The effects of tax evasion and tax planning on society have long been a controversial topic, but governments around the world still struggle to address it. This is believed to have all started from the beginning when trade agreements were drawn up by the government or government associates to favor their family, friends or associates who are in business. Unfortunately, tax planning schemes are legally accepted business practices whereby tax professionals receive huge 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 carried out to minimize the tax obligation 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 timing of income, purchases, and other expenses, investment selection, and type of retirement plans, etc. However, fraud or tax evasion, unlike tax evasion, is not a tax planning plan and therefore the tax professional is considered illegal.
Companies, both national and international, employ numerous tax planning strategies to reduce their tax burden. A comprehensive review is impossible because 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 passive investment companies (d) exploit tax credits, exemptions and / or concessions in the Tax Laws (e) treaty purchase (f) use of hybrids, etc.
Judge Learned Hand in Commissioner v Newman in 1947 stated:
“Over and over again the courts have said that there is nothing sinister about fixing one’s affairs to keep taxes as low as possible. Everyone does it, rich or poor, and everyone does well, because no one has a public duty to pay. more than required by law: taxes are exactions, not voluntary contributions.
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 for business success as it has gained prominence in the Current business planning strategies, all because tax laws have different provisions regarding entities based on location, type of activity, or time period, so each difference invariably offers a planning opportunity for the taxpayer.
So the question that arises is, does tax planning have any benefits?
Proper tax planning is essential in both 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 in favor of tax planning are:
(a) Provides the opportunity to reduce the amount of taxable income, that is, when a taxpayer’s tax and financial planning strategies are aimed at structuring expenses so that they fit into the category of allowable expenses.
(b) It serves as a catalyst to reduce the tax rate at which it is taxed, that is, to locate the commercial operations in locations or businesses to take advantage of the low or zero tax rate that prevails in those jurisdictions, for example, tax havens.
(c) Ensures that you obtain all credits available to you, that is, taking advantage of tax credits, exemptions and / or concessions available in a tax jurisdiction, for example, the provision of the stability agreement for a holder of a mining lease in Ghana .
(d) Allows a cash flow forecast to be more effective and minimizes the tax liability. A business looking to embark on a massive capital or productive investment or reinvestment will plan financial transactions with tax in mind to avoid impulsive moves. With the resulting good cash flow, the entities were positioned to embark on more 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 objective of granting tax breaks, exemptions and / or concessions is to increase the productivity of the private sector, create employment, attract investors and improve cross-border trade.
With these benefits in mind, wouldn’t you recommend more tax planning practices? Just consider them.
Government efforts to improve the national economy have always been limited due to inadequate tax revenues, which constitute a larger percentage of government revenues. This could be attributed to various tax planning schemes, as well as tax evasions. In 2005, the average ratio of tax revenue to GDP in developed countries was about 35%. In developing countries it was equivalent to 15% and in poorer countries the group of low-income countries tax revenue accounted for only 12% of GDP and tax planning through tax avoidance is believed to be an important factor that limits revenue mobilization.
The ActionAid and Tax Justice Network-Africa (TJN-A) in its West African Giveaway report published in August 2005 indicated that West African countries are losing an estimated US $ 9.6 billion in revenue each year by providing incentives. tax to foreign companies and that three countries – Ghana, Nigeria and Senegal – are losing approximately $ 5.8 billion a year through the granting of corporate tax incentives, with Ghana’s share of around $ 2.27.
Tax planning approaches, such as tax avoidance, affect the extent to which the government can meet the basic needs of the population, that is, it results in an inadequate supply of basic services such as poor infrastructure, poor health and education systems, inadequate water and power supply, as well as poor roads. networks. This could be one of the reasons why deficit budget financing has become the order of the day in most developing countries.
Income inequality is another adverse effect resulting from increased tax planning. Taxes are intended to redistribute income, but the accumulation of wealth through tax evasion schemes, for example, has further widened the gap between low-income and high-income people.
During an international conference jointly organized by OXFAM International and the International Tax Justice Network, Africa in Accra in February 2014, for example, OXFAM Deputy Campaign Manager, Mr. Stephen Hale, indicated, among other things, that many developing countries face challenges in their endeavors. in domestic resource mobilization due to factors such as regressive tax regimes, a wide range of corporate tax incentives, etc.
But the question remains that, if each government’s main source of revenue is tax revenue, while government revenue and capital expenditures largely depend on this tax revenue, we can conclude that governments’ efforts to Reducing budget deficits and over-reliance on development partners to fund the national budget is a dead debate as most of the loss of tax revenue is attributable to tax planning schemes such as tax evasion, 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 a wolf in sheep’s clothing that is gradually robbing the government of billions of dollars in tax revenue to cover its huge public expenditures and make reasonable economic policy. . But who is to blame, the taxpayer, the government, or both? I leave you to judge!
Tax planning is indeed here to stay, however I suggest that (a) accountability on the part of governments and the effective use of tax revenues will instill faith in the government, thus encouraging the payment of taxes, (b) the Provision against evasion should be of general application or refer to specific tax havens or tax evasion devices (c) the concept of ethical and responsible investment should not be limited to the products / services of companies, but also to their impact on society as well as (d) unification of tax rates and (e) The Organization for Economic Cooperation and Development (OECD) and the United Nations, which are famous for their international taxation models, should consider paying more attention to the rising national and international tax planning schemes.