write a abstract on this paper ?

Introduction

Governments require money to run their operations and pay civil servants who ensure that services to the population are delivered. The money that states use is collected by way of taxing the citizens, and they are vital for every smooth running of government obligations. Without realizing sufficient taxes to cover for their budgets, governments would be starved off cash and fail their electorate. It, therefore, surmises that governments are very keen on whether the citizenry pay their taxes as expected for them to have the ability to serve their people. The citizenry on the other had device mischievous ways of ensuring that either they do not pay taxes and if they do the sums are lower than what their governments expect. There are two ways of failing to meet the tax obligations which are through tax avoidance or tax evasion. Tax avoidance refers to the different ways of ensuring that people pay lesser monies than expected to the government through exploiting the legal loopholes that exist. Tax evasion, on the other hand, is a form of fraud since the methods adopted are not legally acceptable and may consist of deceit, subterfuge or using concealed methods to escape their legal liabilities. This paper will elucidate more on the various ways in which corporations use to legally avoid paying the amount of taxes that their governments expect.

Problem statement

Tax avoidance represents one of the biggest challenges that governments face in discharging their duties. By avoiding paying the desired amounts, the loss of revenue affects the running of governments and threatens their capability in financing public expenditure. Taxation is a vital source of government income and if exploited may hamper the ability of governments to function.

Literature review

The multinational companies have perfected the art of using tax avoidance to decrease the amount of taxes that they remit to their respective governments. There have been numerous accounts of very successful corporations paying pittances even as they make billions of dollars globally. In 2011, Starbucks was accused or remitting no taxes to the United Kingdom government despite making sales more than 400 million pounds. Amazon has been equally accused of reporting less than two million dollars to the United States government despite making more than 3 billion sales in the same year. The fact that two corporations that are very successful can be caught up in tax avoidance cases shows the apathy of the established organizations on turning their profits to cover the tax obligations.

Globalization and the competition that it brings to the companies in a multinational environment have made tax avoidance harder to track and easier to conceal. A global company is exposed to more avenues where it can channel its funds to escape the scrutiny by parent governments while also covering the transactions through charities, corporate social responsibility events, and subsidiary firms. The momentum for globalization has gathered pace in the last four decades resulting in integrated economies mostly brought about by the adoption of information and technology that has enabled the regular flow of information. The world is also becoming linked with the deregulation of trade across various borders and increased cooperation amongst trading partners. It is now easier to move capital across countries especially after the end of the cold war than it was previously.

The increased closeness has created opportunities to the multinational enterprises to work in multiple environments that were previously not desirable. American companies can set up bases in China and enjoy the benefits of cheaper labor and lower costs even as they feed the home economy with products. Previously, companies were established within the country and produced their commodities within the borders while selling them out of the country as exports (Gravelle, 2009). The trend has gained a different momentum with companies being set in one country like America for example and outsourcing their production to other countries like India or China where the lower costs make their products competitive in their countries or globally. While it was easier to track the sales of commodities while the production was based in the countries of origin, tracking them while the operations span borders becomes increasingly arduous and introduces avenues through which the companies exploit to underreport. The problem is even compounded by some countries introducing measures like tax havens so that multinationals would set their bases in them and help in growing up their economies. Large multinationals like Google continue to shelter their monies in tax havens like Bermuda that have little motivation in probing their tax compliance issues for the dollars that they invest there. The moral obligation for the companies to fully comply with the tax obligations seems to have waned. In the economic crisis of 2008, multinational corporations despite companies being bailed out by federal funds, the practice of taking money to offshore accounts to escape paying taxes on income tax continued. Large multinationals like Verizon, Boeing, General Motors, and Verizon have continually used offshore accounts to make the tax computations complex and limit the amounts that they pay as tax remission.

