University Taxation Principles and Practice Report: 7ACCN017W Analysis

This report delves into the complexities of taxation principles and practice, examining the factors governments must consider when implementing tax reforms, such as balancing equity and efficiency, administrative costs, and international commitments. It differentiates between direct and indirect taxes, analyzing their impact on individuals and the economy, and explores tax avoidance strategies employed by multinational companies, including the use of tax havens and transfer mispricing. The report utilizes academic research and real-world examples to support its arguments, offering a comprehensive overview of government fiscal regimes and the implications of tax policies on businesses and the economy. The report also discusses the differences in government expenditure and its impact on the overall fiscal regime. The report further discusses the schemes that are used by multinational companies to avoid paying a fair share of their profits to the UK government.

Running head: TAXATION PRINCIPLES AND PRACTICE
Taxation Principles and Practice
Name of the Student
Name of the University
Author Note

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TAXATION PRINCIPLES AND PRACTICE
Table of Contents
Introduction..................................................................................................................................2
Factors to consider in implementing a tax reform.......................................................................2
Differences in Direct and Indirect Taxes.....................................................................................3
Tax Avoidance Measures.............................................................................................................5
Conclusion...................................................................................................................................8
References....................................................................................................................................9

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Introduction
The meaning of a tax in financial terms is that of a financial charge or other forms of levy
imposed upon a taxpayer by the governing authority of a country. A tax reform can be defined as
the measure taken by a government to improve the efficiency of the existing system of tax
administration. The purpose of implementing a tax reform is to maximise the social and
economic benefits that can be achieved from the system of taxation. As taxation is an important
aspect in the role of state building by the states, there is an increasing importance being given to
the tax reforms. Taxes constitute of both direct taxes like personal income tax and corporate
income tax and indirect taxes like GST and VAT. A direct tax is one which is directly imposed
upon a person or an entity by the government on the income earned by them from various
sources. An indirect tax is a rather distinct form of tax which is imposed on a transaction
conducted between two individuals by the government. According to Adam Smith, the burden of
the indirect tax usually tends to fall on the final consumer purchasing the goods or using the
services. A tax avoidance practice is one in which an individual uses the tax regime prevalent in
a country to one’s own benefit to reduce the amount of tax which is required to be paid by them.
It is usually done through some legal means.
Factors to consider in implementing a tax reform
The main purpose of implementing a tax reform is to improve the revenue generated from
tax collection and use the same for the benefit of the nation. However, in order to do so, there are
a wide variety of factors to be taken into consideration in order to so. The primary factor is the
balance between equity and efficiency considerations of the new system. One such example is
the removal or reduction of taxes of the lower wage group employees in an organisation. While
lowering the tax rates improves the participation of people in the work force, improving their

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wages over time may not be a priority (Kreiner, Leth-Petersen and Skov 2016). Hence, there
should be a balance between the amount of tax collected and the growth in the economy over a
period of time. This is because of the increase in the marginal rate of tax paid by them. The tax
administration of the country which itself may act as an obstacle to a tax reform implemented by
a country. Administrative changes to the tax system may act as an obstacle to the tax reforms if it
includes additional costs to be incurred as a part of implementing the reform. Some tax reforms
may bring in organisational changes within the administration like requiring more resources, tax
collection agents and digitalisation of tax filing systems. The costs of collecting these taxes
should not exceed the revenues collected from the taxes by the government. The tax avoidance
concerns are another aspect which need to be carefully considered at the time of implementing a
tax reform by a country. Tax revenues are an important factor which tend to act as an obstacle to
the pro-growth reforms which a country looks to implement at a point of time (Oecd-ilibrary.org.
2020). The usual problem with these types of reforms is their dependence on the behaviour of the
people impacted by the reform. If people consider the tax to be too strict, then they may resort to
measures like concealing their income. In case of MNCs, they may consider shifting their home
base to a different country than the one in which they are currently operating. Another important
factor to consider is the International rules and commitments of a country. The prevalent rules in
the International business environment may prevent a country from reducing its taxes below a
certain level in terms of rate. Hence, this can prevent a country from implementing ground
breaking tax reforms as a part of its tax regime.
Differences in Direct and Indirect Taxes
The major difference between the direct tax and indirect taxes lies in their basic nature
and the manner in which they are charged. A direct tax refers to one which is directly imposed

