Global Tax Jeopardy Essay
The paper tries to investigate the risks associated with the tax avoidance practices in the American global organizations. It tries to examine the risks associated with the use of tax avoidance strategies in minimizing the double tax jeopardy.
It further defines how the current tax double tax jeopardy is being avoided by the US expatriate employees. Finally, the paper tries to discuss if the tax avoidance strategy is ethical or not and the risks associated with the avoidance of double tax jeopardy.In the process of having an intensive understanding in financial planning, analysis, value maximization, and risk assessment of most firms, the business analysts and strategists are focused on devising some mechanisms to minimizing the tax liability that accrues from the double taxation jeopardy.
This is the reason as to why most American global business enterprises officials consider it worthwhile to minimize the overall tax liabilities through tax avoidance since most of their organizations function overseas.As a result of entering the global economy and reaping the financial rewards from across the boarder, most of the US multinational companies find themselves in positions double tax liabilities to two or more jurisdictions based on the foreign income rationalities. Double taxation is the practice of imposing two or more taxes on the same income, assets or transaction. It is the instances when the country levies tax on the already taxed income (Walter, 2004).
It can result in cases as when a corporate owner receives salary as an employee and at the same time receives corporate dividends as a shareholder and then all the incomes subjected to tax. As the most prevalent notion of taxation is the institution of justice and equality to the tax payers, the double taxation does not meet this. It is one form of unequal taxation sine it consists the taxation of the same source of wealth in a given state more than twice. This issue of double tax jeopardy has caused the American global organizations’ officials consider it worth to practice tax avoidance strategies to counter the liabilities accruing from such inequalities.Tax avoidance is the legal and professional way of reducing once tax burden that are payable by means that are within the law. It is the use of legal frameworks to modify individuals’ financial situations in order to lower the amount of tax liability (Forbes, 2008). This can be accomplished by using either of the following methodologies; an individual may opt to invest in areas that are totally exempt from tax or claiming the permissible deductions and credits as capital allowances and allowable expenses. An individual can opt to finance a business through debts to take advantage of tax shield benefits accruing from interests charged.
The question is whether these tax avoidance practices are ethical and justifiable or not. Actually there is a thin line between the use of law to one’s advantage and the abuse of the law. Provided that the entity operated in the global economy and did not violate the any of the laws, the process of using the tax minimizing strategy is not illegal. Much as the taxation is a compulsory contribution imposed by the government on individual sources of income (direct or indirect) for public purpose, the double taxation is on the other hand is limited to the field of direct taxation.
The main rational of this is to ensure that the taxation is real and that the double imposition of tax liability is limited.A prudential argument on this ground puts the tax avoidance practices on the front bench of being a legal practice. Unlike the tax evasion practices, it does not indulge in unethical practices of under declaring or non-declaring the organizations’ income or even claiming the expenses that are not due for the organization.
Further, unlike tax evasion, penalties are not imposed but rather, the government through its financial bodies seals the loopholes that exist in the tax rules and regulations that are taken advantage of by the tax payers. But much as the practice is considered legal, the measure the government takes to seal these loopholes contrasts the qualification of tax avoidance being ethical. Contrary to the general belief, tax avoidance is not legal, and neither is tax evasion.Even though the American corporations may be acting within the law, some other entities may not be acting in an ethical manner. The presence of tax treaties makes most of these firms to conduct their businesses overseas thus preventing the transfer of their income across boarders. This treaty allows the corporations to participate in an international arbitrage that takes advantage of the other country’s tax regulations for profit sake (Haworth &). This forces some countries to forsake their tax base.
And in any case the country opts to transfer part or whole of its operations and income to a foreign entity, it results to loss of jobs to US citizens (Ask the business doctor).A closer look at the US tax avoidance provision may be useful to business people. To start with, the US section that provides for adjustment on the account of tax avoidance is labeled as “transactions to avoid liability to tax” but not as tax avoidance. This is a clear indicator that their must be some deliberate effort to arrange for such transaction in a way to avoid taxes. This gives the commissioner discretionary power which has no control under the US Act.
The Act goes on to provide the commissioner with needs to specify such tax avoidance transactions so as to provide necessary adjustments. Because of this, the American global enterprises are associated with some risks that are brought up by such practices.But first, being the international firms, they have to familiarize themselves with the tax consequences in the US as their global operator. These organizations must be careful to stay alert to changes in tax laws to avoid circumstances when they will not comply with the law (Bauman & Mantzke, 2004). According to the Tax policy, when the US entity earns profits from its foreign operations, the source country usually gets the first crack at those profits through its corporate income tax (Govannini, Hubbard & Slemrod, 1996). The US law dictates that domestic corporations are deemed to be US residents. If the entity has branches abroad, any income accruing from such branches would be subjected to US corporation tax and the foreign income tax. The only way to avoid such a double taxation is to open a separate entity that is not subjected to US taxes.
