Taxation as a topic is often a subject of hard facts and law. It is very rare that one could look at establishing a philosophy around the matters of tax significance. I was reading a book named ‘Loophole Games’ by Shri. Smarak Swain and was impressed by the lucidity in the manner in which the book explained the 2 causes of Tax Avoidance. Frankly, when I thought of any other cause, I was able to categorise all the cause in one of these two buckets. The international taxation and transfer pricing philosophy that was built in the initial few chapter of the book was admirable.
What is Tax Avoidance?
Tax Avoidance is a measure to depriving the rightful taxes to a nation by either shifting the profits to another country or eroding the base itself on which profits could have been built in future; all of this without adequate commercial substance but fully legally compliant. Tax Avoidance is a much bigger devil than Tax Evasion, as it has full potential and quantum to strip of a substantial and rightful profits of a country.
Why study causes of Tax Avoidance?
It is necessary to study the causes of tax avoidance because one could work on a solution only if the person working on the solution knows the cause of the problem. Further, it is important that such a person itself is not a contributor to the cause of the problem. To explain in plain language, one may like to protest against the use of plastics for a greater cause, but the banners and the protest materials that the protestors use are all made up of plastics. In such a case the solution could not be arrived through the eyes of the protestors.
Let us study the causes:
The author classifies the causes of Tax avoidances in to two buckets:
Let us understand both of them one by one.
“Financialisation” is the process by which the financial intermediaries like the fund managers, Private Equity players, venture capitalist, merchant banks, hedge funds, investment banks etc undertakes decision-making for the company. These could also be me and you when we are looking from the eyes of an investor. Such investors are the ones who are interested in multiplying the investments and one of the way of such multiplication is through saving the tax cost to the respective government in which the business functions. The corporates are under pressure to maximise the value in the company under the slogan of being tax efficient. We have seen many Indian start-up going for an inverse structures with the investment being secured at a tax haven level with favourable tax treaties by migrating IPs to such tax havens. All this happens as a conditions to a PE investment. Either the business goes for a said structure or never get funded. What follows later are only built up or after effects of the Financialisation where the business follows several loops and methods to always stay tax efficient. An exception once becomes a rule for the business life.
“Jargonification” boils down to the advisory firms backed by tax academics device tax avoidance schemes and reports based on the interpretation rules and treaty interplay. They project that the law is ambiguous and unclear and hence a different interpretation could be pulled together to take a non-harmonised meaning of the law. There are jargons interposed between the businesses and taxes with complex web of tax scheme which is advised upon and also implemented by the advisory firm. When questioned by the tax authorities, such businesses takes shelter under such legal interpretations and schemes to prove their side of the story, which might reach the court and also could be proven right. There are many stories in India and across the world that have used such methods and also proven success to the corporate but to the detriment of the country.
As a CXO or a business owner, one should understand that paying the right level of taxes in every country is their duty to contribute to the larger and global development. It is the responsibility of the private economy to sustain in its eco-system and also the eco system.
Credits: The author of the blog and Team TransPrice gives the credits of this article to ‘Loophole Games’ written by Shri. Smarak Swain.