The Routledge Companion to Tax Avoidance Research

Nigar Hashimzade, Yuliya Epifantseva

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317377078
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

An inherently interdisciplinary subject, tax avoidance has attracted growing interest of scholars in many fields. No longer limited to law and accounting, research increasingly has been conducted from other perspectives, such as anthropology, business ethics, corporate social responsibility, and economic psychology. This was –recently stimulated by politicians, mass media, and the public focussing on tax avoidance after the global financial and economic crisis put a squeeze on private and public finances. New challenges were posed by changing definitions and controversies in the interpretation of tax avoidance concept, as well as a host of new rules and policies that need to be fully understood.

This collection provides a comprehensive guide to students and academics on the subjects of tax avoidance from an interdisciplinary perspective, exploring the areas of accounting, law, economics, psychology, and sociology. It covers global as well as regional issues, presents a discussion of the definition, legality, morality, and psychology of tax avoidance, and provides guidance on measurement of economic effect of tax avoidance activities. With a truly international selection of authors from the UK, North America, Africa, Asia, Australasia, Middle East, and continental Europe, with well-known experts and rising stars of the field, the contributors cover the entire terrain of this important topic.

The Routledge Companion to Tax Avoidance Research is a ground-breaking attempt to bring together scholarly research in tax avoidance, offering rigorous academic analysis of an important and hotly debated issue in a structured and balanced way.

1
Introduction

Yuliya Epifantseva and Nigar Hashimzade¹

Tax avoidance has traditionally been a subject of research in accounting and law. The past decade has witnessed growing interest in this subject in other disciplines, including anthropology, economics, psychology, and sociology. This was at least partly stimulated by politicians, mass media, and the public focussing on tax avoidance in many countries after the global financial and economic crisis put a squeeze on private and public finances. Changing definitions, controversies in the interpretation of concepts, new rules and policies have motivated researchers across disciplines to analyse tax compliance as decision-making in multilateral interaction among individuals, tax practitioners, governments, and broader society. In this book we have aimed to provide a comprehensive overview of the historical and contemporary matters in tax avoidance across several disciplines, including accounting, law, economics, psychology, and sociology.

The topics in tax avoidance research addressed in this Companion include global as well as regional issues, the aspects of legality, morality, and psychology of tax avoidance, and the challenges of measurement of economic effect of various tax avoidance activities. The volume is divided into five parts, each focussing on a specific set of topics. This division is, to a certain extent, arbitrary, as a number of important concepts and themes cut naturally across topics. Thus, the variable definition of tax avoidance and its distinction from tax evasion is discussed, along with related concepts, from the historical and foundational perspective in the first part, and from the social and ethical perspective in the final part. A variety of approaches to tackling tax avoidance is analysed as a conceptual framework in the second part, and as case studies in the third part. The role of tax intermediaries, or tax practitioners, is discussed in the final two parts, first as an interaction between individual tax practitioners and taxpayers in a social environment, and then from the viewpoint of ethical issues arising in the tax advice industry.

The first part of the Companion addresses the historical definitional aspects of various terms related to tax avoidance, and touches on their evolution in response to the increased public exposure and attention to issues of tax avoidance and evasion around the world. Because of the conflation of even the most basic definitions of tax avoidance and tax evasion both across English-speaking jurisdictions and within a variety of jurisdictions, by politicians, tax authorities and the media, it is crucially important to define and delineate the activities subject to the discussion before providing normative analysis. It is therefore not surprising that the themes of the chapters in this part echo the concluding part of the Companion that discusses societal aspects of tax avoidance.

In the opening chapter, Jane Frecknall-Hughes describes the fascinating history of taxation terminology, and in particular the intertwined semantic evolution of the key concepts of “tax avoidance” and “tax evasion” in the United States and UK. The chapter discusses the timing and reasons for the conceptual switch between these notions, perhaps shedding some light on the current fluidity and lack of coherence in their usage and connotations. It also discusses the evolving historical use of these concepts in law, tax administration, press, and other sources.

In the next chapter Henry Ordower explores the effect of legislative grants of economic incentives through the tax system on taxpayer behaviour and the resulting difficulty in drawing the line between legitimate and objectionable tax avoidance. He further argues that while the attempts to separate the two types of tax avoidance such as enacting general anti-avoidance rules (GAARs) and following general principles of economic substance may be partially successful, subsidies delivered through the tax system will inherently limit their effect. The resulting lack of clear delineation between legitimate tax planning and objectionable tax avoidance enables an even firmer embedding of ‘the culture of tax avoidance’ in the society, indirectly spilling over into lack of stigmatization for even the clearly illegal tax evasion activities.

