The effects of tax avoidance and tax planning on society have long been a controversial issue, but governments around the world still struggle to address it. It is believed that this all started from the very beginning when the government or government associates wrote business agreements to favor their family, friends or associates who are in business. Unfortunately, tax planning schemes are legally accepted business practices whereby tax professionals are paid large sums of money to offer tax planning advisory services for both personal and corporate decision making.
According to Investopedia, tax planning is the analysis of a financial situation or plan from a tax perspective. It is an exercise that is carried out to minimize the tax burden through the best use of all available resources, deductions, exclusions, exemptions, etc. to reduce income and/or capital gains (businessdirectory.com). Therefore, tax planning encompasses many different considerations, including the timing of income, purchases and other expenses, investment selection and type of retirement plans, etc. However, tax fraud or evasion, unlike tax avoidance, is not a tax planning scheme and is therefore considered illegal in the tax professional.
Companies, both national and international, employ numerous tax planning strategies to reduce their tax burden. A comprehensive review is impossible because the known strategies are numerous and many strategies are likely to be unknown to tax analysts. Some forms of tax planning include (a) reclassifying business income as non-business income (b) using transfer pricing to shift income from high-tax jurisdictions to low-tax jurisdictions (c) employing tax companies passive investment (d) the exploitation of tax credits, exemptions and/or concessions in tax laws (e) purchase of treaties (f) use of hybrids, etc.
Judge Learned Hand in the case of Commissioner v. Newman in 1947 stated:
“Time and time again the courts have said that there is nothing sinister about arranging one’s affairs so that taxes are kept as low as possible. Everyone does it, rich or poor; and everyone does the right thing, because no one has a public duty to pay more than is required by law: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morality is a mere inability.”
In fact, tax planning has invariably become an integral part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are crucial to business success, as it has gained importance in today’s business planning strategies, all because tax laws have different provisions relating to entities based on location, type of activity or time period, so each difference invariably offers planning opportunity for a taxpayer.
So the question that arises is, does tax planning bring any benefit?
Correct tax planning is essential both in national and international business to reduce distortions that arise, for example, due to the lack of harmonization of national tax systems. Without tax planning, entities are likely to suffer excessive tax payments and additional tax compliance costs. Among the reasons argued for tax planning are:
(a) Offers the opportunity to reduce the amount of taxable income, that is, when a taxpayer’s financial and tax planning strategies are directed at structuring expenses to fit the category of allowable expenses.
(b) Serves as a catalyst for lowering the tax rate at which you are taxed, i.e. locating business operations in locations or businesses to take advantage of the low or zero tax rate prevailing in those jurisdictions, eg tax havens.
(c) Ensures you get all available credits, i.e. take advantage of tax credits, exemptions and/or concessions available in a tax jurisdiction, for example, the stability agreement provision for a mining concession holder in Ghana.
(d) Allows a cash flow forecast to be more effective while minimizing the tax liability. A business looking to start with massive capital or productive investment or reinvestment will plan financial transactions with tax in mind to avoid impulsive moves. With a resulting good cash flow, entities are positioned to embark on further productive and capital investments. Effective tax and financial planning maximizes shareholder wealth and improves cash flow for capital and productive reinvestment, among others.
(e) For the government, the granting of tax relief, exemptions and/or concessions is intended to increase the productivity of the private sector, create employment and attract investors and improve cross-border trade.
Given these benefits, wouldn’t you recommend more tax planning practices? Just consider these.
Government efforts to improve the national economy have always been constrained by inadequate tax revenue, which constitutes a larger percentage of government revenue. This could be attributed to the various tax planning schemes as well as tax evasion. In 2005, the average ratio between tax revenue and GDP in developed countries was approximately 35%. In developing countries, it was equal to 15% and in the poorest of these countries, the low-income group of countries tax revenue was only 12% of GDP and tax planning through tax avoidance is widely believed. which are important factors limiting revenue mobilization.
The ActionAid and Tax Justice Network-Africa (TJN-A) in their West Africa grants report published in August 2005 indicated that West African countries are losing some US$9.6 billion in revenue each year by granting tax incentives to foreign companies and that three countries – Ghana, Nigeria and Senegal – are losing about $5.8 billion a year through the provision of tax incentives to companies, Ghana’s share being about $2.27.
Tax planning approaches such as tax avoidance affect the extent to which the government can meet the basic needs of the population, i.e. it results in inadequate provision of basic services, such as poor infrastructure, poor health and education systems, supply inadequate water and power, as well as poor roads. networks This could be one of the reasons why deficit financing has become the order of the day in most developing countries.
Income inequality is another adverse effect of increased tax planning. Taxation aims to redistribute income, but the accumulation of wealth through tax avoidance schemes, for example, has further widened the gap between low and high income earners.
During an international conference organized jointly by OXFAM International and the International Tax Justice Network, Africa in Accra in February 2014, for example, OXFAM Assistant Campaign Manager, Mr. Stephen Hale, indicated, among other things, that many countries Developing countries face challenges in their domestic resource mobilization efforts due to factors such as regressive tax regimes, wide range of corporate tax incentives, etc.
But the question remains that if the main source of revenue for each government is tax revenue, while government revenue and capital expenditures are highly dependent on these tax revenues, then can we conclude that the efforts of governments to reduce budget deficits and excessive reliance on development partners to finance the national budget is a dead debate upon arrival, as most of the loss in tax revenue is attributable to tax planning schemes such as tax avoidance, tax incentives and poor tax education and awareness?
Tax planning is probably not as beneficial to the government as we are led to believe, but rather a wolf in sheep’s clothing that is gradually robbing the government of billions of dollars in tax revenue to cover its huge public spending and make a reasonable economic policy. But who is to blame, the taxpayer, the government, or both? I leave you to judge!
In fact, tax planning is here to stay, however I suggest that (a) government accountability and effective use of tax revenue will instill confidence in government, thus encouraging tax payment, ( b) the anti-avoidance provision must be of general application or refer to specific tax havens or tax avoidance schemes (c) the concept of ethical and responsible investment must not be limited to the products/services of companies, but also to their impact in society, as well as (d) the unification of tax rates and (e) The Organization for Economic Co-operation and Development (OECD) and the United Nations, which are famous for their models for international taxation, should consider lending more attention to the growing national and international tax planning schemes.
