Taxation in tax heaven regimes (“How do companies

Taxation
is a crucial part of the society and government. It is a required payment to
governments to fund public goods and services, to stabilize the economy, to
influence behaviors, and to redistribute income. There are different types of
taxes, such as social security tax, income tax, sales tax, excise tax, property
tax, and so on. In this paper, the author will focus on an indispensable part
of the taxation system, corporate income tax. Corporate tax is precious for countries
because governments can raise a considerable amount of funds to support
government decisions financially. Perhaps more importantly, corporate income
taxes play a role in the stability of the governments, making governments
function properly. However, corporations are becoming more and more aggressive
in making tax avoidance (Habu,
2017).
Lots of firms transfer their assets or cash to offshore companies, which are
registered in tax heaven regimes (“How
do companies avoid tax? ,” 2014). In those
regimes, the owner of the assets can avoid national taxes in their resident
country (“How
do companies avoid tax? ,” 2014). By doing so,
corporations can reduce the corporate tax bills and have free access to all the
benefits provided by governments. Since corporate tax avoidance still exists,
and more and more international firms are accused of avoiding taxes, the author
will then try to analyze the causes behind it and see if the current tax
principles can be amended to overcome the problem. Therefore, the central
question of this paper is “how can the general anti-avoidance rule(GAAR) in European
governments be further amended to prevent tax avoidance from happening?”. The
paper includes three parts. In the first part, a description and analysis of
the corporate tax and tax avoidance will be illustrated. The author mainly
focuses on the causes of the tax avoidance, the forms of tax avoidance, the
consequences of tax avoidance, and the efforts that European governments have
put into the process of tax avoidance prevention. In the second part, the
author’s opinions about improvements in the corporate tax principles will be
indicated. In the third part, research will be conducted. The research consists
of three aspects, which are the current European principles that are aimed at
prevention of tax avoidance, and possible modifications that can be made to
those laws.

Part 1

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The
Primary cause of tax avoidance is the save of revenues. By taking a series of
actions, firms can save a tremendous amount of revenues that are taxable.
Directors of corporations think that the tax payments reduce the company’s
wealth-generating activities, impeding firms’ growth (Dowling,
2013).
Therefore, they utilize the loopholes in the tax principles to achieve their
goal of tax avoidance. There are several forms of tax avoidance schemes, which include
transfer pricing structures, tax rate negotiations, and domicile location (Raiborn,
Massoud, & Payne, 2015). Also, some US
firms use a rule called “check the box” rule to avoid taxes (Raiborn
et al., 2015). Most of the methods that firms use
to prevent tax rely on tax heavens, which have an extremely low tax rate for
non-residents (Fisher,
2014).
Tax authorities consider the tax avoidance legitimate. However, the abuse of
tax avoidance may result in adverse outcomes for the society. First, if
companies avoid paying tax, then states may not function properly because of
the lack of funds. Second, the non-payment of corporate tax becomes burdens of
those who are not capable of avoiding taxes (Dowling,
2013).
Thus, it intensifies the inequality in the society and destroys civilian’s
confidence in the tax law (Dowling,
2013).
Third, companies making tax avoidance arrangements are free riders of all the
benefits provided by local governments. These companies may provoke other local
businesses into the tax avoidance arrangements.

 

However, European governments took steps to prevent
tax avoidance from happening. In the EU member states there are two forms of
anti-avoidance rules that are prevalent; one is based on the specific
anti-avoidance rule (SAAR) governed by the general principles of prohibition of
abuse stated in court jurisprudence, the other is based on a written judicial law
which prohibits the abuse – general anti-avoidance rule (GAAR) (Belevica & Grasis, 2016). The SAAR focuses on the specific
known tax avoidance arrangements; however, the GAAR can be considered as a
general rule which enables tax authorities to nip the tax avoidance behaviors
in the bud (PricewaterhouseCoopers). The SAAR consists of transfer price
rules, thin capitalization rules, rules limiting interest deductibility,
controlled foreign company rules (CFC), and so on (Johansson, Skeie, & Sorbe, 2017). The SAAR is both effective and complicated,
but it is not adequate to deal with a variety of business arrangements
involving tax avoidance (“The Role of a General
Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries,”
2017).
Therefore, the adoption of the GAAR is approved, ensuring the completeness of
the anti-avoidance system. Despite that GAAR involves uncertainties, it still
plays a role of safeguard and is viewed as a supplement of SAAR (PricewaterhouseCoopers). Unlike the SAAR that is statutory,
the GAAR can also be juridical, which is another reason why it is utilized (“The Role of a General
Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries,”
2017). Because
SAAR deals with the known arrangements and can only be amended by adding new
tax avoidance arrangements that have been detected, the GAAR, which is a
precaution to prevent tax avoidance, will be the primary focus in this paper. The
GAAR has been essential for the EU member states to avoid tax avoidance, and it
has been functioning properly for decades. However, due to the rapid change in
the business world, the rule has to be amended to be future-proofing.