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on a taxpayer and needs to be paid directly by the taxpayer to the government. The incidence and
the impact of taxation is to be faced by the same person in this regard. There is usually no impact
on the prices of the commodities. However, there are attempts to conceal the income or reduce it
to avoid paying additional taxes to the government. Indirect Tax, on the other hand, are the taxes
which are levied on the transactions taking place within a country, in a given point of time.
These are usually collected by the intermediaries like the retailers and the burden of taxation is
charged on the final consumers. In this case, the burden of taxation can be shifted from one
person to another. One of the main purposes of the indirect taxes is to increase the competency in
the economy and reduce the dependence of the government on the revenue generated from direct
taxes. These are also partly responsible for the price levels prevailing in the economy at a given
point of time. The tax policies of a government have also been found to have a significant impact
on the fiscal policies of the government. In majority of the countries, the direct taxes tend to
charge more taxes from the people who have earned a greater share of income. For this reason,
they are considered to be progressive in nature. Indirect taxes such as VAT and GST have been
found to be generally regressive in nature. This is because they charge the same amount of tax
from a person irrespective of who is entering into the transaction. However, these regressive
taxes, when combined with efficient transfers result in a net fiscal system which is more
equalising in nature (Lustig 2016). In countries like Singapore where the growth of the economy
is dependent on the foreign investment inflow, the indirect taxes are used as a measure to keep
the direct income taxes low and complement the tax revenues earned by an entity. While direct
tax change policies are necessary in improving the income inequalities in a country, it may not
always be the case. In case of a country like US, it has been found that the tax policy changes
played a role in aggravating the pre-tax income earned by people. Analysts suggest that the lack

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of reforms in the direct taxes during this period would have resulted in a better distribution of the
available income. Another important observation about the direct and indirect taxes is that they
play an important role in determining the reaction of the consumers towards the payment of a
tax. Hence, the important factor which differentiates both these taxes in terms of the behavioural
pattern of the consumers is the rate of detection. If the change in tax policy is easily detectible,
then the willingness of the consumers towards paying the tax declines. A healthy mix between
the direct and indirect taxes is essential for the proper framing of a tax system (Watrin and
Ullmann 2008).
Tax Avoidance Measures
As previously stated, tax avoidance is a legal strategy in which the companies use the tax
regime prevalent in a single country to reduce the amount of taxes paid by them at a given point
of time. One of the measures is to use Tax Havens. A tax haven can be defined as a place which
seeks to bring in more businesses by providing politically stable facilities which allow people to
find their way around the rules existing in the home country. One such politically stable facility
provided by these havens is the extremely low rates or no taxes charged on the businesses
investing in them. Tax Havens tend to account for about half of the trade occurring in the world
and a third of the world’s FDI. Some of the most popular tax havens in the world are the Cayman
Islands, Guernsey, British Virgin Islands and Jersey. Some of the common features of a tax
haven includes low or zero taxes and lack of offshore activities in the domestic economy. The
financial services industry in the country is extremely large when compared to the domestic
economy and the local politics mainly tend to focus on the interests of financial services. There
are groups of tax havens existing within the world. The four main groups include the European,
British Overseas Territories, United States of America and other countries. One of the most high

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profile case related to the tax havens in recent times is the dispute between the European Union
and the company Apple. In this case, the EU ordered Apple to make a payment of €13 billion to
the Irish government for the gross underpayment of taxes from the period of 2003 to 2014
(Barrera and Bustamante 2018). The company used the commonly used method of establishing
shell companies incorporated in Ireland to reduce the profits earned in Europe and pay taxes at
an effective tax rate of 1%. However, it should be noted that not all firms tend to use tax havens
as a measure of avoiding taxes that need to be paid by them. Some of the companies which are
more likely to use tax havens are the ones which have a global presence and are operating in a
country with high rates of tax. Research-intensive firms which usually tend to have a greater tax
avoidance opportunity are more likely to be involved in the usage of tax havens. However,
researchers suggest that the relationship between the non-haven taxation and the haven taxation
followed by firms is a complex one and consists of two completely opposite effects.
The main procedures followed by the firms in reallocating their incomes include shifting
their home base from a territory which has high rates of tax to a low income country which tends
to charge low taxes. Double Taxation Avoidance Agreements between two countries are also
used to shift the base of the business to a country in which lower or no taxes are charged by the
home country (Bernards et al. 2016). Some of the methods of exclusion include the unlimited
exclusion of the income earned in a foreign country in the country of domicile. The other method
includes the exclusion of the income on a exclusion with progression basis. In this case, the
income of a company is exempted from taxation but is used in calculating the overall tax liability
of the company. Another most commonly used method of tax avoidance is that of transfer
mispricing or fraudulent mispricing by individuals. This is also known as the transfer pricing
manipulation. This usually involves the wrong quoting of the prices charged by the entities on

