Tax Planning Involves Taking Steps Which Minimise the Tax Liability of Tax Payer - Assignment Example

Tax Planning Involves Taking Steps Which Minimise the Tax Liability of Tax Payer Table of Contents Question Present Arguments For and Against Tax Planning and Tax Avoidance 3 Question 2: Summarise the Recently Launched (Last 2 Years) Important Initiatives at the National and International Levels To Deal with Tax Avoidance Using Cross-Border Facilities and Differing Tax Regimes 5 The General Anti-Abuse Rule (GAAR) 5 The Common Consolidated Corporate Tax Base (CCCTB) 6 Action Plans 7 Question 3: Identify and Discuss the Circumstances in Which These (Discussed In Question 2) National/International Efforts Have the Best Chance of Success 8 Question 4: “Let There Be One International Tax Framework Like The International Financial Reporting Standards And There Will Be No Tax Avoidance Issues”. Discuss This Statement 10 References 12 Question 1: Present Arguments For and Against Tax Planning and Tax Avoidance Prior to presenting the arguments in order to judge whether tax planning and tax avoidance are two separate and distinct aspects, it is quite indispensable to acquire a brief understanding about these important aspects in a comprehensive manner. Conceptually, the notion of tax planning refers to the timing and the arrangement of trades, which tends to maximise benefits and most vitally lessen the results of income taxes (Thomsett, 2014). In precise, it can be affirmed that the facet of tax planning takes into concern certain major steps in minimising tax liability of the taxpayers (HM Revenue & Customs, 2012). On the other hand, the perception of tax avoidance refers to the legitimate minimisation of tax liabilities in the form of adopting, developing along with executing comprehensive financial planning strategies. In general, tax avoidance is regarded as the approach of bending the guidelines of the taxation structure with the aim of gaining maximum tax benefits (National Audit Office, 2012). Thus, based upon the conceptions of tax avoidance and tax planning, it can be affirmed that these two approaches differ considerably and apparently. The arguments supporting this fact have been presented in the following discussion. One of the arguments, which can be presented in proving tax planning and tax avoidance as dissimilar approaches lay in their respective functionalities. In this similar context, it has been evident that the function of tax planning is to organise one’s financial concerns for reaping full advantages in relation to tax deductions, discounts, exemptions, and concessions that are permitted under the legal guidelines of the Income-Tax Act of 1961. It has often been claimed that tax-planning approach is adopted by a taxpayer for minimising tax burden in a legal manner. Arguably, tax avoidance functions in lessening tax obligations illegally in the form of structuring one’s financial affairs (Surana, 2011). These evidences eventually result in making the above-discussed two approaches quite different from one other. Apart from the stated functionality aspect, another factor revealing the disparity persisting between tax avoidance and tax planning is their respective objectives. In this regard, the prime target of tax planning can be apparently noted as minimising tax liabilities through the mode of compliance with legal provisions and obligations. Arguably, the major intent of tax avoidance is not to pay taxes by seeking loopholes in relevant lawful guidelines applicable for the same. Evidences also project that the disparities between the significant concerns of tax avoidance and tax planning lay in their respective modus operandi. In relation to the case of tax planning, a bonafide intention seems to exist. Arguably, the modus operandi of tax avoidance involves malafide intention, which eventually makes the two approaches quite dissimilar from one another (Agrawal, 2007). It is worth mentioning that the approaches of tax planning and tax avoidance are mainly adopted as well as executed by the taxpayers in this modern day context at an increasing rate. This might be owing to the reasons of increased level of internationalisation, gaining momentum of globalisation and prevalence of extreme business market competition in general. It can further be apparently observed in this similar context that the taxpayers often adopt the approach of tax planning in order to secure their future. Arguably, the taxpayers often assume the approach of tax avoidance to be their past, present and upcoming tool of managing taxes in this complex modern scenario. It has also been argued in this regard that tax planning is a fragment of tax compliant behaviour, merely a portion of tax avoidance (Tax Research LLP, 2010). Based upon various research works, it can be revealed that the approach of tax planning relates to better governance, as the business organisations specifically tend to minimise tax liability by way of adhering towards various legal norms or obligations. It can thus be argued in this similar circumstance that the approach of tax avoidance is not related to better governance, as the modern business organisations make deliberate efforts towards lessening tax liabilities through non-adherence towards the legal provisions. In this case, it can be affirmed that tax avoidance is a moral issue and tax planning is a vital