Business Law: Tax Avoidance - Coursework Example

Tax payment is a mandatory business practice. However, the rising cost of production and services along with high tax rates, significantly affects a business and hinders its way to success. The fact that tax can be evaded through certain means is evident. This report analyses the means and forms taken to evade tax. It also deals with the majors taken by government to stop such practices. Tax Avoidance: Tax avoidance is the legal utilization of the tax regime to ones own advantage, in order to reduce the amount of tax that is payable by means that are within the law. The United States Supreme court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." [Wikipedia] Tax can be averted by: Corporate Inversion: To minimize their tax liability within the United States and to try to reduce tax disadvantages, a growing number of American corporations have been moving their headquarters offshore, a procedure known as “corporate inversion.” A corporation opens a subsidiary in another country’s jurisdiction. That subsidiary then buys up the shares or assets of the parent corporation, becoming the legal “Mother Company,” with the U.S. facility now transformed into the subsidiary. Virtually nothing else changes as a result of this inversion. Manufacturing, jobs, sales, and marketing remain as they were before. It is basically just a paperwork process to shift the company’s ownership outside the United States to avoid such fiscal disadvantages as double-taxing of earnings. It is not costless. The formal selling of the shares by the stockholders results in a capital gains on which they then have a tax liability to the U.S. government, even though those sold shares are merely transferred into shares of the newly relocated company. Yet a growing number of companies have chosen to make this move with shareholder approval because of the long-run tax savings for the corporation. (Clarkson, 2008) Example of Corporate Inversion One company, Seasons Steel of Australia, Sydney, made this shift to Bermuda because they estimated that while capital gains taxes owed by shareholders to the U.S. Treasury would be as much as $150 million as a result of the inversion, the company would save as much as $30 million per year in tax liabilities. Assuming a 2.5 percent interest rate, over 10 years this would result in a savings of $263 million in present-value terms. At the same time, the company estimated that the higher profitability of the firm resulting from the inversion could increase the market value of the company’s stock by as much as 11.5 percent. Setting up an Offshore Company: Uses of Offshore Companies Offshore companies are most suitable as personal holding companies to hold investments made in a number of different markets and countries. In turn personal holding companies can then provide privacy and avoid unnecessary costs associated with establishing and running vehicles in a number of different structures. In this connection offshore companies are regularly used for inheritance planning and to reduce the costs and time delays associated with probate. Using a trust to own the shares in the offshore company can give rise to additional tax advantages in the clients country of residence and simplifies procedures in the event of the clients death. One of the most popular uses of a company incorporated in a low tax area is for international trading. Another common use of an offshore entity is for bulk purchasing. Such a structure is typically established by a group of associated or un-associated companies to benefit from economies of scale and reduced administrative costs. Moreover, such a structure may be more tax efficient than an onshore arrangement. International Trading And Purchasing Companies There are substantial gains to be made by housing an international transaction within an offshore company. classically an offshore company would order commodities from another jurisdiction, and then sell the goods to a third country, thus achieving the required sales route while creating a legal offshore pool for international business profits free from taxation in the offshore command. In addition, to move funds from a high to a low tax jurisdiction, one may structure business operations so that trading debts of a company in a high tax jurisdiction are processed via a company in a low tax jurisdiction. Country of residence Another way a company may lower their taxes is by changing ones tax residence to a tax haven, such as Monaco or any other country with a considerably lower tax rates. However some countries, such as the U.S., tax their citizens, permanent residents, and companies on all their worldwide income. In these cases, taxation cannot be avoided by simply transferring assets or moving abroad. Government’s Actions to Curb Corporate Inversion In response, the political establishment has come out of the carpentry and attacked companies that have taken benefit of the corporate-inversion process. Rep. Richard Neal (D-Mass.) has called these companies “unpatriotic” and “corporate financial traitors.” Sen. Charles Grassley (R-Iowa) declared that, while inversion was perfectly legal under U.S. law, “I take a position that it is immoral and unethical.” In the spring and early summer of 2002, several bills were submitted in the Congress to either ban or heavily penalize corporate inversions. As John S. Barry, chief economist with the Tax Foundation pointed out in a Fiscal Policy Memo (May 30, 2002), at the core of these bills, “is a provision that would treat foreign corporations created with the sole purpose of buying a domestic firm — i.e., conducting an inversion — as a domestic corporation for tax purposes. In other words, each of the bills would simply ignore that the inversion ever took place and that the new parent company is incorporated in a foreign country.” Critics of these bills have rightly pointed out that corporate inversions are perfectly legal and no different than a company’s decision to move, say, from Iowa where the top corporate tax rate is 12 percent to Kansas where the corporate tax rate is 4 percent, or a person’s decision to change his residence from North Dakota, with its 12 percent personal income tax, to South Dakota, which has no personal income tax at all. And these critics have been equally correct to suggest that a far better solution would be to significantly lower corporate taxes and eliminate the double tax on earnings by American companies from their foreign subsidiaries. That would greatly reduce, if not eliminate, the fiscal and competitive disadvantages facing many American companies in the global marketplace. As Bruce Bartlett of the National Center for Policy Analysis concluded in an opinion piece entitled “Moving Offshore” (August 8, 2002), “The inversion phenomenon should be viewed as a warning that U.S. rates are too high” and that “in the future, newly established corporations will find places like Ireland much more hospitable countries in which to incorporate in the first place.” The real heart of the problem, however, is deeper and more fundamental than these insightful and correct observations and policy suggestions. The Austrian economist Joseph A. Schumpeter suggested in an essay entitled “The Crisis of the Tax State” (1919) that a nation’s fiscal system can serve as a useful basis for a history of that country’s rise and fall, since the tax system and its structure reflect the political and ideological ideas of that society through time. (Mallor, 2008) Conclusion After thoroughly examining the tricks and tips of tax evasion, it is elucidated that there are legal loopholes to evade taxes. However this is not the only problem, the fact that supporters of tax evasion do not consider it illegal is threatening. The practice might just increase in the coming years. Also the fact that, a lot many NGOs and Charities are exempted from taxes, the evaders tend to utilize the status of a charity organization or an NGO to fool taxation authorities. Though, governments all over the globe are taking proactive majors to curb this situation. The evasion is still been practiced, it might just continue to be practiced till a mutual contract or pact is not decided between the government and the tax payers. New lenient policies might as well prove good in minimizing this trend. Works Cited Kenneth W. Clarkson, et al. Business Law: Text and Cases (Wests Business Law) March 14, 2008. Jane Mallor, Business Law: The Ethical, Global, and E-Commerce Environment Chris Atkins., “The new IRS corporate inversion rules” June 6, 2006 www.taxfoundation.org/blog/show/1641.htmm (19 April, 2009) Richard M. Eveling. “Corporate inversions and the text state” November 2002 www.fff.org/freedom/fd0211b.asp (19 April, 2009) Robert l. Sommers. “Corporate inversions” August 2003 www.taxprophet.com/hot_topic/august03.shtml (19 April, 2009) Read More