The consequences of globalization are one of the most analyzed topics by economist strategists in recent past. Much of it has revolved around the issue of whether globalization has resulted in a spike in inequality. The issue that has generated interest in policymakers, however, is the practice of tax avoidance that has been used extensively by multinationals to reduce the amount of taxes that they remit to governments. Tax avoidance, unlike tax evasion, is the practice of using legal loopholes inherent in the taxation systems to gain leverage and escape exposure to heavy taxation. Abusive tax avoidance strategies have been perfected by the multinationals to avoid what they owe to respective governments and have resulted in a spike in the number of legal suits on companies like Apple, Google, and Amazon in different jurisdictions. Engaging in the various countries has made it easier for companies to shift costs, profits and revenues to different jurisdictions in a manner that makes the process of tax rationalization harder to track. There have been suggestions by various authors to change the definition of tax avoidance from legal to illegal to ensure that the multinationals do not uses it to starve the governments of their rightful share. A more profound analysis by Benn2014) however disagreed with the assertion that tax avoidance may be against the law. That scholars would not agree on the legality of the practice by different corporations shows the legal conundrum that the governments face in trying to establish a common ground. The multinationals have increasingly become aggressive in their zeal to avoid paying taxes and have set up different channels through which they shift governments around. It is interesting for example to note that the suit filed against Google came from Ireland and the one against Starbucks came from the United Kingdom. The issue of tax avoidance is no longer a preserve of the governments where the companies are started but an encompassing approach spanning several countries.

Tax avoidance can be classified into three broad categories of:

• State-induced avoidance that involves the corporations getting involved in measures that are put in place by governments. The mode of avoidance used in such instances concerns the use of tax breaks that governments introduce in the hope of achieving social goals.
• Strategic avoidance involving the payment of taxes as per the obligations but introducing practices that ensure the amounts paid are less than the amount they should pay.
• Toxic avoidance includes lack of transparency in the process and undertaking measures designed to reduce liabilities like transactions that only exist on paper.

Franklin D Roosevelt famously said that death and taxes are unavoidable, but corporations in the current dispensation seem to be using every available means to ensure that taxes are avoided. One of the measures that they have aggressively used is pricing transfer where subsidiaries of big corporations in jurisdictions that are lowly taxed retain ownership of multinational’s intellectual rights. The interplay between paying of services between the multinationals from lowly taxed areas to high tax areas results in avoidance of tax obligations. Transfer pricing more often than not involves the pricing of goods or services between the parent and the subsidiary in prices that are not reflective of the market prices or what the other companies offer. By doing so, the profits of the parent company reduce, and the avoidance of high prices put in place.

Pharmaceutical companies have become big business with factories and industries distributed across the globe. The manufacturing and marketing are decentralized across nations while issues like research and development are kept in one place. The various networks and semiautonomous facilities make the industry the best example of how transfer pricing works. The research and development arms of the pharmaceutical firms do not make any direct sales, and as such, they have to rely on the marketing and distribution arms that may be located outside the country. In the guise of shifting salaries and costs to other departments of the same multinational, money leaves one jurisdiction to another and the revenues and costs are understated in a similar manner to mask the extent of profits. Sometimes when the product is new to the market, and there are no competitors who can offer an estimate of the right value for the product, the system is skewed in a manner that the profits are understated to minimize the tax obligations. Transfer pricing to multinationals especially those with leverage becomes a tool through which a degree of autonomy in determining the production costs is hedged on. It becomes an indispensable instrument for the management and control of the dealings between the government, the firm and the subsidiaries.

The European Union and Apple

A clear lesson from the European Union is that tax avoidance is a global phenomenon that needs an exerted effort to stamp out. American technology Apple Inc. was deemed by the commission to owe Ireland $14.5billion as accumulated back taxes. Apple had deceitfully divorced the business that pays the taxes from the company responsible for generating the income through which the taxes were calculated. The vested interests in the case show how involved the issue of taxation to the multinationals is and the enormity of trying to enforce the taxes. Apple in the European Union case gets backing from its government that has a stake in the case if the case is thrown out. On the other hand, Apple was deemed to owe Ireland taxes spanning many years while having an agreement on tax exemptions that the union does not recognize. The case shows the complexity of different taxation regimes and how they can be exploited by corporations keen on benefiting from tax avoidance loopholes.