As the word ‘sham’ is increasingly being used – and misused – in describing purported tax abuses, especially in the context of any tax haven activity of multinational corporations, it is very important to have a clear understanding of this term. The chapter by Miranda Stewart presents an exploration of the origin of the judicial doctrine of sham and its development in a variety of jurisdictions. It then explores the relationship between the doctrine of sham and tax avoidance and evasion, and also the GAARs.

The second part of the Companion contains a variety of perspectives on GAARs. It opens with Rebecca Prebble’s and John Prebble’s chapter that discusses the apparent conceptual conflict between GAARs and the broadly accepted values commonly referred to as the rule of law. GAARs violate the certainty principle embedded in the rule of law in that by their very nature their scope is not well defined. The chapter (i) examines the underlying values of the rule of law, (ii) argues that the very nature of the problem of impermissible tax avoidance warrants the departure from the rule of law, and (iii) argues that this departure does not weaken the rule of law but rather advances its importance.

The chapter by Graeme Cooper delivers a nuanced comparative analysis of one particular feature of many GAARs, namely, the requirement of a ‘purpose’, the term that GAARs use in different ways and to different results. The chapter discusses a number of challenges in designing GAARs that may prevent successful use of the ‘purpose’ feature to separate tax avoidance that aligns with legislative intent from impermissible tax avoidance.

The next two chapters present an in-depth analysis of the Canadian GAAR. Vokhid Urinov introduces the history and the development of the Canadian GAAR, and provides an in-depth discussion of its features. Reuven Avi-Yonah and Amir Pichhadze contrast the Canadian GAAR with the codified economic substance doctrine in the United States and identify the factors that should be used in analysing GAARs. The chapter goes on to discuss the application of these factors should the United States lawmakers consider implementing a GAAR.

The third part of the Companion presents regional approaches to addressing tax avoidance, both legislatively and judicially, as well as in cooperation between a tax authority and taxpayers. Along with an impressive evolutionary cross-comparison of the anti-avoidance approaches in the United States, the UK and France, the chapter by Steven A. Dean, Lawrence M. Solan, and Lukasz Stankiewicz provides a number of general insights that echo the first two parts of the Companion. In particular, the chapter explores the similarities and divergence of the doctrines developed by courts when attempting to strike the balance between preserving the rule of law and giving the necessary tools to tax authorities to curb tax avoidance. This comparison is especially interesting in light of the different traditions of legislative-judicial interactions and doctrinal development in common law jurisdictions of the United States and the UK vis-à-vis the civil law system in France.

Tadao Okamura and Takako Sakai provide an in-depth analysis of addressing tax avoidance within the Japanese legal system, and the unique problems that stem from the importation, or partial importation, of German legal principles into Japanese law. In addition to discussing the issues unique to Japanese tax law, the chapter provides an illustration of challenges in addressing tax avoidance specific to a civil law jurisdiction.

The chapter by Giulio Allevato and Carlo Garbarino analyses the evolution of a civil law system in Italy in dealing with tax avoidance. Echoing the topics developed in the first and the second part of the Companion, this chapter explores how the Italian legal doctrines related to taxation evolved from the initial adherence to the certainty principle of the rule of law, which is especially salient in the civil law systems, to embracing a GAAR inspired by various developments in taxation within the European Union. The chapter also addresses briefly the new Italian tax compliance initiative designed to facilitate the implementation of the GAAR.

Leyla Ateş discusses the fascinating history of taxation in Turkey and describes how the evolution of tax law and administration in Turkey is informed by the challenges of a developing economy. The chapter argues that the mechanism of presumptive tax assessment in Turkey serves as evidence of the inadequate resources, lack of expertise, and lack of transparency in the Turkish taxation system.

Tarun Jain in his chapter sets forth an extensive survey and analysis of Indian tax law as it relates to tax avoidance, considering both the judicial and legislative approaches to these issues. The first part of the chapter describes the central role that Indian tax jurisprudence played in developing and implementing the anti-tax avoidance agenda, and analyses the varying and sometimes apparently inconsistent responses of the Indian courts. The second part of the chapter argues that the legislative reaction to tax avoidance has consisted of responses, usually through specific anti-avoidance provisions, to pro-taxpayer judicial decisions. The chapter also analyses the GAAR promulgated in response to the famous Vodafone decision, and describes the most recent anti-avoidance tax measures informed by the Base Erosion and Profit Shifting (BEPS) initiative.

