Further Taxation Theory and Practice Report: Developments Analysis

This report delves into the significant developments in corporate taxation since 2017, examining the impact of the Trump Tax, the Base Erosion and Profit Shifting (BEPS) project, and the rise of tax havens. It analyzes the reactions of multinational corporations, auditors, governments, and other stakeholders, including NGOs like Tax Justice Network. The report highlights the complexities of tax avoidance, the role of auditors in navigating these challenges, and the evolving landscape of global tax policies. It discusses the implications of these changes on various stakeholders and explores potential future trends, including the adoption of new taxation methods like Destination Based Cash Flow Tax (DBCFT) and Unitary taxation with formulary apportionment. The report also considers the impact of these developments on the relationship between auditors and multinational corporations, as well as the reactions of various stakeholders, including NGOs, to these changes. It concludes by suggesting that the current developments in major parts of the world are contrasting in nature.

Running head: FURTHER TAXATION THEORY AND PRACTICE
Further Taxation Theory and Practice
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Table of Contents
Introduction..................................................................................................................................2
Major Developments in Corporate Taxation since 2017.............................................................2
Impact on the relationship with the auditors................................................................................4
Reaction of Other stakeholders....................................................................................................5
Conclusion...................................................................................................................................5
References....................................................................................................................................7

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Introduction
When major business corporations make profits, a part of it is generally collected from
them by the governments. This is known as the corporate income tax. The main rationale behind
charging this tax is to ensure that the businesses pay their fair share towards the public services
and resources used by them. In a regular country which is not a tax haven, the corporation taxes
usually range between 20 and 35 percent. They tend to make up more than 10 percent of the
revenues in case of most of the countries worldwide. The main advantages in relation to these
taxes are that they hold the entire tax system of a country together and curb inequality from a
system. However, the downside to a consistently higher rate of tax is the loss of business from
the country. Companies typically tend to conduct a majority of their business in countries where
the policies are favourable for them. These taxes are one of the most common methods of
determining the growth of business in a country for a particular time period.
Major Developments in Corporate Taxation since 2017
One of the major developments which has taken place on a level of global significance is
the introduction of the Trump Tax, formally known as the Tax Cuts and Jobs Act (TCJA) in
2017. This bill was signed by American President Donald Trump in 2017 and lowered the
statutory federal income tax rate from 35 percent to 21 percent. However, the policy makers
failed to eliminate many of the loopholes or tax breaks into consideration (Nunns et al. 2016).
This resulted in an increase in the profits of the entity and resulted in the payment of effective tax
rate of 11 percent. Almost 91 of the major corporations in the country did not pay any federal
taxes on the income earned by them for the Financial Year 2018. Some of the techniques used by
the companies to take full advantage of these amendments and reduce their tax liabilities include
full expensing of capital spending, selling of stock options to employees and various benefits

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specific to industries operating within the country (ITEP 2020). Even though the Alternative
Minimum Tax (AMT) was proposed as a part of the proposal, the government did not choose to
go ahead with this plan.
One of the loopholes which exists within the rules set out by the US tax system is the
presence of loopholes which allow tax avoidance. Although it is not mentioned anywhere in the
tax code of the country, most of the US corporations tend to use tax havens as a means of
avoiding an estimated $100 billion taxes every year. It has been estimated that around 73% of the
foreign subsidiaries have subsidiaries in one of the tax haven countries. The lack of action on the
part of the US Congress results in an increase in the dependence on the tax havens for tax related
savings (Bennedsen and Zeume 2018). This is one of the most commonly followed trends in the
modern day corporate taxation.
One of the biggest flaws in the current tax system is that it is based on rules created a
long time ago which do not tend to take the current business scenario into account. The problem
of tax havens and the lack of sufficient taxes paid by the MNCs is a problem which is likely to
continue in the current year. In order to tax more amounts from the MNCs, new methods may be
adopted by the governments of various countries. They may include a Destination Based Cash
Flow Tax (DBCFT), Residence Based Worldwide Taxation and Unitary taxation with formulary
apportionment (PSI 2020). The DBCFT tax may charge taxes from the customers on the basis of
the destination in which the customers to whom the sales are made exist. This method makes tax
evasion more difficult as countries all over the world would be looking to charge taxes from the
entity. The RBWT is a method where taxes are levied on MNC in its home country by providing
a credit to the entity for the taxes it has paid in the foreign country. This provides the entities
with an opportunity to set up more businesses in places where the tax rates are very low. The

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home of the business may also be set up in the country where more taxes are available. Hence,
this issue may depend on the strictness of the tax policies prevalent in the home country. In order
to avoid the shifting the MNCs to another country, there may also be the levy of a global anti-
erosion tax which makes it difficult for the businesses to relocate their businesses to a country
other than their home country (Ginevra 2017). The unitary approach is one where the taxes are
charged from a business on the basis of a correct balance between the supply and demand of the
entity. However, some critics suggest that this method would be more effective if it is adopted as
a unilateral method with the taxes levied on the global consolidated profits of the entity.
Impact on the relationship with the auditors
One of the most common methods of avoiding taxation is to create information
asymmetry between the regulators and the people within the organisation. This would result in
the necessity for an increased scrutiny of the financial statements of the entity. Hence, any
changes occurring in the tax policies make it necessary for an organisation to hire auditors who
share a good working experience with the organisation. This is highlighted by the vast financial
resources possessed by the MNCs which in no way can be matched by the regulatory authorities.
The complications caused due to the existing tax structures make it difficult for the auditors to
conduct a proper audit of the financial statements without much hassle. As the revenue
generation and survival of the audit firms depends on the satisfaction of the clients, the reliability
of an audit result tends to go down. While MNCs tend to undertake unfair means to avoid their
tax burden, the same also applies to the audit firms in some of the cases (HOUSE 2012). It has
been observed that the audit and consulting firms tend to obtain confidential data of customers
and use it for the purpose of creating generic products for tax planning. As there is a chance for
increased scrutiny from the auditors, these audit firms tend to remain as confidential as possible

