Separation of Ownership Control and Corporate Tax

Question: Discuss about the Separation of Ownership Control and Corporate Tax. Answer: Introduction This study deals with the subject on Accounting and Society. In this particular assignment, emphasis has been made for evaluating the contemporary accounting and business issues that incorporates from global perspectives (Wray 2015). The current segment explains analyzing the financial as well as non-financial information that assist managers for taking ethical and responsible decision making and reporting at the same time. It is required to write a report to the Deputy Commissioner of Taxation on why some Australian companies which are subsidiaries of international corporations finds ways for transferring profits to lower tax regions (McGuire, Wang and Wilson 2014). It can be used by explaining agency theory and link it with Australian Taxation Office role and function for finding out the actions for transferring profits to the lower tax regions. In the next segment, arguments are made based on legitimacy theory where Australian Taxation Office should use for encouraging Australian companies for recording their profits and paying their taxes in Australia (Rogowski 2015). Background of the topic Most of the Australian companies owned by multinational corporations have been asked by Australian Taxation Office for explaining the fact why the profits they earn on large revenue numbers are so low (Karp 2017). Addition to that, the ATO perceives that profits gets reduced as a result of intercompany expenses being used as a means of moving corporate profits to lower tax regions. The newspaper article is taken from the guardian under the title Dont soften diverted profits tax on multinationals as urged by the Senate Committee. In this news article, it discuses on the new power for the tax office that order companies for paying penalty rate of taxes on profits diverted overseas as it will encourage compilation with the tax system as quoted by Senate economics Legislation Committee. The Scheme used will encourage multinationals for structuring their activities and capturing by the ordinary income tax framework. It depends upon the subjects for making punitive arrangements for setting out in anti-avoidance provisions (Parsons, Lacey and Moffat 2014) Evaluating facts by using agency theory Agency theory explains the association between principals as well as agents in trade Corporation. This theory helps in resolving issues that exist in agency relations because of unaligned goals or various aversion levels of risk (Nadler 2017). Agency relationship in business takes place between shareholders as well as corporation executives. By using agency theory, it can be explained on the fact as to why Australian companies that are subsidiaries of international corporations select transferring of profits to the lower tax regions. Tax evasion methods for multinational companies are all about location. The Australian companies select to open offices and generate subsidiaries where it can choose means for allocating their profits and expenses (Menndez 2013). Australian companies that are subsidiaries of international corporations want to diminish their tax bills by shifting their proceeds to subsidiaries where there is a low or zero tax government (McGuire, Wang and Wilson 2014). This action actually is performed by the Australian companies so that they pay less tax while they try to documentation their expenses in high tax jurisdictions that offer good rates of tax relief. These companies use number of techniques to falsely move their money around that include tax heavens, price manipulation as well as creation of artificial structures that actually have no economic value. They can decide to develop loopholes in tax law where tax regimes of country alongside each other as well as hide dealings in confidentiality jurisdictions by hiding the nature of their performance in their financial records. The Australian companies can select to be apparent regarding the operations and making decisions based on factors other than dues and contributi ng towards fair amount of tax to each country for operating activities (Masulis and Reza 2014). Addition to that, Fair Tax encourages companies for starting selection of one criterion that will help in increasing the level of clearness as well as pay their duty. Multinationals evade paying their fare share tax by selecting the location. Figures released by Australian Taxation Office revealed that more than 1500 Australian companies did not pay tax for the financial year (2013-2014). This includes companies such as Qantas Airways Limited, ExxonMobil, General Motors and Virgin Australia (Bittencourt, Gupta and Stander 2014). These are wealthy companies with elevated annual incomes as well as led to assumption where Australia is absent out on billions of dollars of tax. When corporation does make a profit, it majorly makes deductions for reducing the taxable profits as these deductions are completely legal. This includes prior year losses where business deducts losses from preceding financial year from its taxable proceeds in the present financial year. In addition to this, research and development means money spends for earning tax credits. Franking credits where corporation can counterbalance its tax accountability in and alongside the dividends for paying dividends to shareholders (Kleven, Kreiner and Saez 2016). Tax deductions may be lawful but they may not be actually a good strategy. The release of ATO information actually talks about whether there are too many business tax deductions. There are various ways that are used by companies that actually reduces their taxable income (Hyman 2014). Some of the dark arts of business tax avoidance include debt dumping where business brings debts from one of its abroad subsidiaries into Australia for reducing the assessable profits. Profit uneven is other way out where company sends profits offshore in order to avoid tax. For example, Apple was accused at the time of inquiry into corporate tax avoidance where they had shifted profits to overseas to Ireland (Bittencourt, Gupta and Stander 2014). The question came after the Australian Financial Review where Apple had shifted an estimated $8.9 Billion in untaxed proceeds over the last decade from its Australian operations to a tax haven arrangement in Ireland. Arguments based on legitimacy theory As rightly put forward by Rogowski (2015), Legitimacy theory gives widespread awareness or assumptions where events of an entity are enviable, proper and suitable in communally constructive systems in according to norms, beliefs, values as well as definitions. Addition to that, legitimacy theory has the role for explanation the performance