Karen Boll’s chapter on securing tax compliance by collaboration presents a novel approach used by tax authorities for large corporate taxpayers in several countries, usually referred to as ‘cooperative compliance’. Karen Boll uses the institutional theory framework to analyse a case study of the cooperative compliance experience in Denmark. She argues that the Danish ‘Tax Governance’ system is a close copy of the cooperative compliance approaches employed elsewhere – notably, the Compliance Assurance Process in the United States, the Annual Compliance Agreement in Australia, and similar programmes in some European countries. Interestingly, the analysis shows that, while the cooperative compliance programmes are viewed as ‘a cost-efficient way to secure tax compliance and to prevent future tax avoidance’, measuring the outcomes of the programme remains a major challenge for the Danish tax authority.

This raises an important general issue of measurement. The success – or, indeed, the failure – of any policy intervention, including tax compliance policies, can only be assessed if the extent of the targeted activity can be accurately measured before and after intervention. Since taxpayers are seldom compelled, and have little incentive, to be fully transparent about their tax activities, empirical research in economics has demonstrated (though its conclusions have not been universally accepted) ingenuity in developing approaches to measuring tax avoidance and tax evasion. The next two chapters present the analysis of the important practical issue of quantifying the extent of the tax avoidance and evasion activities by firms and a review of some of these approaches.

The focus of the chapter by Bodo Knoll, Nadine Riedel, Farzaneh Shamsfakhr, and Kristina Strohmaier is on the issues of measuring tax avoidance and evasion in developing countries. The authors critically review the existing approaches in economic literature to the empirical estimation of the extent of tax avoidance and evasion, and present their own estimates based on the firm-level data for multinational corporations. The measured quantity is the corporate income shifting from 38 middle- and low-income countries (according to the World Bank classification). The authors find that an increase by one percentage point in the corporate tax rate in a host country is associated with a 1.7 per cent fall in the pre-tax profits reported by multinational firms, with yet stronger effect – a 2.1 per cent fall – for large corporations. The authors conjecture that the true effect might be even bigger, since the changes in the actual corporate tax rate faced by the multinationals are likely to be lower than the observed changes in the statutory tax rates. It is plausible that various forms of tax avoidance, such as the transfers to lower-taxed subsidiaries, debt shifting, and strategic location of intangible assets are responsible for this phenomenon.

The empirical estimation of the extent and consequences of trade misinvoicing as a form of tax avoidance and evasion activity is the subject of study by Volker Nitsch. Trade misinvoicing typically involves either using wrong classification of the goods or stating wrong quantities or values in the customs declaration. Ambiguities in tariff classification can be exploited to reduce import tariffs due, especially for newly introduced products. Developing countries are, therefore, more likely to be vulnerable to misclassification because of lack of resources, such as information, classification data, or local expertise. The chapter presents a discussion of the relative merits and drawbacks of various empirical methods employed by economists to estimate trade misinvoicing, and a comparison of estimates reported by different authors, primarily for the trade activities involving developing countries.

The analysis of the regional and global issues in tax avoidance is rounded up by two chapters written from the perspective of the international political economy. In these chapters the reader is introduced to a novel concept of Global Wealth Chains (GWCs), recently developed in the international political economy, along with the demonstration of how this framework qualitatively captures the nature of a variety of tax avoidance activities by multinationals.

The chapter by Leonard Seabrooke and Duncan Wigan outlines the GWC framework as a methodology for comprehensive analysis of the evolution of international capital which draws on and synthesises the approaches in institutional economics, economic geography, and international political economy to the study of finance and law, and economic sociology as it studies relations within networks that define market dynamics. They identify three factors that explain the variation in the governance of GWCs: (i) the complexity of information and knowledge transfer; (ii) the regulatory liability and the ease of intervention; and (iii) the capabilities of suppliers to solve or mitigate challenges posed by regulators. Based on these factors, the authors classify the GWCs into five different types: market, modular, relational, captive, and hierarchy, and link these types to the opportunities for tax avoidance activities in the world of international capital flows.

In the following chapter Leonard Seabrooke and Attiya Waris apply this framework to the analysis of GWCs in Africa, with special emphasis on the accountability and hierarchy of multinational businesses in the off-shore world. Improving the global value chains (GVCs), defined as the dispersal of production activities by multinational corporations, has been widely viewed as key to the development of African economies. There has been far less emphasis on upgrading financial institutions, or the role of aggressive tax planning and tax avoidance in how firms profit from their value chains. In the GVC research finance is generally tied to a defined development paradigm, such as microfinance, whereas the GWC framework takes a more general approach to the international flows of capital. The authors examine the attempts by different African states to create complex GWCs through the establishment of international financial centres, and discuss how these attempts can be characterized as a case of arrested development.