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the prices charged on the subsidiaries owned by them. In these cases, the company usually has
different subsidiaries operating in different parts of the world. The initial subsidiary would sell
the product to a subsidiary, usually located in a tax haven at an extremely lower price and report
lower profits. The tax havens then sell the products at an extremely high price to the final
companies purchasing the product and selling it to the retailers. These techniques often result in
the reporting of lower profits by an entity on the final products sold by it. Hence, the tax which
needs to be paid by it also reduces. The incentives obtained by the firms by using these
techniques remains extremely clear to all the firms using the transfer pricing technique.
However, there is a dearth of direct or systematic evidence of the use of this technique due to the
lack of verified data from organisations or from governments. Hence, the importance of the
usage of transfer pricing as a technique in tax avoidance cannot be appropriately quantified by
the business. However, a data which can be built on the basis of the available information
suggests that the internal prices in cases of tax havens are likely to remain very low and is
usually found in the case of large scale MNEs. One of the reasons why transfer pricing has not
been brought under control by the international governments is the lack of a proper legislation to
determine the amount of tax avoided or the manner in which it is undertaken. This has acted as a
tax loophole especially in case of foreign firms shifting their home base to different continents.
Some of the measures which are useful in preventing the tax avoidance by firms include
the introduction of the Destination-Based Cash-Flow Tax (DBCF), Residence-Based Worldwide
Taxation (RBWT) and the Unitary Taxation with Formulatory Apportionment. The DBCFT
taxes the MNC on the basis of the destination to which the sale is being made. This would be
useful in keeping a check on the usage of transfer pricing techniques. The RBWT charges taxes
on the worldwide income of a firm based on its home. However, this would result in the home-

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erosion of a firm and would not control the loss in tax revenues. A more recent approach is that
of taxing a business on the basis of its assets and liabilities as these are important factors in
determining the supply and demand of a firm (PSI 2020).
Conclusion
On the basis of the above discussion, it can be suggested that the global impact of the tax
reforms are an important factor which should be considered by a government. Others include the
potential loopholes or giveaways which may result in tax avoidance. Hence, a good balance
between direct and indirect taxes is necessary to maintain competency in the economy and avoid
tax erosion. Some of the tax avoidance measures include shell companies, tax havens and
transfer pricing. The current administration should do more to change the rules which avoid the
tax avoidance by firms.

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References
Bargain, O., Dolls, M., Immervoll, H., Neumann, D., Peichl, A., Pestel, N. and Siegloch, S.,
2015. Tax policy and income inequality in the United States, 1979–2007. Economic
Inquiry, 53(2), pp.1061-1085.
Barker, J., Asare, K. and Brickman, S., 2017. Transfer pricing as a vehicle in corporate tax
avoidance. Journal of Applied Business Research (JABR), 33(1), pp.9-16.
Barrera, R. and Bustamante, J., 2018. The rotten apple: Tax avoidance in Ireland. The
International Trade Journal, 32(1), pp.150-161.
Bernards, N., O’BRIEN, R.O.B.E.R.T. and Zhang, F., 2016. Labour and Tax Justice. FUTURES
COMMISSION, p.19.
Davies, R.B., Martin, J., Parenti, M. and Toubal, F., 2018. Knocking on tax haven’s door:
Multinational firms and transfer pricing. Review of Economics and Statistics, 100(1), pp.120-
134.
Kreiner, C.T., Leth-Petersen, S. and Skov, P.E., 2016. Tax reforms and intertemporal shifting of
wage income: Evidence from Danish monthly payroll records. American Economic Journal:
Economic Policy, 8(3), pp.233-57.
Lustig, N., 2016. Fiscal policy, inequality and the poor in the developing world. Center for
Global Development Working Paper, (441).
Oecd-ilibrary.org. (2020). [online] Available at:
https://www.oecd-ilibrary.org/docserver/5kg3h0v54g34-en.pdf?

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expires=1585110267&id=id&accname=guest&checksum=EC7479590FA02050139A059009AC
D845 [Accessed 25 Mar. 2020].
PSI. (2020). PSI. [online] Available at: http://www.world-psi.org/ [Accessed 25 Mar. 2020].
Watrin, C. and Ullmann, R., 2008. Comparing direct and indirect taxation: The influence of
framing on tax compliance. The European Journal of Comparative Economics, 5(1), p.33.