Incentive compensation

Tax avoidance is not only based on the loopholes created by operating in diverse environments. Within the jurisdictions of single country’s economic policy decisions, there arise avenues that are exploited by the persons in charge of companies to ensure that their tax obligations remain low. One of the methods is through the unintended use of incentive compensation to reduce the amounts to be remitted to the governments (Phillips, 2003). The taxation code adopted by the United States allows the publicly held institutions to make deductions of the compensations that the top executives were paid for performance if the amounts exceed 1 million dollars. The incentive is a social policy intended to ensure that the country attracts and values the executives that are productive and actively steer corporations to profitability. The companies, however, saw it as an opportunity to ensure that the compensations would lower the amounts of taxes that they had the obligation of paying to the government. The structure of the salaries paid to top executives started becoming more performance-based so that the final figures would show that they paid performance-based allowances that would reach the threshold put in place. When the performance-based incentives are varied between the pre-tax accounts and the after-tax earnings, the differences on the profits may be substantial (Frank, Lynch, & Rego, 2009). Companies are continuously adopting the after-tax basis to reduce the tax burden on their books. For purposes of reducing the tax burden the method adopted of after –tax incentives is equally a riskier option to the companies since they would be expected to pay bigger incentives to the chief operating officers. Since taxation regimes change, some businesses do not favor the method for fear of being exposed to overheads.

The book-tax gap

Enforcing the compliance of tax remittance is a tedious venture that the authorities cannot scrutinize every financial year. The companies understand that the books are not examined every year, and the auditors know the red flags that may make the authorities want to scrutinize submissions. When it is determined that the figures lie within the safe limits, the book-tax gap method is used. The method is used when firms present different incomes for taxation compared to those that were read to the shareholders. Such variations shield the companies from shouldering a high tax burden but are riskier to pull through successfully. The financial statements that publicly traded firms present must be in conformity with the Generally Accepted Accounting Principles (GAAP). The tax reporting rules, on the other hand, uses a different set of rules that are not in agreement with the GAAP. The differences arising from presenting two sets of books may be attributed to the two sets of rules making the procedure of varying the numbers free from scrutiny. The numbers may even be close, but the differences in reporting dates ensure that values of things like depreciation produce varying figures. There are tax exempt considerations that have to be made and can distort the final figures. Tax-exempt interest charged on municipal bonds, for example, would be missing on the determination of taxable net income but included in the book income (Rego & Wilson, 2012). The variances are termed as normal in different transactions, and it is only when the differences are phenomenal that extra scrutiny is given to the figures.

Agency-View of Tax Avoidance

Corporations are owned by individuals who have a stake in the amounts of profits that are generated. When the firms are privately owned, the conflict between what the owners deem as revenues and the actual profits emerges. The owners or managers of such companies are expected to make decisions on tax compliance but instead more often than not are opportunistic and divert the corporate wealth for private benefit. In publicly traded companies the phenomenon is minimal as the managers of the corporations represent the interests of diverse personalities and not their personal interests. While the agency view of tax avoidance may be minimal in the United States, across the border in Mexico, there are a plethora of publicly traded firms that are still in the hands of families or conglomerates of related families that actively play the role of managing the companies. Founding families of different businesses play different roles of managing the firms and their private interests may be used to making taxation related issues. Most businesses in Mexico offer shares that have no voting rights and when they do, a denial of the chance to determine whether incumbent directors are eligible for re-election or the nomination of new directors.

Tax Shelter and implication on equity

Sometimes businesses create diversionary tactics that are aimed at ensuring that the taxable incomes are reduced. There are varieties of ways that the reduction is made possible including the accelerated transfer of liability, lease in lease out, liquidation and redistribution and corporate owned life insurance. The corporation owned life insurance enables the uses of tax deductible interest expenses even with the knowledge of exempts.

Markets are dynamic, and involvement in tax avoidance is a double-edged sword to the shareholders. Engaging in tax avoidance measures is likely to increase the value of shares due to the higher figures of income not exposed to the tax burden. Conversely, it can also be a bane if the authorities discover and the news gets to the public domain. There are not many people who understand the difference between tax avoidance and tax evasion and the firm being mentioned as having been involved in either would have adverse effects on the appetite for the stock. Hanlon and Slemrod (2009) observed that the stock price of companies that have been exposed to participate in tax sheltering declines as the investors react negatively to the news. The adverse reaction to the news underscores the moral issue of engaging in tax avoidance measures and the way investors are sensitive to their lines of investment undergoing extreme scrutiny. On the other hand, Wilson(2009) observed that when the corporate governance of multinationals are strong, engagement in tax shelter firms becomes a precursor to higher stock values in the future. Shareholders who however invest in companies knowing that they are involved in tax avoidance understand the risks involved but expect that their investments would draw higher returns. There are significantly increased costs of capital in companies that have strong corporate governance and at the same time are involved in tax shelter initiatives.

