Globalisation of Business and the Importance of International Data Exchange in Tax Evasion and Tax Avoidance

The world today faces one of the very important negative effects of globalisation, aggressive tax planning, which individuals and companies use in tax evasion and tax avoidance. The hypothesis H1, that there is a significant difference between the concepts of tax avoidance and tax evasion, can be fully confirmed. Using the example of company 'B' operations, it was illustrated how a company can avoid paying its tax obligations.

Solution and Method

The world today faces one of the very important negative effects of globalisation, aggressive tax planning, which individuals and companies use in tax evasion and tax avoidance. For the economy of a country to function normally, it needs public revenues, which it allocates to cover public expenditure. The quality and functioning of education, healthcare, infrastructure, police… of a country depends on the amount of taxes collected, which taxpayers are forced to pay whether they like it or not.

The most important revenues of the public budget are value added tax and corporate income tax. These two types of taxes are most often abused in tax avoidance and tax evasion. Research has shown that the global average corporate income tax rate has been constantly decreasing in recent decades, whilst the average VAT rate is increasing (legal entities are paying less and less, whilst we consumers are paying more and more). Tax evasion as an illegal, usually well-thought-out attempt to abuse tax obligations represents a huge tax gap in the European Union, estimated by economists at approximately 160 billion euros per year. ** Tax avoidance is the legal exploitation of deficiencies in tax legislation,** which arises from aggressive tax planning, used not only by wealthy individuals but also by the largest multinationals.

They redirect their wealth to those areas where data confidentiality is guaranteed and the tax rate is extremely low or non-existent. We call these areas tax havens or offshore areas. As much as 8% of total global wealth is said to be hidden in tax havens, whilst OECD members are said to lose 2–3% of total annual revenues annually due to tax avoidance through profit shifting.

The author of the diploma thesis wanted to investigate the question of how transfer prices affect tax avoidance and whether they are really the only example of the weaknesses of globalisation in tax evasion and tax avoidance. Using the examples of tax evasion by company 'xy' and tax avoidance by company 'B', it was found that human imagination is much more extensive and far-reaching. There are many different ways in which business entities engage in tax avoidance. Although manipulation of transfer prices is considered tax evasion and is illegal, through research it was concluded that it can be completely legal or poses no risk to business.

It involves manipulation of intangible assets (trademarks, patents, software…), as their value is more difficult to measure. As intangible assets grow, profit tax decreases. From the above, it can be summarised that tax avoidance is only the exploitation of manoeuvring space in legislation, which is completely legal, whilst tax evasion is illegal and unacceptable, as it deliberately violates legislation.

Results

The hypothesis H1, that there is a significant difference between the concepts of tax avoidance and tax evasion, can be fully confirmed. Using the example of company 'B' operations, it was illustrated how a company can avoid paying its tax obligations. It was proven that if company 'B' carries out its transactions by transferring part of its business to more tax-favourable areas, and this is permitted by the legislation of both the parent and subsidiary country, it can avoid paying taxes in a completely legal way.

In this illustration, the second hypothesis H2 was also confirmed, namely that company 'B' can avoid tax obligations in a legal way. Through research, it was found that even despite countless adopted measures for international data exchange, the biggest problem remains data anonymity. Human ingenuity knows no bounds, and legislation allows individuals and companies to exploit this through shell companies and tax-favourable areas.

If there is no information about the actual owners of assets, it is impossible to tax these owners. It happens that foreign institutions, despite their commitment to international cooperation on data exchange, prefer, rather than lose the investor's assets, to cite lack of data or not investigate at all who is behind certain capital. A major problem is also corporate lobbying, which has already achieved the exclusion of economically sensitive data from country-by-country reporting (CbCR).

It may even happen that their influence on legislation will achieve the postponement of this type of reporting indefinitely. Among OECD members, several legal instruments for automatic data exchange are present. The author of the diploma thesis focused on the Common Reporting Standard (CRS), exchange of information on advance tax rulings (CbCR – BEPS 5), exchange of country-by-country reports of international groups of companies (BEPS 13), and the FATCA model. The problem of data exchange is the fact that only those jurisdictions that meet the conditions and have concluded agreements for the implementation of individual reporting models are obliged to report. Most wealth is still hidden and not reported or is reported incorrectly. ** If I compare the data on how much tax information the Republic of Slovenia** exchanged bilaterally in 2017, I find that under the Common Reporting Standard it exchanged more than 37,000 pieces of information with EU countries, ** but only just over 730 pieces of information with countries outside the EU.

Consequently,** I must reject my third hypothesis H3, as data exchange with countries outside the EU is not at the same level as with EU countries. The question arises whether governments and competent institutions will succeed in curbing the problem of tax gaps caused by tax evasion and tax avoidance, despite increasingly strict measures. Given that the share of hidden global wealth in tax havens, according to estimates by various economists and offices, is growing year on year (between 2010 and 2015 by approximately

2%, despite the fact that in the same period corporate income tax at global level decreased by approximately 2%), I believe that data exchange will not reduce this share, as this wealth is hidden there precisely with the intention that it not be disclosed and not be reported. If we want to curb the problem of tax evasion and tax avoidance, legislation must be adopted that will not allow such conduct. ** To reduce the extent of tax evasion, it would be sensible to use the reverse charge mechanism for those areas** where the greatest evasion occurs (extension of Article 76a of ZDDV-1), and faster data exchange with tax administrations within the EU.

If we want to reduce the extent of hidden wealth, it is necessary to break the network of anonymity and protection of data on asset ownership, which in most cases is hidden in various foundations and funds. Therefore, information exchange, cooperation of tax administrations and implementation of tax audits at global level are extremely important. [deof_form download_text="Aleksandra-Rankovec_DD.docx" download_url="https://www.academia.si/novice/wp-content/uploads/2018/09/Aleksandra-Rankovec_DD.docx"]