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to avoid disclosing any information to the authorities. The transactions occurring in relation to
the sale of the tax products are also structured in a manner that any payments related to the tax
products are received in the tax havens and avoid taxation of both the MNCs and the auditing
firms. Studies also suggest that there is very strong correlation between the usage of the Big Four
firms for the audit of the business and maintaining a strong tax haven networks (Jones, Temouri
and Cobham 2018). Hence, it can be suggested that any new policies which would increase the
strictness of taxation would result in an increased cooperation between the auditors and the
globalised organisations.
Reaction of Other stakeholders
Some of the other important stakeholders in the given scenario include the NGOs across
the world that are increasingly involved in promotion of a fair tax system across the world.
NGOs like Tax Justice have been campaigning for a long time to increase the importance of civil
societies when forming a tax policy. One of the issues that has become more significant in the
recent times is the OECD’s BEPS proposals. The NGOs across the world have suggested that
these proposals will not be the end of the tax avoidance schemes undertaken by multinational
companies (Oecd.org. 2020). The country by country reporting scheme where every company is
required to state the profits earned by it is a good step in achieving the purpose of finding the
profit patterns of other stakeholders. The current developments previously evaluated like the
Trump Tax and the tax reduction on MNCs is likely to be received negatively by the NGOs. A
majority of their beliefs are towards make the tax system more fair and distribution of revenue
more equal. Hence, the main focus of the NGOs has been towards reducing the unfairness of the
tax system. It is quite evident that their support will be more inclined towards the system which
increases the tax paid by the corporates and not otherwise. They recognise that tax avoidance has

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been a part of the business model of the entities and it needs to be modified to better suit the
needs of public. Another issue which needs to be financed more is the climate justice. Many
external stakeholders think that the climate change caused by the corporates needs to be financed
by them to overcome its adverse effects. Hence, there is a need to overcome these issues. Any
policy reducing the corporate tax rate will not go well with the ordinary stakeholders
(Taxjustice.net 2020).
Conclusion
On an overall basis, it can be suggested that the current developments in major parts of
the world are contrasting in nature. While countries like US and the UK are reducing the
effective tax rates to boost investment, there is an increased demand to levy more taxes on
MNCs and crackdown on the existing tax havens. These result in a possibility of increased
cooperation amongst the auditing firms and the MNCs. However, a majority of other
stakeholders are not in agreement with this and this may increase the pressure on the
governments to increase their taxes.

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References and Bibliography
Barrera, R. and Bustamante, J., 2018. The rotten apple: Tax avoidance in Ireland. The
International Trade Journal, 32(1), pp.150-161.
Bennedsen, M. and Zeume, S., 2018. Corporate tax havens and transparency. The Review of
Financial Studies, 31(4), pp.1221-1264.
Ginevra, G., 2017. The EU Anti-Tax Avoidance Directive and the Base Erosion and Profit
Shifting (BEPS) Action Plan: necessity and adequacy of the measures at EU
level. Intertax, 45(2), pp.120-137.
HOUSE, O.C., 2012. COMMITTEE OF PUBLIC ACCOUNTS (2013) Tax avoidance: the role
of large accountancy firms. Forty-fourth Report of Session, 13.
ITEP. (2020). Corporate Tax Avoidance in the First Year of the Trump Tax Law. [online]
Available at: https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/
[Accessed 22 Mar. 2020].
Jones, C., Temouri, Y. and Cobham, A., 2018. Tax haven networks and the role of the Big 4
accountancy firms. Journal of world business, 53(2), pp.177-193.
Nunns, J., Burman, L., Rohaly, J. and Rosenberg, J., 2016. An Analysis of Donald Trump’s
Revised Tax Plan. Urban-Brookings Tax Policy Center, Washington, DC, http://www.
taxpolicycenter. org/sites/default/files/alfresco/publication-pdfs/2000924-an-analysis-ofdonald-
trumps-revised-tax-plan. pdf.
Oecd.org. (2020). [online] Available at: https://www.oecd.org/ctp/BEPSActionPlan.pdf
[Accessed 4 Apr. 2020].

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PSI. (2020). PSI. [online] Available at: http://www.world-psi.org/ [Accessed 22 Mar. 2020].
Taxjustice.net. (2020). [online] Available at:
https://www.taxjustice.net/wp-content/uploads/2020/03/TJF_2020_11-2_V3.pdf [Accessed 4
Apr. 2020].
War on Want. (2015). Unhappy Meal: €1 Billion in Tax Avoidance on the Menu at McDonald's.
[online] Available at: https://waronwant.org/media/unhappy-meal-%E2%82%AC1-billion-tax-
avoidance-menu-mcdonalds [Accessed 4 Apr. 2020].
Taxjustice.net. (2020). [online] Available at:
https://www.taxjustice.net/wp-content/uploads/2019/04/Ashes-to-ashes_How-British-American-
Tobacco-Avoids-Tax-in-Low-and-Middle-Income-Countries_Tax-Justice-Network_2019.pdf
[Accessed 4 Apr. 2020].