ACCY963 Tax Avoidance, Tax Planning, Tax Evasion Case Study Assessment Answer
ACCY963 CASE STUDY ASSESSMENT
CASE STUDY –
Tax Avoidance, Tax Planning, Tax Evasion:
Tax Avoidance – Ass per the perception of the Xynas, (2011), it is evaluated that this is the use of the legal methods of the Income tax rules that apply to any individual or a business. This is to be accomplished by claiming the various deductions available and the credits available which are allowable. It can also be achieved by investing in the tax advantage schemes which would result in less income tax liability of an individual or a business (Australian taxation office, 2020). Tax avoidance by using the proper tax planning is considered legal if the rules are followed (Australian taxation office, 2020).
Example – An individual can claim a deduction for a donation to a charitable trust. So, if an individual has spent $ 1,000 on payment to the charitable trust, then he could claim a tax deduction for the donation (Australian taxation office, 2020).
These are considered for the tax avoidance. But if an individual does not spend $ 1,000 for the charitable purpose and claims the deduction at the time of lodging the Income Tax Return this not considered as Tax Avoidance (Otusanya, 2011, 11-55).
Tax Planning – As statreted by Xynas, (2011), this to make the best use of the various tax exemptions and deductions and benefits to the tax liability in each of the financial years. Tax planning is an integral part of an individual’s and business financial growth. As the payment of taxes is mandatory on the income earned by each assesses (Australian taxation office, 2020). Tax planning and analysis which considers the finance from the tax perspective in order to achieve optimum tax efficiency. Nature and timing of income, nature and timing of the expenditure and planning of the expenditure are the most prominent elements of the tax planning (Australian taxation office, 2020). It is used to manage the tax liability of the individual and help in reducing the tax burden.
Example – If an investor had $ 10,000 income from the Long-term capital gains and the capital gain tax rate be 20% then the Long-term capital gain tax would be $ 2,000 as the liability (Australian taxation office, 2020). If the same investor sells his underperforming investments carrying the loss on capital gain to be $ 10,000. This would result an offset of the gain with the losses and minimizing the tax liability in a legal way (Australian taxation office, 2020).
Tax Evasion – Tax Evasion is an illegal act of concealing on misrepresenting the income to avoid taxation (Australian taxation office, 2020). These are the method which are been adopted to avoid or to minimize the tax liability deliberately by an individual or a business entity. These is also an illegal activity under many federal laws. There can be either illegal non-payment or underpayment of the actual liabilities due. Failure to tax liability can lead to criminal charges (Sikka. & Willmott, 2010). To levy the charges, it must be the responsibility of the Income tax department to prove that the avoidance of taxes was a wilful act done by an individual or a business entity (Braithwaite, 2017, 32-76).
Example – continuing with the example discussed above for the tax avoidance, the second scenario can be considered as an example for the tax evasion i.e., if an individual has claimed a deduction of the donating into a charitable trust at the time of filing the income tax return to the Australian tax office. But in the actual scenario, the organization has not donated any amount for the donation. This would result in the tax evasion of the organization (Australian taxation office, 2020). Also, such an act is illegal for any tax laws which makes the person responsible punishable with fine or imprisonment or both. However, tax evasion is considered to be the illegal and in context with the tax planning, it is used to lower down the tax burden with the compliance with the taxation rules (Sikka, 2017, 54-74).
Concept of Transfer Pricing –
In the present case, an Australian company is been working in the last 40 years and has been blurring of the three tax categories (Tax planning, tax avoidance and tax evasion). Alongside the global recognition, the recent decade have witnessed the transfer pricing as the movement of the capital and tax avoidance. As per the Australian tax office in conventional accounting literature, transfer pricing is to be portrayed as a technique for optimal allocation of the cost and revenues (Xynas, 2011, 40-44). The transfer price needs to be considered with the implication of the arm length price method and allow parties to the transactions to record the transaction at the fair price (Australian taxation office, 2020).
The transfer pricing rules in Australia seeks to avoid the underpayment of taxes in Australia. The objective of the rule framed for transfer pricing is to make sure there is parity in prices of the company’s dealing with the international related party and others in the same situation. Australia’s double taxation agreements and domestic law require the pricing of the goods and the services along with the allocation of income and expenditure between the related party and to identify to as whether the transactions are entered following the arm’s length principle (Australian taxation office, 2020).
The arm’s length principle uses the independent party behavior as a benchmark to determine the international dealing between the related parties-
- Price of goods and services, and
- Income and Expense allocation.
- absorption of the cost associated with the particular benchmark
Many factors may influence the price and the income margins, so a close examination of the dealings of the prices that are taken for consideration for examination and the circumstances of the parties involved. For dealing to be comparable (Braithwaite, & Reinhart, 2019). However, the transactions needs to be recorded at the same price which would be required at the price with the other parties. The transfer pricing avoidance issues needs to be done by the parties to the contract by undertaking the arm length price which shows that the transaction would be recorded at the price which would have been entered by company with the other party considering the market factors (Australian taxation office, 2020).
- None of the differences in the situations should be material.