 

In
recent years, numerous multinationals have been criticized for being
aggressively minimizing the taxes that they were supposed to pay (CAMPBELL,
2016).
Multinationals such as Google, Amazon, Starbucks, and Apple are on the
criticism list. According to reports, Starbucks had sales revenue of £400m in
the UK, but paid no corporation tax; Amazon made £3.35bn in the UK in 2011 but
paid a corporate tax of £1.8 million; and Google, which had a turnover of
£395m, reported a tax expenditure of only £6m. All these reports keep being on
the front pages of all kinds of papers, making the tax avoidance further
attention-getting (Barford
& Holt, 2013). These reports make people assume
that the GAAR is out of date and should be replaced by new rules; however,
according to the analysis, there are still about 20 countries using the GAAR worldwide
(Ernst
& Young, 2013). Of all the countries surveyed,
China is the one which benefits significantly from the adoption of the GAAR.
Based on its reports, in 2011, 248 GAAR cases were started, and 207 concluded,
with taxes collected as a result totaling around CNY24billion (US$ 3.81
billion). The successful application of GAAR in China indicates that the GAAR
is still effectual.

 

The
feasible approach is to modify the GAAR, making it future-proofing.
Progressivity, simplicity, neutrality, and stability are four core principles
that we have to concern. In respect of the progressivity, the GAAR should be
up-to-date because the new businesses can take advantage of the loopholes of
the current GAAR to gain a tax benefit. The progressivity of the GAAR can avoid
this situation from happening. Additionally, GAAR should be less dense,
reducing the uncertainties involved due to the complexness. As a rule, it
should also be neutral, ensuring the fairness for stakeholders. Finally, it
should be reliable and stable.

Part 2

From
the author’s point of view, the GAAR can be further amended. This opinion can
be concluded by analyzing the current GAAR. GAAR has wider provisions and
grants taxman discretionary authorities; therefore, the GAAR can be used to
detect the arrangements of tax avoidance efficiently (GUPTA
& SHERRY). There are several vital steps in
the GAAR that have to be taken when identifying the tax avoidance arrangements.
The first step is to target transactions that may comply with a technical
interpretation of the law but generate tax benefits the government considers to
be unintended or inconsistent with the spirit of the law (Ernst
& Young, 2013). Then the tax authorities define the
artificial scheme, transaction or arrangement that is utilized to gain a tax
benefit in the suspected business arrangements. The third step is to apply
substance and purpose test as a filter for determining whether a transaction is
legitimate.

 

However,
steps required in the GAAR also have drawbacks. The most arguable disadvantage
is that the discretionary rights granted to the judges by GAAR create
uncertainties. Final decisions can be unconvincing for companies because
arguable cases are usually left to the judges who have discretionary rights (Paulson,
2013).
Therefore, uncertainties are usually involved in cases judged using GAAR (Ostwal). Fear of firms
may be intensified due to the unconvincing decisions of tax authorities. Also,
the present GAAR has failed in defining ‘commercial substance’ and ‘tax benefit;
Therefore, the decision to classify an arrangement vests is in the hands of the
tax authorities who may exploit their rights (GUPTA
& SHERRY; MP). This has led to negative sentiments
in the environment. Thus, it is vital that decisions taken today should be
evaluated with a fundamentally strong law which has clear guidelines which can
be well interpreted by both the stakeholders and tax authorities (GUPTA
& SHERRY). Furthermore, over-inclusiveness and
inefficiency are drawbacks of the GAAR too (Agunbero,
2015).
Many firms consider the tax payments as a cost to the firms; therefore, many of
them take actions to minimize the fees. There are firms that spend lots of
money finding loopholes in the tax laws to avoid taxes. However, not all
tax-avoidance schemes are illegal and fall under the scope of the GAAR (Agunbero,
2015).
Thus, it is essential to identify the abusive tax planning and moderate tax
planning. However, the definition of abusive planning is interpreted by judges.
The level of the tax planning may not be easy to distinguish. And the
non-abusive transactions of tax planning can fall under the scope of a GAAR
without it being the purpose of the legislator (Agunbero,
2015).
Moreover, the punishments inflicted on firms avoiding taxes abusively are too
mild. Penalties only apply when the taxpayer is accused of gross negligence or
fraud. The schemes that companies plan to avoid taxes are not considered illegitimate;
therefore, no lawsuit can be filed, and no fine can be levied.