strategy for taxpayers in minimising their respective tax liabilities (IBE, 2013). Question 2: Summarise the Recently Launched (Last 2 Years) Important Initiatives at the National and International Levels To Deal with Tax Avoidance Using Cross-Border Facilities and Differing Tax Regimes Identifiably, numerous initiatives have been framed, devised and implemented in recent times at national along with international levels, for dealing with the crucial problems of tax avoidance. These initiatives are comprehensively discussed hereunder. The General Anti-Abuse Rule (GAAR) The General Anti-Abuse Rule (GAAR) policy was introduced by the UK government and is regarded as one of the effective national initiatives for dealing with the significant concern of tax avoidance, which is usually conducted by the taxpayers. The policy had been proposed in the year 2011 and came into effect in the year 2013. Notably, the prime intention of this policy is to promote fairness, specifically in the UK taxation system, by lessening tax avoidance intention as deciphered by the taxpayers, particularly owing to the reason that such measures are usually conducted through unlawful means. According to the UK government, the policy would be applicable on ‘National Insurance Contributions’ (NICs), ‘corporation along with income tax’, ‘capital gains tax’, ‘stamp duty land tax’, ‘inheritance tax’ and ‘petroleum revenue tax’. Beyond lessening the tax liabilities through the conduct of tax avoidance, the aforementioned policy would also seek towards rising greater tax advantages through its application in the above-described taxation fields (Crown, 2013). After acquiring a brief idea about the policy of GAAR, it can be argued that this might help in curbing tax avoidance, using cross-border facilities by a greater extent. This can be justified with reference to the fact that deterring the taxpayers from entering into abusive schemes like tax avoidance and tackling the same, would certainly aid in diminishing the crucial concern of tax avoidance using cross border facilities. By taking into concern the execution of cross-border facilities, it can be affirmed that the policy might support in curbing tax avoidance, as it imposes extensive impacts only upon the businesses that partake in abusive policies, merely impacting the taxpayers, who undertake standard profitable transactions (HM Revenue & Customs, n.d.). The Common Consolidated Corporate Tax Base (CCCTB) The Common Consolidated Corporate Tax Base (CCCTB) proposal is regarded as one of the effective international directives towards dealing with the issue of tax avoidance. The proposal was mainly placed by the UK government in the year 2011 and became effective in the year 2012. The proposal of CCCTB further focused upon introducing a particular set of guidelines or instructions that the business organisations operating in the EU can utilise for calculating their respective taxable profits. In precise, it can be affirmed that a company or a group of companies conducting business in the EU would require complying with a single taxable income computation system, instead of other diverse rules persisting within the dissimilar member states wherein they operate (European Commission, 2014). One of the distinct facets of this proposal can be apparently viewed as the common tax base. In this context, the UK government strongly believed that the focus of the tax payers towards adopting and maintaining a single taxation system would certainly aid in curbing the issue of tax avoidance through the use of cross-border regimes by an extensive degree. This can be acceptable with reference to the fact that following a single taxation system would assist the auditors to identify the loopholes, flaws and various sorts of intended misconducts regarding the same and make the corporate taxation procedure more transparent as well as effective. This might be supported with the notion that following of multiple taxation standards as well as regimes fundamentally makes the situation quite complicated for the auditors to identify and work upon the respective illegal conducts such as tax avoidance, as diverse sorts of business transactions and taxation policies are depicted (Panayi, 2011). Action Plans Apart from introducing the lawful framework of GAAR and the proposal of CCCTB, the European Commission has also devised certain effective actions plans based on national as well as international levels for dealing with the issue of tax avoidance. Specially mentioning, emphasising the national level, the Commission has framed the action plans of tightening tax rules of EU corporates in opposition to forceful tax planning and extending the instinctive information exchange, specifically between diverse EU tax administrations. These national level based action plans might aid in curbing tax avoidance using cross border facilities, covering all the forms of account balances and financial incomes in a transparent manner. Apart from these, the Commission has also adopted certain international actions plans in order to deal with the issue of tax avoidance including cooperation with the neighbouring nations and framing new standards of Value Added Tax (VAT) forms. These action plans might support in curbing tax avoidance using cross border facilities through enhancements in tax compliance and establishing better tax governance (European Commission, 2013). Question 3: Identify and Discuss the Circumstances in Which These (Discussed In Question 2) National/International Efforts Have the Best Chance of Success Concerning the circumstances in which the national or international efforts, such as the lawful framework of GAAR, the proposal of CCCTB and effective action plans, have better prospect of attaining success, it can be affirmed that the implementation of tax planning approach by various organisations have eventually led diverse nations to frame effective legislation along with administrative policies. This might be aimed at encouraging the adoption of more transparent practices relating to taxation on behalf of the taxpayers (Alty & et. al., 2013). For instance, the legal framework of GAAR, the proposal of CCCTB and effective action plans of tightening tax rules of EU corporates in opposition to aggressive tax planning and extending the automatic information exchange between diverse EU tax administrations, have been recently developed for dealing with the issue of tax avoidance. It can be affirmed in this similar concern that there lay certain obvious circumstances wherein these national along with international efforts would have the best chance to attain success. One of these factors, which might make the aforementioned initiatives successful towards effective prevention as well as abolition of illegal tax avoidance offenses, is building cooperation with the respective business organisations or the taxpayers. This can be justified with reference to the fact that most of the tax avoiders might conceal certain proportion of their respective business activities to financial centres located in overseas locations. Thus, for obtaining such information regarding offshore activities, greater level of communication and cooperation is required to be formed as well as maintained with those overseas financial centres. Consequently, this particular factor might assist the aforesaid initiatives to become successful from the practice of tax avoidance (ITC, 2010). Apart from the factor of cooperation, effectual data collection and analysis, is the other factor or circumstance, which might contribute in making the above-discussed measures successful towards dealing with the issue of tax avoidance using cross-border facilities and differing tax regimes. In this similar concern, effective data collection and analysis procedure would eventually facilitate the aforesaid initiatives towards recognising the inherent discrepancy sources that exist between the projected and the actual tax gathered. With regards to make the process of data gatheration and analysis more efficient, the above depicted measures would require paying greatest attention on sufficient as well as relevant data collection, on processing and most vitally, on storing various sorts of infrastructures such as ‘management information systems’ and ‘database management systems’. The third factor, which might drive success for the above portrayed initiatives in mitigating the issue of tax avoidance is adapting dynamic financial along with corporate trends. In recent times, financial analysts and accountants have been observed as inclined to apply creative methods for evading taxes. In this regard, the initiatives, such as the lawful framework of GAAR and the proposal of CCCTB among others, ought to be aligned with the existing trends in dealing with the issue of tax avoidance (Bowler, 2009). In addition, the approach of such initiatives in communicating with the taxpayers might aid them to attain success in curbing the significant concern of tax avoidance. This factor would certainly assist in sensitising the taxpayers on the significance of paying taxes, rather than merely focusing upon evading taxes. Finally, the factor concerning the adoption and the execution of such initiatives in a sustained and constructive manner would also create a circumstance for having better prospect of accomplishing success in dealing with the issue of tax avoidance (Soreide & Williams, 2013). Question 4: “Let There Be One International Tax Framework Like The International Financial Reporting Standards And There Will Be No Tax Avoidance Issues”. Discuss This Statement Emphasising the statement “Let There Be One International Tax Framework Like The International Financial Reporting Standards And There Will Be No Tax Avoidance Issues”, it can be affirmed from a broader understanding that the existence of a single international tax framework would solve a broad assortment of challenges that may arise from the critical concern of tax avoidance. Moreover, the existence of a single international tax framework would not only generate transparency in the approach of tax planning but would also enhance the comparability along with the quality of the financial reports by a considerable extent. Application of one particular international tax framework would generally develop the standards of tax reporting particularly within third world nations that lack sufficient institutions and infrastructures of tax reporting for effectual collection of taxes and introduce a higher benchmark of global uniformity in taxation. These can be justified with reference to the fact that the existence of a single international tax framework would introduce no varying tax policies, aiding in eliminating the intention of the organisations to minimise