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Ref No: 1377

Introduction

Sustainable Development Among the case studies provided, the case study named Multinational Companies: Tax Management, Avoidance, and Evasion is selected for the purpose of this essay/case study analysis.

The case study puts me in a role for an international NGO and asks to prepare a document for a non-specialist audience and explain the social responsibility challenges for multinational companies that use tax management strategies to reduce their overhead expenses and show an improved picture of profitability.

The case study will carefully explain some basic concepts related to tax, i.e. tax management, tax avoidance and tax evasion; it will also focus on the role played by the government for competitive taxation in the country and the impacts of aggressive tax policies of multinational companies on the social environment and development.

Answers to the Questions in Case Study

Question#1: what are the differences between tax management, tax avoidance, and tax evasion by companies?

There are some primary differences between tax management, tax avoidance, Sustainable Development and tax evasion by companies. In accordance with Huseynov and Klamm (2012), tax management can be defined as the measures taken to manage the finance for the payment of tax, accrue the tax liabilities effectively and manage the deferred tax assets and deferred tax liability to improve the financial performance and position of the company in the long run.

Some companies also manage their product portfolios and take other key decisions of the organization keeping the tax payment in mind; this is an active approach to tax management. Sustainable Development However, some companies, especially multinational giants misuse tax management and use it to replicate better financial statements when the actual performance of the company is not up to the mark. According to Water Street (2015),

tax management is an important aspect considered by the companies these days due to different types of taxes implemented in each economy and varying rates of taxation based on the nature of the business and income of the corporations. It has been found that the cost of taxation is rising for companies very instantly and these costs account for 2% to 3% of turnover on average varying from industry to industry.

Sustainable Development It is also found that these costs can be decreased as a result of active tax management especially in the case of mutual fund and other service companies.

According to Slemrod and Yitzhaki (2002), tax avoidance can be defined as the capitalization of loopholes in the income tax law; tax avoidance does not lead to penalties due to the fact the tax is avoided based on what is written in the income tax law. Tax avoidance is legal but unethical in some cases as the weak phrases of income tax law are capitalized by companies or individuals. Tax avoidance

is possible due to the weaknesses of tax policies formed by the policymakers.

The companies are able to capitalize on these weaknesses and often report higher after-tax income than possible in other ways. On the other hand, tax evasion is defined as the avoidance of tax by avoiding what is written in the law. It is illegal and can lead to punishments and penalties for both individuals and companies.

Multinational companies are often involved in tax avoidance so these are not subject to penalties and punishments as well (Huseynov and Klamm, 2012).

Slemrod and Yitzhaki (2002) studied the differences between tax avoidance and tax evasion and state that one of the key differences between these two is that tax avoidance is done when the compliance is made to the law but the intention of the law is defeated. On the contrary, tax evasion relates to the non-compliance of any provision of law as a whole.

This is why tax avoidance is legal and tax evasion is illegal. Another major difference highlighted by Needham (2013) is that tax avoidance does not involve the reduction of tax by any unfair means and tax evasion involves employment of unfair means as discussed earlier. It is further discussed that the taxation department in a country can challenge and punish the company in case of tax evasion; whereas,

it is not applicable in the case of tax avoidance. Further,

it is discussed that tax avoidance is a part of tax planning or tax management and it is done before the tax liability has arisen. In contrast, tax evasion is simply a fraudulent activity and is often done after the tax liability has arisen (Desai and Dharmapala, 2006).

Tax management is different entirely different from tax avoidance and tax evasion and is a broader concept than these two.

In the view of tax experts, tax avoidance is part of active tax planning which is why the effective tax rate is decreased as a result of active tax management. Multinational companies also employ tax management techniques to improve their financial performance and position (Slemrod and Yitzhaki, 2002).

In the view of Needham (2013), multinational companies are often involved in tax avoidance as these companies comply with the law but disregard the intention of the law despite knowing the intentions. There are many examples of multinational companies paying a lower amount of tax in a particular country by employing different tax management strategies. For example

Amazon paid a very small amount of tax in the UK from the year 2009 to 2011 on average sales of 7.6 billion Pounds in each year and staff over 15000 employees. According to Needham (2013), there are some common strategies used by multinational companies; some of those are listed below:

• Shifting profits from higher-tax countries to the lower tax countries.
• Setting higher transfer prices with the companies owned by the same group.
• Providing loans to subsidiaries in higher-tax countries.
• Listing as shell company as part of tax planning…