- Reasonably accurate are to be adjusted to eliminate such difference the effect of any of such differences (Australian taxation office, 2020).
The materiality of any of the differences depends on each other i.e., depending upon the facts and circumstances in each case. There are several internationally accepted methodologies that the business complies with the arm’s length principle. There are no set of rules or preferences set for the determination of arm’s length prices in the Australian Transfer Pricing rules. However, any method chosen by the assesses should be able to provide the commercial realistic outcome (Australian taxation office, 2020). It is generally expected that a reasonable business would seek to commercial benefits which shows that company has recorded possible issues with the determined amount of benefits (Australia, & McCormack, 2020).
Maximize the price received for supplying the goods or services, taking into account of the strategy adopted by the business, the economic and the market circumstance of the business dealing in industry and minimize the cost associated with the acquisition of the goods and services (Australian taxation office, 2020). The allocation of the cost is done in the particular department which helps in assessment of the lower cost with the purchased goods and services in business (Australian taxation office, 2020).
- Be adequately rewarded for any of the activities carried out.
Business with international related party dealing may face – a client risk review, a subsequent audit, with all possible pricing agreements and penalties. Generally, transfer pricing cases are based on the perceived risk to revenue of the business not complying with the arm’s length price (Jones, Passant, & McLaren, 2016, 112-155). However, it is assessed that Transfer pricing of the tangibles and intangibles is evaluated as substitutes in shifting the profits. The business is at the greatest risk (Australian taxation office, 2020).
- If it has a significant level of international related parties dealing,
- If the company is paying less taxes comparing then that with the other companies from the same industry,
If the company has undertaken business restructure that affect the international related party dealings (Australian taxation office, 2020).
The commissioner and the tax officer on request of the taxpayer allows them to enter into an agreement in advance for the calculation of arm’s length price for the determination of transfer pricing (Hampton, & Sikka, 2005, 34-75), Transfer pricing of the tangibles and intangibles can be viewed as substitutes in shifting the profits. An appropriate set of criteria is formed for the similar transactions over a period of time for the controlled transactions. The term of the advance pricing agreement is generally for 3 years or 5 years. An advanced pricing agreement is entered into by (Australian taxation office, 2020).
- In case of bilateral Advanced Pricing Agreement – the competent authority of the tax administration and the Australian tax office competent authority.
In case of unilateral Advanced Pricing Agreement – the taxpayer and the Australian tax office (Australian taxation office, 2020).
There are several advantages in entering into advanced pricing agreements:
- Advance pricing agreements provide the tangible benefits by decreasing the costs of compliances over the period of the term of the agreements.
- The tax officer may be able to build a strong relationship between them and the taxpayer by building a relationship with the mutual trust in an early engagement (Australian taxation office, 2020).
- Advanced pricing agreement gives the taxpayer and the tax opportunity the method of application of the arm’s length price and prevents in the difference in calculation of the transfer pricing (Jones, Passant, & McLaren, 2016, 23- 55).
Australian tax office must enter into an agreement with the taxpayers if one or more indicators are present –
- There are simple conditions for the determining the arm’s length prices.
- The value for determination of the international transaction is not material.
- The proposed agreement would ensure the true profit and economic activities of the company.
The agreement appears to have less commerciality and have more concentration on the tax-driven (Australian taxation office, 2020).
For the determination of prices aspect other than the prices is also to be considered. this includes the value of the global chain. Consideration of the other matters is a part of the dealing with an advanced pricing agreement request or application (Australian taxation office, 2020).
After negotiating with the terms and conditions of the proposed advanced pricing agreement, the matters which would be mentioned in the agreements (Australian taxation office, 2020).
- The name, address and countries of residence for the taxation purpose.
- Term period of the agreement
- The arm’s length rate, amount, and output of the transactions.
- Condition of any breach of the agreements
- Accounting standards based on which the taxpayer financial records are to be prepared.
Details of the records required to maintain (Australian taxation office, 2020).
- Due date for filing of the records required to be filled to the tax office for the international related party transactions (Ingram, 2016, 22-55).
- Proper filing and undertaken work program with the details of the tax payer is recorded while recording the transfer pricing agreement (Australian taxation office, 2020).
Several studies have shown the extent of the price arm’s length and intra firm trade (internationally related) concerning the corporate tax structure in the country of operation where the company has a place of management located. A key challenge is for the literature to identify the effects of the tax prices and the fixed effects employed in a country. The variation sets the fixed rate that is to be employed making it difficult for comparison among the working papers. For the assessment, we study the manipulations that can be made in identifying the arm’s length prices (Australian taxation office, 2020).
Transfer pricing of the tangibles and intangibles can be viewed as substitutes in shifting the profits. Also, research and development can make the firm get specialization in the products they are dealing which can make it difficult in finding the comparable prices which will make it easier for the company to shift the profit from one location to another. In such a way, tangibles and intangibles help the companies in shifting the profits from one country to another (Australian taxation office, 2020). However, there is need to set up proper compliance while viewing the tangible and intangible assets with the view to transfer the profit from one country to another.