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Tax evasion and tax avoidance are often used interchangeably. However, there is a huge difference between the two terms. Tax evasion is a criminal activity. In most countries, tax evasion would attract a jail term.
Evasion is usually done by not reporting income or overstating expenses. However, tax avoidance is not a criminal activity. Tax laws tend to be complex and lengthy. Hence, people with knowledge of these laws can end up paying significantly less tax than others. It is for this reason that the big four accounting firms hire tax experts. These tax experts help multinational corporations legally minimize their tax bill. However, over a period of time, the thin line between legal and illegal is being blurred. Several policies suggested by these tax experts are downright unethical and bordering on illegal.
Tax avoidance may be legal. However, it has a negative impact on the economy of the nation. Firstly, it creates public anger. People tend to realize that companies are paying significantly fewer taxes than they should. This leads to a culture of tax avoidance wherein everybody tried to avoid paying any tax at all. Also, companies that can lower their tax bills using these loopholes have significant cost advantages. They are able to simply price the competition out of the market. Hence, tax avoidance ends up skewing the entire industrial structure in an economy.
There are many countries that are facing this problem of tax avoidance. Although it feels like they are helpless, this is not the case. Here are some of the steps that can be taken to solve the problem of tax avoidance.
The Laffer curve explains that beyond a certain point an increased tax rate leads to lower collections. The government needs to find out the optimal tax rate and implement it. President Donald Trump of the United States has realized this problem and as a result, has lowered tax rates significantly to increase tax compliance.
Countries like the United States and the United Kingdom must blacklist these nations. This means that if a company is incorporated in these locations, they will not be allowed to trade in the local markets. The idea is not to infringe on the sovereignty of other nations. However, at the same time, these nations and associated multinational corporations should not be allowed to steal tax revenue with impunity.
Also, countries like Ireland and Luxemburg are involved in a tax war wherein they are lowering the tax rates and causing losses to their respective exchequers. At the same time, multinational companies are playing them off and reaping the benefits. New laws must be introduced which ensure that if the good or service is being delivered in the United Kingdom, it must be taxed as per local laws.
Many companies have been using transfer pricing as a mechanism to move profits to subsidiaries abroad which have lower tax rates. Instead of letting companies decide, what the appropriate price for a product or service is, countries must have strict transfer pricing laws which apply evenly to all companies.
To sum it up, tax avoidance has become a menace. Countries have lost a total of $3.4 trillion in 2017 due to tax avoidance. It is high time that the seriousness of this situation is understood and measures are taken to stop this menace once and for all.
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