Tax avoidance behavior plays an integral role in increasing the cost of equity since investors develop a concurrent view of the exposure that their investment would be subjected to if they invested. Other than increasing the risk associated with the firm, engaging in tax avoidance and the exposure of information to the public domain gives rise to the complexities pertaining to the value of the stock. The markets do not agree on whether exposure to the risks increases the value of the stock or reduces it. Such kind of misinterpretation can mislead investors and make them fail to take the right decisions concerning their stock. Desai (2004) cited the case of Enron investors who were subjected to the issue of manipulation of their earnings. Greater financial opacity emanating from the desire to manipulate the earnings that are subject to taxation can also be a bane to shareholders who would be caught up in the obfuscation attempts and fail to understand the exact position of the company. Tax avoidance could impair the ability of the investors to understand the health of the firms and increase their uncertainty regarding the value of their investments.

Tax avoidance; the moral conundrum

Even as it is regarded as legally allowed, governments devote considerable time and resources to plug the loopholes that ensure they lose out of tax money. The incorporated tax laws with loose ends are the biggest contributors to the scheming ways of the corporate multinationals to avoid paying the expected taxes. Multinationals move money around and have a degree of immunity when it comes to the application of taxes between the resident countries and their countries of origin. There may exist tax avoidance loopholes that the billionaires in the society exploit but the enormity of the practice makes tax avoidance no different from tax evasion. Citizens have the obligation of paying taxes so that governments continue to have the ability to offer the important services. The policy makers that look at the moral concept of tax avoidance contend that tax avoidance is schemes designed to ensure that the rich do not pay taxes. The tax filing of different taxation regimes makes for interesting reading. The figures released by the United Kingdom on the tax remittances of the resident billionaires in 2006 showed that 54 billionaires contributed a total of £14.7 million as taxes. Of the fifty-four billionaires, James Dyson had contributed a sum of £ 9 million indicating the extent of tax avoidance prevalent across all levels of the super-rich in the society (Mathiason, 2007). The issue is compounded by the fact that the richest in the society are not the biggest tax payers. It shows that segments of the society have no problem with taking their tax money to safe havens even as they contribute little to the places that have given the right incentives to make more money.

Recommendation

Tax avoidance by big corporations that have dominated industries is significant losses to the countries where they are based. There are elements of feeling that the governments do not deserve part of the profits that the corporations make as profit since they have done little to deserve it yet trade thrives only in places where conditions allow. The technology giants that have dominated innovation from America, for example, have succeeded because there were enabling environments that made their success achievable. Access to private equity, hedge funds, tax breaks, incentives and such facilities were only possible because governments had put structures in place for free trade to thrive. Governments are also responsible for creating the enabling environments for people to develop their expertise. There are large pools of available talent because governments have invested in educating the citizenry making them ready for available opportunities. By avoiding paying taxes and limiting the ability of the governments to provide facilities, the corporations enrich individuals while states lack the resources to spur the economies and generate revenue across the board. If the economies of different countries were to stagnate and fail to progress the amounts that the corporations make would lack buyers, and the effect would be felt across the board. It pays to ensure that tax obligations are met for the whole society to thrive concurrently.

Conclusions

This paper has outlined various ways that the tax avoidance corporations use to minimize the amount of taxable income in the books. Issues of failing to honor tax obligations are more complex than can be envisaged for the reason that the companies that are involved in tax avoidance do so within the legal parameters. Failure to pay the necessary taxes to governments where corporations thrive in is almost universally accepted to be morally repugnant, but loopholes that the companies exploit have never been unanimously sealed because of competing interests. The enormity of harmonizing taxation regiments across the globe makes it inevitable that tax avoidance will continue to dominate policy decisions in future.