, New York. Farmer P., & Lyal R., 2004, EC tax law. Oxford University Press, Oxford. Terra B. J. M. & Wattèl, P. J. 2001, European tax law. Kluwer, Kluwer. Pasquale P., 2002, The impact of Community law on tax treaties: issues and solutions, Kluwer: Kluwer Law International. Read More