IntroductionTaxation is a crucial part of the society and government. It is a required payment to governments to fund public goods and services, to stabilize the economy, to influence behaviors, and to redistribute income. There are different types of taxes, such as social security tax, income tax, sales tax, excise tax, property tax, and so on. In this paper, the author will focus on an indispensable part of the taxation system, corporate income tax. Corporate tax is precious for countries because governments can raise a considerable amount of funds to support government decisions financially.
Perhaps more importantly, corporate income taxes play a role in the stability of the governments, making governments function properly. However, corporations are becoming more and more aggressive in making tax avoidance (Habu, 2017). Lots of firms transfer their assets or cash to offshore companies, which are registered in tax heaven regimes (“How do companies avoid tax? ,” 2014).
In those regimes, the owner of the assets can avoid national taxes in their resident country (“How do companies avoid tax? ,” 2014). By doing so, corporations can reduce the corporate tax bills and have free access to all the benefits provided by governments. Since corporate tax avoidance still exists, and more and more international firms are accused of avoiding taxes, the author will then try to analyze the causes behind it and see if the current tax principles can be amended to overcome the problem. Therefore, the central question of this paper is “how can the general anti-avoidance rule(GAAR) in European governments be further amended to prevent tax avoidance from happening?”.
The paper includes three parts. In the first part, a description and analysis of the corporate tax and tax avoidance will be illustrated. The author mainly focuses on the causes of the tax avoidance, the forms of tax avoidance, the consequences of tax avoidance, and the efforts that European governments have put into the process of tax avoidance prevention.
In the second part, the author’s opinions about improvements in the corporate tax principles will be indicated. In the third part, research will be conducted. The research consists of three aspects, which are the current European principles that are aimed at prevention of tax avoidance, and possible modifications that can be made to those laws.Part 1 The Primary cause of tax avoidance is the save of revenues. By taking a series of actions, firms can save a tremendous amount of revenues that are taxable. Directors of corporations think that the tax payments reduce the company’s wealth-generating activities, impeding firms’ growth (Dowling, 2013).
Therefore, they utilize the loopholes in the tax principles to achieve their goal of tax avoidance. There are several forms of tax avoidance schemes, which include transfer pricing structures, tax rate negotiations, and domicile location (Raiborn, Massoud, & Payne, 2015). Also, some US firms use a rule called “check the box” rule to avoid taxes (Raiborn et al., 2015).
Most of the methods that firms use to prevent tax rely on tax heavens, which have an extremely low tax rate for non-residents (Fisher, 2014). Tax authorities consider the tax avoidance legitimate. However, the abuse of tax avoidance may result in adverse outcomes for the society. First, if companies avoid paying tax, then states may not function properly because of the lack of funds. Second, the non-payment of corporate tax becomes burdens of those who are not capable of avoiding taxes (Dowling, 2013).
Thus, it intensifies the inequality in the society and destroys civilian’s confidence in the tax law (Dowling, 2013). Third, companies making tax avoidance arrangements are free riders of all the benefits provided by local governments. These companies may provoke other local businesses into the tax avoidance arrangements. However, European governments took steps to prevent tax avoidance from happening. In the EU member states there are two forms of anti-avoidance rules that are prevalent; one is based on the specific anti-avoidance rule (SAAR) governed by the general principles of prohibition of abuse stated in court jurisprudence, the other is based on a written judicial law which prohibits the abuse – general anti-avoidance rule (GAAR) (Belevica & Grasis, 2016). The SAAR focuses on the specific known tax avoidance arrangements; however, the GAAR can be considered as a general rule which enables tax authorities to nip the tax avoidance behaviors in the bud (PricewaterhouseCoopers).
The SAAR consists of transfer price rules, thin capitalization rules, rules limiting interest deductibility, controlled foreign company rules (CFC), and so on (Johansson, Skeie, & Sorbe, 2017). The SAAR is both effective and complicated, but it is not adequate to deal with a variety of business arrangements involving tax avoidance (“The Role of a General Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries,” 2017). Therefore, the adoption of the GAAR is approved, ensuring the completeness of the anti-avoidance system. Despite that GAAR involves uncertainties, it still plays a role of safeguard and is viewed as a supplement of SAAR (PricewaterhouseCoopers).
Unlike the SAAR that is statutory, the GAAR can also be juridical, which is another reason why it is utilized (“The Role of a General Anti-Avoidance Rule in Protecting the Tax Base of Developing Countries,” 2017). Because SAAR deals with the known arrangements and can only be amended by adding new tax avoidance arrangements that have been detected, the GAAR, which is a precaution to prevent tax avoidance, will be the primary focus in this paper. The GAAR has been essential for the EU member states to avoid tax avoidance, and it has been functioning properly for decades.
However, due to the rapid change in the business world, the rule has to be amended to be future-proofing.