The analysis of an individual decision on tax avoidance and its perception in a society has been in the focus of research in cognitive and social sciences and across disciplines. The final two sections of the volume introduce the reader to the approach taken to this issue in psychology, economics, sociology, and law. In all these studies an individual decision is analysed in an interaction with the decisions of other individuals and with broader, societal attitudes and perceptions.

The chapter by Matthias Kasper, Jerome Olsen, Christoph Kogler, Jennifer Stark, and Erich Kirchler starts with a famous quote, attributed to John Maynard Keynes, one of the most influential economists in the modern time, about ‘[t]he avoidance of taxes’ being ‘the only intellectual pursuit that still carries any reward.’ While the origin of this quote is still a subject of debate, the research presented in this chapter demonstrates that the effort put by an individual in such a pursuit is driven not only by a material reward but also, to a significant extent, by that individual’s perception of fairness of the tax system and the social norms. The authors view tax avoidance as a social phenomenon arising from an interaction among individual decisions within a society. They introduce a concept of social representations as a theoretical framework, grounded in cognitive psychology, for the analysis of a dynamic interaction between individuals and their social environment. This framework is then used to discuss how the perception of fairness determines the social representations of tax avoidance (not necessarily illegal) and tax evasion (necessarily illegal). The empirical analysis is based on survey data collected by the authors. Among several interesting findings, the results suggest that, at least in the survey sample, tax avoiders are viewed more favourably in comparison to typical taxpayers and tax evaders. Along with other results, the study indicates that ‘cheating on tax is not necessarily perceived as a crime, but rather as a game played by smart people’ – seemingly in support of the aforementioned quote. The authors conclude that tax compliance policies should thus emphasize the negative social effect of tax avoidance and address the social acceptance of tax avoidance, in addition to restricting opportunities for avoidance and evasion.

Alejandro Esteller-Moré, Amedeo Piolatto, and Matthew D. Rablen present an overview of the theoretical and empirical literature in economics on taxation of high income-earners. While these individuals contribute a large portion of income tax revenue in a country, they are also highly mobile; they are also better informed and have better access to paid expertise that helps them exploit tax advantages across different countries. The authors synthesize the existing research and offer some avenues for further exploration in this area.

Elea Wurth and Valerie Braithwaite focus on the role of tax practitioners in tax avoidance. Their framework considers the relationship between a taxpayer and a tax practitioner as a micro-social process that is affected by social forces. The chapter offers an overview of several models of interaction between taxpayers and tax practitioners, along with an integrated framework for a broader study of tax avoidance industry. The authors use a survey of over 1,000 practitioners preparing and lodging returns for clients with the Australian Taxation Office to analyse how tax practitioners operate within the industry, with full knowledge of oversight by the tax authority. They outline the limitations of the traditional approach focussed on “battle” between tax practitioners and taxpayers for the attribution of responsibility for tax avoidance and evasion. In a broader and more balanced social and economic relational model many other factors can be identified that influence the behaviour of a tax practitioner and that can be used to change this behaviour. Examples include public narratives, application of principles over rules, signalling of enforcement intent, and cooperation between professional practitioner networks and tax authorities.

An economic analysis of the design of an optimal tax enforcement system is presented by Duccio Gamannossi degl’Innocenti and Matthew D. Rablen. In contrast to the traditional economic theory, where a taxpayer can only reduce tax liability by illegal under-reporting of their income, in their framework individuals can, in addition to such evasion, participate, at a cost, in a tax avoidance scheme that permits them to further lower reported income. The role of the societal attitudes to tax non-compliance in either form is modelled as a social stigma cost. While the avoidance scheme is not explicitly illegal, it is deemed unacceptable to the tax authority, which will attempt to outlaw it after its use by taxpayers is discovered. An audited taxpayer is, therefore, penalised on the evaded tax, but not on the avoided tax, although the latter may be recovered once the scheme is outlawed. The authors characterise the optimal design of audits and penalty schemes when tax authority can only observe the declared income, with some interesting non-trivial implications. In particular, t...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• List of Contributors
• 1 Introduction
• Part I Tax avoidance: definition and trends
• Part II General anti-avoidance rules
• Part III Regional and global perspectives in tax avoidance
• Part IV Tax avoidance in an individual decision
• Part V Tax avoidance and society
• Index