of organization for developing as well as implementing deliberate social and environmental revelation of information for fulfilling the social contract. This will help in recognizing the objectives as well as continued existence in jumpy and turbulent surroundings (Durnev and Magnan 2017). Opined by Menndez (2013), Social theories explain the compliance from the perspectives of legitimacy theory as well as procedural fairness that affect the formulation in a regulatory pyramid. Australian Taxation Office should encourage Australian companies so that they can record their profits and pay taxes in Australia. There are various mechanisms that should be used for reducing the tax liabilities but established little concentration from business regulators and tax regulators (Bittencourt, Gupta and Stander 2014). The function of Australian Taxation Office (ATO) is to guarantee the society has the essential level of confidence in the management of Australias taxation as well as superannuation systems. Addition to that, the assessment as well as superannuation systems are major part of Australias communal and financial communications (Chelli, Durocher and Richard 2014). By using legitimacy theory, it is argued that ATO has to encourage Australian companies so that they record their profits by using fair means and pay their taxes on time (McGuire, Wang and Wilson 2014). It can be done by creating awareness among the Australian companies that paying taxes according to the profit earned is beneficial for the welfare of the society as a whole. ATO should use the concept of legitimacy theory as it is based upon the concept that there is societal contract between the society as well as the organization. In case a firm receives permission for operating from the culture as well as answerable to the culture for the operational factors as it will help Australian companies in getting benefits of the society at the time of use of natural resources and hiring of employees (Bittencourt, Gupta and Stander 2014). According to Wray (2015), Profit Maximization is concerned as the important measure of corporate performance. By using the concept of legitimacy, Australian Taxation Office can comment that profit is viewed as one of the inclusive measure of organizational legitimacy that requires to be attained by the Australian companies. This concept should be used by the Australian companies where they must believe the rights of the public at large and the rights of the investors (McGuire, Wang and Wilson 2014). If the Australian companies fail to pay the taxes, they have to undergo various complaints and illegal actions. If company fails to fulfill with the communal prospect, it majorly results in sanctions being compulsory in the form of limitations on the operational aspects of business firm. It takes into consideration firms resources as well as demand for its products. Research showed that legitimacy theory explains the study on social as well as environmental reporting. This theory proposes a relationship between corporate disclosures as well as community expectations at the same time. With the progression of models or theories of Corporate Governance, the new dimensions are taken in a crux of social ethics so that they make profits (McGuire, Wang and Wilson 2014). In the current competitive world, companies are trying for inculcating the wisdom of good governance into given corporate organization. The ultimate theories in corporate governance that started by using legitimate theory where it discourses the cause as well as consequences of variables like formation of board structure, independent non-executive directors as well as audit committee that undertakes organizational and social responsibilities rather than the regulatory structures (Badertscher, Katz and Rego 2013). Conclusion At the end of the study, it is concluded that Australian companies should make use of legitimacy theory where they are encouraged by the ATO for recording of their profits as well as make the payment of taxes in Australia. It has been noted that Australian companies are earning on large revenues but their profit figures are less. This has been the reason why there was need for Australian Taxation Office for bringing awareness of the necessity of payment of tax by the Australian Companies. It has been noted by Australian Tax Office that more than 670 large companies paid no business tax for the monetary year 2014-2015. It is further reviewed that Australian Taxation Office commented on no tax paid does not mean tax avoidance. It depends upon the aggregate figures listed that do not reflect the complexity of the tax system in the most appropriate way. Reference List Badertscher, B.A., Katz, S.P. and Rego, S.O., 2013. The separation of ownership and control and corporate tax avoidance.Journal of Accounting and Economics,56(2), pp.228-250. Bittencourt, M., Gupta, R. and Stander, L., 2014. Tax evasion, financial development and inflation: Theory and empirical evidence.Journal of Banking Finance,41, pp.194-208. Chelli, M., Durocher, S. and Richard, J., 2014. France's new economic regulations: insights from institutional legitimacy theory.Accounting, Auditing Accountability Journal,27(2), pp.283-316. Durnev, A., Li, T. and Magnan, M., 2017. Beyond tax avoidance: Offshore firms institutional environment and financial reporting quality.Journal of Business Finance Accounting. Hyman, D.N., 2014.Public finance: A contemporary application of theory to policy. Cengage Learning. Karp, P. 2017.Don't soften diverted profits tax on multinationals, Senate committee urges. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2017/mar/21/diverted-profits-tax-multinationals-senate-committee [Accessed 1 Apr. 2017]. Kleven, H.J., Kreiner, C.T. and Saez, E., 2016. Why can modern governments tax so much? An agency model of firms as fiscal intermediaries.Economica,83(330), pp.219-246. Masulis, R.W. and Reza, S.W., 2014. Agency problems of corporate philanthropy.Review of Financial Studies, p.hhu082. McGuire, S.T., Wang, D. and Wilson, R.J., 2014. Dual class ownership and tax avoidance.The Accounting Review,89(4), pp.1487-1516. Menndez, A.J., 2013.Justifying taxes: some elements for a general theory of democratic tax law(Vol. 51). Springer Science Business Media. Nadler, J., 2017. Expressive Law, Social Norms, and Social Groups.Law Social Inquiry,42(1), pp.60-75. Parsons, R., Lacey, J. and Moffat, K., 2014. Maintaining legitimacy of a contested practice: How the minerals industry understands its social licence to operate.Resources Policy,41, pp.83-90. Rogowski, R., 2015.Rational legitimacy: A theory of political support. Princeton University Press. Wray, L.R., 2015.Modern money theory: A primer on macroeconomics for sovereign monetary systems. Springer.