tax liabilities through evading taxes illegally (The UK Parliament, n.d.). With regards to determine the importance of a single international tax framework in mitigating tax avoidance issues, it can be affirmed that this aspect would provide the advantage of implementing the system of transfer pricing. This transfer pricing mechanism would certainly aid in addressing along with mitigating tax avoidance issues through making the multinational companies towards paying taxes based upon the profits that are generated from their respective business operations. This would eventually ensure consistency in paying taxes within a stipulated period and bring transparency in the overall taxation procedure. Based on these advantageous facets, the statement i.e. “Let There Be One International Tax Framework like the International Financial Reporting Standards and There Will Be No Tax Avoidance Issues” can be supported by a certain level. On the contrary, it can also be argued that implementing a single taxation regime all round the world will increase disparities in the global wealth distribution and economic structural positioning of individual countries, imposing serious effects on the health of national economies (Keen & Perry, 2013). Hence, the single international tax framework might emphasise developing a guiding route to discourage tax avoidance in a uniform manner and strengthen the reporting standards likewise internationally, rather than interfering in the tax structure of the nations. In this similar concern, the existence of a single international tax framework would aid in mitigating tax avoidance issues through forming a consolidated tax base, which would result in paying taxes uniformly by the taxpayers. This might further contribute in identifying the loopholes or flaws that pertain in the procedure of tax avoidance (IMF, 2013). Thus, based on the above discussion, it can be concluded that the existence of a single international tax framework can cope up with the issue of tax avoidance in the form of altering the lawful guidelines of the taxation policies, rather than developing the entire taxation system. References Agrawal, K. K., 2007. Corporate Tax Planning, Volume 1. Atlantic Publishers & Dist. Alty, D. & et. al., 2013. Corporate Tax Planning. Canadian Tax Journal, Vol. 61, Iss. 3, pp. 829-855. Bowler, T., 2009. Current Approaches Used to Counter Tax Avoidance. Countering Tax Avoidance in the UK: Which Way Forward?, pp. 1-168. Crown, 2013. Reducing Tax Evasion and Avoidance. Actions. [Online] Available at: https://www.gov.uk/government/policies/reducing-tax-evasion-and-avoidance [Accessed February 24, 2014]. European Commission, 2014. Common Tax Base. Taxation and Customs Union. [Online] Available at: http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm [Accessed February 24, 2014]. European Commission, 2013. Fighting Tax Evasion and Avoidance: A Year of Progress. Press Releases Database. [Online] Available at: http://europa.eu/rapid/press-release_MEMO-13-1096_en.htm [Accessed February 24, 2014]. HM Revenue & Customs, 2012. Tackling Tax Avoidance. Issue Briefing. [Online] Available at: http://www.hmrc.gov.uk/about/briefings/briefing-avoidance.pdf [Accessed February 24, 2014]. HM Revenue & Customs, No Date. General Anti-Abuse Rule. Budget 2013. [Online] Available at: http://www.hmrc.gov.uk/budget2013/tiin-4754.pdf [Accessed February 24, 2014]. IBE, 2013. Tax Avoidance as an Ethical Issue for Business. Business Ethics Briefing. [Online] Available at: https://www.ibe.org.uk/userassets/briefings/ibe_briefing_31_tax_avoidance_as_an_ethical_issue_for_business.pdf [Accessed February 24, 2014]. ITC, 2010. Addressing Tax Evasion and Tax Avoidance in Developing Countries. Documents. [Online] Available at: http://www.taxcompact.net/documents/2011-09-09_GTZ_Addressing-tax-evasion-and-avoidance.pdf [Accessed February 24, 2014]. IMF, 2013. Issues. Issues in International Taxation and the Role of the IMF, pp. 1-19. Keen, M. & Perry, V., 2013. Issues in International Taxation and the Role of the IMF. International Monetary Fund. [Online] Available at: https://www.imf.org/external/np/pp/eng/2013/062813.pdf [Accessed February 24, 2014]. National Audit Office, 2012. Tax Avoidance: Tackling Marketed Avoidance Schemes, HM Revenue & Customs. The Stationery Office. Panayi, C. H., 2011. The CCCTB Proposal. The Common Consolidated Corporate Tax Base and the UK Tax System, pp. 1-96. Surana, S., 2011. Know the Difference between Tax Planning & Tax Avoidance. Personal Finance. [Online] Available at: http://articles.economictimes.indiatimes.com/2011-09-13/news/30149459_1_tax-avoidance-tax-authorities-tax-evasion [Accessed February 24, 2014]. Soreide, T. & Williams, A., 2013. Corruption, Grabbing and Development: Real World Challenges. Edward Elgar Publishing. Thomsett, M. C., 2014. Investing in Energy: Creating a New Investment Strategy to Maximize Your Portfolios Return. Palgrave Macmillan. Tax Research LLP, 2010. Tax Research UK. Tax Briefing, pp. 1-2. The UK Parliament, No Date. Government response to House of Lords Select Committee on Economic Affairs 1st Report of Session 2013-14. Documents. [Online] Available at: http://www.parliament.uk/documents/lords-committees/economic-affairs/Corporate-Taxation-April2013/Government%20Response/EA66%20HMT%20Response%20to%20Corp%20Tax%20Report.pdf [Accessed February 25, 2014]. Read More