When people are asked about tax avoidance, they often answer: “that’s illegal!! They should be heavily punished!” (not always that polite, but you got the idea). When people are saying that, they are actually thinking about tax evasion.
Indeed, tax evasion is illegal whereas tax avoidance is completely legal! What’s the difference? The results are the same, aren’t they? They both aims at not paying taxes… Well, the answer to that question is what I will try to cover in this week post.
According to McGee (1998), tax evasion is when companies don’t abide by the law and do not respect the tax regulations, edited by the government. It is a felony punished by up to five year of prison and/or a substantial fine. On the other side, tax avoidance is defined by the legal utilisation of the tax policies to one’s own advantage. Using means allow by the law, it is then possible to reduce the amount of tax payable. So the first difference, which I would say is a major one, is a legal matter.
Then, how does “tax avoidance” works? How come one is legal and the other is not when they both aim at the same thing? That’s a harder part! In a basic way of considering it, companies have to pay taxes on their income. The tax rate changes from a country to another. For example, it is around 28% in the UK, 12.5% in Ireland and 0% (!) in places like Cayman Island, also called “heaven tax” countries. When we see these figures, no wonder why companies are trying to avoid paying taxes the best they can! What would you do?
Let’s take the example of Kraft/Cadbury take over. Once Kraft had bought Cadbury, the first thing they did was to move the former English company’s headquarter to Switzerland (17% tax rate instead of 28%!). Several companies have done that in the past, and if nothing changes, it is to bet that several will do that again! I understand why companies are doing that. Honestly, if it was for their own company or their own money, a lot of people will try to do the same and “change of country” if it was possible to do that without literally moving out of the country. No one is glad to pay taxes, but if they exist, they are here for a reason…
In this “ethical matter” two theories confront each other. Some people believe that the only responsibility of a manager is to maximise shareholder value, no matter what. In this concept, manager should try to reduce the tax bill (often a big component in the company growth) by any means necessary. This is understable, isn’t it? If they can do otherwise, why would they pay, right?
Well, let’s take the opposite theory. I think that the moral aspect of this should also be considered. If companies are leaving to “tax heaven” countries, who is going to pay the share of taxes they were paying? The ones staying in the country, and that means… Us! However, I don’t want to condemn companies doing that, but I think they should show a little bit more solidarity, don’t you?
The issue for me with corporate tax is that the logic of it isnt irrational but the rates presently set in the UK are beyond rediculous. As well as corporation tax you should consider VAT and NIS charges. Often tax ruins a businesses chance to grow because tax is made before money for investments can be set aside. Company leaders/owners arent greedy often they start as entrepreuners they are just good at reinvesting. If dividends are taxed by then why should coporate income be taxed? This is what the economy needs is that not more detrimental? We are the ones suffering at the very end of that because less jobs are available as a result. I have posted an interesting clip of this onto my blog have a look and let me know what you think ruthylightfoot.blogspot.com -
ReplyDeleteAlso as an income tax payer we recieve free health care, housing support and benefits when needed what do the coroporations tax payers get in return for their part
ReplyDeleteGood morning Ruth,
ReplyDeleteI understand completely your point, and i agree with you at some point. I come from France and the rate there is 33%... One third of what companies earn goes directly in tax! And then they still have social charges employers (45% of the employee salary) and social charges employees (21% of the employee salary) to pay! So yes, these rates are ridiculous, as you say!...
I had a look at your video, and even if I think the author made his point, I'm not sure he has considered everything. At the end of it, he said that we should tax only the executives, it would be the same that taxing the company's profit. But I see a major issue here: there is no guarantee that the executives are going to take they bonuses in cash (and therefore risk to be taxed on it), and they would probably take it "in goods" or as advantages where they don't have to pay taxes on it, don't you think ?
I think what should be done is try to find a way of reducing these rates, way too important and which, as you said, ruins a business’s chance to grow. But to do so, they first need a way to reduce governments' expenditures.
And to reduce these expenditures, they probably have to make some cut in some advantages people have as income tax payer (like free health care, housing support, and other benefits...).
I'm not saying they should or should not do that, I am not qualified for that. I am just saying this a very complicated issue, present in numbers of countries now. And at the end, we will have to find a solution working for everybody, businesses and people.
I hope I answer your questions,
Thanks,
Aurelie CREGUT.