The source country may also levy withholding taxes on a foreign income in form of dividends, interests, rents and even royalties. In addition, it imposes taxes on ordinary corporate income tax and on profits from branches of foreign companies.On a deferral tax system, the time at which the US treasury first taxes the foreign profit depends on the how the entities’ foreign operations are structured. For example, if they are structured as branches of the US entity, the US government then taxes the profits as they accrue.
But if they are organized as subsidiaries, their profits are not taxed until remitted to a parent corporation in the mother country in US. This deferral tax system gives entities an incentive to accumulate their profits at low taxes. But much as this deferral tax system takes advantage of this, it has a short fall in allowing the US multinational entities to avoid the US taxes on their foreign income by retaining their foreign income abroad to take advantage of low tax rates (Govannini, Hubbard & Slemrod, 1996).This brings us to the main content of this paper of the risks associated with tax avoidance. First, by so avoiding tax to the mother country through a deferral tax system, the US government suffers a tax income deficit.
Therefore, the US government is forced to impose more tax on its local companies to raise enough revenue for its citizens. In this regard, the parent corporations bear the burden of the raised taxation that could have been lessened if the foreign subsidiaries had contributed in paying tax.Even though the direct implications of tax avoidance are insignificant on unemployment, inflation and the interest rates, its indirect effect may have a substantial weight. The economists discuss the effects of tax avoidance as a consequence of the application of scarce resources to tax avoidance activities (Tooma, 2008). The tax payers alter their employment and investment choices only to take advantage of tax avoidance activities.
From a social point of view, these reactions results to unproductive decisions which may affect the economy. On the other hand, the indirect effects of such a practice follow from the belief that wealth tax payers are placed in a better position to avoid tax. Further, if the wage earners belief that non-wage earners are in a position to avoid tax, thy will be forced to demand for a wage raise. If this is met, it results to a raise in inflation which will have subsequent effects to unemployment opportunities and the performance of the corporate.The change of investment choices to take advantage of the lower tax rates will lead to a risk of loosing potential investors in American global organizations that practice tax avoidance. This later will have a gradual effect on the financial position of the company.
By so loosing their potential wealth, the American global firms’ financial viability declines. Therefore, their resulted financial position and soundness would render them no chance to get normal financial aids as when the potential investors had not shifted their investment choices. Moreover, by so increasing the inflation rates, the American global enterprises suffer systematic financial risks financial risks. These are risks inherent in the entire market in which the corporate operate and are caused by factors that affect he prices of the all the corporate portfolio which cannot be avoided even by risk diversification (Tatum).The other risk related with the tax avoidance practices is that of a tax payers engaging in tax avoidance scheme believing that the other parties are also engaged in the same. This consequence is important in support of the accounting standards applicable.
Much as the standards propose the reduction of tax rates to reduce the tax avoidance practices, this is not always the case. The reduction in the rates does not boost the morale of the tax payers to reduce instances of tax avoidance. Rather, this will contribute in reduction of the government revenue which will have a subsequent effect on the government development especially in the industrial areas thus affecting the growth of the economy.Finally, the overall and the most predominant risk accruing from such international tax liability avoidance relate to the laws in the jurisdiction countries. Failure of the US corporations to comply with the foreign countries’ tax regulations will amount or result to fines, penalties and even the liquidation of the foreign corporate. Therefore, to properly succeed in the tax avoidance strategies, the American global corporate should familiarize themselves with the underlying regulations in the foreign country to escape such huge fines.
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& Mantzke, K. (2004). An education and enforcement approach to dealing with unscrupulous tax preparers. Journal of legal tax research, retrieved August 1, 2010 from Bsiness source completeForbes (2008). Tax avoidance. Investopedia. Retreved August 1, 2010 from http://www.investopedia.
com/terms/t/tax-avoidance.aspWalker, F.(2004) Double taxation in the United States. The Law book Exchange, Ltd, Vol. 5, 1- 9,Govannini, A., Hubbard, G., & Slemrod, J.
(1996), Studies in the international taxation. University of Chicago Press, pp.79, ISBN 0226297020Tatum M., ‘What is total risk’, Retrieved August 1, 2010 from http://www.wisegeek.com/what- is-total-risk.
htmTooma, R. (2008) Legislating against tax avoidance. IBFD, PP.25, ISBN 9087220340