Therefore,
the author is convinced that the GAAR can be modified, and the modifications
should be made on the defects mentioned above. The first modification is on the
discretional rights granted to taxmen. The GAAR is a rule which guides taxmen
to make decisions (Ostwal). If all the disputable
cases are left to the court, then this rule loses its meaning of existence (Ostwal). So, additional
guidelines should be added into the GAAR to help judges make decisions. But it
is not saying that the discretionary rights of the taxmen should be fully abolished.
It is acceptable that taxmen are allowed to interpret tax principles when the
taxmen cannot find supportive laws to make a decision (GUPTA
& SHERRY). Therefore, the first modification
is to increase the reliability of the GAAR to a point to which firms can put
trust into the GAAR. The subsequent adjustment should be made on the clarity of
the definition of the “commercial substance.” (GUPTA
& SHERRY). The substance test is a crucial
step in the process of identification of tax avoidance arrangements (Paulson,
2013).
Therefore, the definition should be as clear as possible to ensure that it can
be interpreted by both the stakeholders and taxmen. Moreover, there should be
guidelines which can help judges distinguish extent of tax avoidance schemes.
Not all tax avoidance schemes are illegal. 
Judges should be able to distinguish abusive tax-avoidance planning from
moderate tax-avoidance planning. Furthermore, severe penalties should be part
of the GAAR as well. If firms are only required to repay the amount of money
they avoided, the tax avoidance behaviors will never be eliminated.

 

Anti-tax
avoidance is not only related to the use of the GAAR but also correlated with
the behavior of governments, the general public, and companies. Tax avoidance
is created by human beings, not nature. Therefore, change in the stakeholders’ behavior
will also eliminate tax avoidance arrangements.

 

Governments
play an essential role in the process of elimination of tax avoidance. One
effective way they can use is to promote the firms that are not involved in any
tax avoidance arrangements, indirectly reducing other suspected firms’ social
influence. Additionally, governments should introduce preferential policies
which are only applied to firms against the tax avoidance, making suspected
firms worse off. And all the procurements of the governments should be made
from firms against the tax avoidance. Help from other corporations is also
necessary. Companies should make statements to stand against tax-avoidance
arrangements. Also, the big companies such as Google, Apple, Amazon, General
Electric should be the first ones making the statements. These giant companies
should be the pioneers in the process of the anti-avoidance campaign. The
general public is also a nonnegligible part of the anti-avoidance campaign. And
they are the principal victims under the tax avoidance arrangements. They should
adjust their behavior by opposing those involved in the tax avoidance
arrangements in the media, stopping to purchase products from them, and ceasing
working for them. If all the stakeholders make adjustments on their behavior,
the tax avoidance arrangements will decrease significantly.

Part 3

The
research question of my paper is “how can the GAAR in European governments be
further amended to prevent tax avoidance from happening?”. To conduct the
research, a hypothesis has to be made, which is “the GAAR in European governments
can be further amended by decreasing discretionary rights to judges,
elaborating on definition of ‘commercial substance’, introducing penalties, and
reducing inclusiveness.” There are several questions that have to be concerned when
proving this hypothesis. First of all, what are the current tax avoidance rules
used in Europe? Second, is there a need to modify the GAAR? Third, is it
feasible to alter the GAAR? Fourth, what are the consequences of the
modifications? In this research part, all those questions will be answered to
prove the hypothesis.

 

European
governments use both the GAAR and SAAR to prevent the tax avoidance behaviors.
The GAAR aims to provide all-encompassing provision to shield tax statutes from
contrived aggressive arrangements aimed at exploiting loopholes in a tax regime
(Paulson,
2013).
The GAAR is applied where an arrangement has met the technical requirements of
the law but is nonetheless an unacceptable arrangement (Paulson,
2013).
The SAAR, on the other side, is more precise and specific. The SAAR focus on
specific known arrangements aimed at gaining a tax benefit; therefore, it
minimizes the efforts required to identify artificial arrangements.
Additionally, the SAAR doesn’t grant tax authorities discretionary rights and
cannot be used to detect the artificial arrangements not included in it. Owing
to the SAAR’s nature that it is aimed at preventing the known artificial
arrangements from happening, only the modification of GAAR will be discussed in
the research.

The
society is changing over time and so the business arrangements. The law must be
flexible and receptive to change, so that stays fair, relevant and up-to-date (“WHAT
IS LAW REFORM?,”). A law based on
outdated values will lead to an erosion of people’s confidence and trust of the
law (“WHAT
IS LAW REFORM?,”). By analyzing all
the tax avoidance arrangements made by those multinational corporations in
recent years, it is easy to conclude that the current tax law is not doing its
job. And the exposures of those arrangements have been making the public lose
the trust of the tax law because the part of the tax due that has been avoided
by the firms is becoming burdens on their shoulders (Dowling,
2013).
Therefore, modification of the tax law is necessary.

Modifications
of the tax law should be made for the shortcomings of the tax law, and there
are several drawbacks. The major shortcoming is that the GAAR contains
uncertainties (Ostwal). The
uncertainties are mainly caused by the discretionary rights left to the tax
authorities to explain tax laws and identify complex tax avoidance
arrangements. The second weakness is that the definitions of the ‘tax benefit’
and ‘commercial substance’ are not clear. This defect is also essential because
the ambiguity of the definitions of the terms may lead to the abusive of
discretionary rights by taxmen. A trustworthy law should have clear guidelines
which can be interpreted by both the stakeholders and tax authorities (GUPTA
& SHERRY). The third drawback is that the GAAR
is so inclusive that all kinds of tax avoidance
schemes fall under the scope of the GAAR. A broad rule should also contain
guidelines which distinguish abuse tax avoidance planning from moderate tax
avoidance planning. Furthermore, punishments on the tax avoidance behaviors are
too mild. To play its role as a safeguard, more punishments are necessary.

The
first corresponding solution should be to limit taxmen’s discretionary rights
and provide more guidelines for taxmen to follow when making decisions. These
guidelines will not only provide a basis for decisions by judges but also
indirectly reduce taxmen’s discretionary rights. The second should be to specify
the definitions of the commercial substance and tax benefit to avoid the same
cases being treated differently. Definitions are main contents of a rule. The
rule will never be stable and trustworthy without the definitions of all terms.
The third approach is to avoid inclusiveness by adopting rules which can help
judges distinguish different levels of tax avoidance schemes. The final
approach is to introduce more punishments on different types of tax avoidance
behaviors. Severe penalties will strengthen the rule.

By
answering all the questions mentioned above, it can be concluded that the GAAR
can be further amended to prevent tax avoidance. However, several limitations
are involved in the process of acquiring conclusion. First, there are not many
sources that are related to the modifications of the GAAR available. It is
impossible to make detailed and feasible solutions based on all the sources
available. Second, no statistical data to support the findings in the papers.
Therefore, some findings may not be convinced. Third, the sources available are
not easy to be verified. So, it is possible that some of the sources are not
trustworthy. Therefore, the research question needs further investigation.

Conclusion

In
conclusion, the author first stated the cause of the tax avoidance, which is
the greed of firms. Then the forms of the tax avoidance were expressed, which
are transfer pricing structures, tax rate negotiations, and domicile location.
Moreover, consequences of the tax avoidance were also discussed, which are that
states may not function properly, the financial burden on civilian will be
heavy, and firms are free riders on government infrastructure. Then two
anti-tax avoidance rules, SAAR and GAAR, were illustrated. SAAR deals with
specific known arrangements, and the GAAR deals with the artificial
arrangements that are unknown. Then the stakeholders’ behaviors were
investigated. The research question of the paper is “how can the GAAR in
European governments be further amended to prevent tax avoidance from
happening?”. To answer this research question, the shortcomings of the GAAR were
analyzed, which are uncertainties, unclear definitions, inclusiveness, and mild
punishments. For each shortcoming, the author created one responding solution.
The first solution is to reduce judges’ discretionary rights and add new
guidelines to provide a basis for judges to avoid uncertainties. The second
solution is that all the definitions of the GAAR should be elaborated on to
lessen ambiguities. The third approach is to introduce guidelines which help
judges distinguish abusive tax-avoidance schemes from moderate tax-avoidance
schemes. The last solution is to complete the punishments system of the GAAR to
empower the GAAR. Severe punishments can reduce tax avoidance arrangements
further. Finally, the author concluded that the GAAR in European governments
can be amended, but several limitations encountered when doing the research may
require further work on this research question.

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