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Taxation Management,
011301519
Spring,2016
Fouz Khalid Khan
INTL TAXATION ISSUES
• National tax policies create cross-country
spillovers creating opportunities for
– Tax avoidance by Multinationals
– Tax evasion by rich individuals
• Both exploit gaps and inconsistencies in the
international tax framework that arises from
combining national tax systems
Why is it easy to avoid taxes
• Intra-firm transactions and complex modern
business models (bilateral tax treaties can not
be looked at isolation anymore)
• Digital transactions
• Financial sector innovation
• Intangibles
• Non sharing of information by tax havens –
secrecy laws
• Failure of tax policies?
Tax evasion practices
• Shifting profits to low tax jurisdictions—abusive transfer
pricing is often raised as a concern, but there are many other
devices too: these include the direct provision of services
from, and location of intellectual property rights in, low tax
jurisdictions;
• Taking deductions in high-tax countries…—by, for example,
borrowing there to lend to affiliates in low-tax jurisdictions;
• And as many times as possible—passing on funds raised by
loans through conduit companies may enable interest
deductions to be taken several times (without offsetting tax
on receipts);
Tax evasion practices
• Exploiting mismatches—tax arbitrage opportunities
can arise if different countries view the same entity,
transaction, or financial instrument differently;
• Treaty shopping‟—treaty networks can be exploited
to route income so as to reduce taxes;
• Delay repatriating earnings—countries operating
worldwide systems defer taxing business income
earned abroad until it is paid to the parent.
DETERMINANTS OF TAX EVASION
• Tax collector’s point of view, it is revealed that
• The statements shadows of exempted incomes,
political influence ad non-payment of taxes form
political leadership have been supported by the
respondents i.e. tax officers /officials.
• The statements; lack of education, lack of
counseling campaigns by governments, political will
and commitment of government and underground /
un-documented economy has been negated by the
respondents
DETERMINANTS OF TAX EVASION
• Tax payer’s point of view, it is concluded that;
• All the variables /factors regarding determinants of
tax evasion are correct.
• Further, on the basis of arithmetic mean the factors
can be ranked as; unproductive expenditures /
misuse of funds is at first, anti tax culture at two,
corrupt tax administration at three, multiple &
higher tax rates at four, complex tax system at five
and amnesties and incentives for tax evaders at six
number.
TAXATION EFFECTS ON ECONOMY OF
PAKISTAN
• Economic activity is examined through real GDP,
consumption and investment, and for each of the
said proxies a different econometric model is
developed for analysis.
• Tax to GDP ratio for growth model, sales tax for
consumption model and income tax for investment
model are used. Real GDP, total investment and
household consumption expenditures are used as
dependent variables.
TAXATION EFFECTS ON ECONOMY OF
PAKISTAN
• Time series data from 1973 to 2010 are used for
empirical analysis.
• We found negative effects of tax to GDP ratio on
real GDP, negative effects of income tax on
investment and negative effects of sales tax on
household consumption expenditures.
• Finally, we concluded that the present level of
taxation in Pakistan needs to be revised carefully as
this has negative effects on economic activity in
Pakistan.
ROLE OF TAXATION IN FORMULATION OF
MONETARY POLICY
• The paper concluded that tax collections are highly
and positively correlated with the monetary assets
available in the country.
• Meaning that when tax collection base is exactly
planned or implemented, monetary collection will
improve and this will lead to more money available in
the economy for the leading the country towards
growth and development.
TAX REVENUE COMPARATIVE STUDY: INDIA
& PAKISTAN
• This sample ranges from 1999-2000 to 2008-2009.
• The results show that Pakistan is generating more
tax revenue through indirect taxes whereas India is
from direct taxes. The results of these two types of
fiscal policies can be very different and the more the
indirect taxes in country, the more will be increasing
gap between rich and poor and thus the more will be
the exploitation of labor class.
TAXING THE INFORMAL ECONOMY
• The informal sector consists of firms and individuals
who are not fully registered and regulated, and
therefore not in the standard tax net.
• Taxing the informal sector can be through
registration and formalisation to push these firms
and individuals into the tax net, or it can be through
taxing them indirectly. In most countries there are
several types of business registration and varying
degrees of formalisation.
TAXING THE INFORMAL ECONOMY
• An economic modelling study suggests that full enforcement
of taxation on the informal sector would increase labour
productivity and output through reducing economic
distortions.
• However, it is unlikely that taxing the informal sector through
formalisation of all firms would bring in significant tax
revenues at least in the short- and medium-term To tax firms
while they remain informal, government should tax the goods
and services that they buy and sell .
• Another approach is to delegate the role of collecting tax to
trade unions, and to business or other associations.
TAX HAVENS: CONS
• Secret bank accounts and offshore trusts in tax
havens provide wealthy elites and companies with
the means to escape their tax obligations.
• Multinationals’ ability to substantially lower their tax
burden by routing capital flows through mailbox
companies in tax havens provides them with unfair
competitive advantages vis-à-vis their – often smaller
– competitors in developing countries.
TAX HAVENS: CONS
• Banking secrecy and offshore trusts offered by
financial institutions in tax havens make it
possible to launder the proceeds of political
corruption, illicit arms deals, and other crimes.
• Tax havens have contributed to the rising
incidence of financial crisis that can destroy
livelihoods in poor countries.
TAX HAVENS: PROS
• Minimum tax on transactions as well as
person
• Maximum privacy of both transactions and
person
• Security of both transactions and
establishment
• Convenience for business and person
PAKISTAN TAX REFORMS
• A good tax system should be fair, adequate, simple,
transparent, and administratively easy to adopt and
comply.
• Tax-GDP: 12.2 % in TY 2016 (estimated 17.7% in TY
2020).
• 800,000 Cos and individuals out of 180 million pay
taxes, 100 companies pay 82% of Sales Tax, Taxes by
ONE tobacco company = Taxes by the salaried
individuals, 25% tax comes from POL at various
stages, 3.1% Tax comes from Salaries Class, 61% of
Parliamentarians do not pay income tax.
PAKISTAN TAX REFORMS
• Exemptions and preferential treatments (called the
tax expenditure) reduce tax collection by between 2
and 3 percent of GDP each year.
• Agriculture sector that contributes 21 percent in
GDP, contributes less than 1 percent in taxes.
• Manufacturing sector, that has a share of 13 percent
in GDP, contributes around 52 percent in taxes.
• Services sector that contributes to 58 percent in GDP,
contributes to 37 percent in taxes.
BASED ON THE ABOVE, WRITE BRIEF
NOTES ON THE FOLLOWING:
• Can Pakistan hope to achieve positive
economic indicators on the basis of tax
reforms only?
• Identify potential determinants of tax
evasion/avoidance and how to plug them?
• Determinants of tax regime in the present and
future global economic scenario.

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Taxation Management Presentation dated 29042017.ppt

  • 2. INTL TAXATION ISSUES • National tax policies create cross-country spillovers creating opportunities for – Tax avoidance by Multinationals – Tax evasion by rich individuals • Both exploit gaps and inconsistencies in the international tax framework that arises from combining national tax systems
  • 3. Why is it easy to avoid taxes • Intra-firm transactions and complex modern business models (bilateral tax treaties can not be looked at isolation anymore) • Digital transactions • Financial sector innovation • Intangibles • Non sharing of information by tax havens – secrecy laws • Failure of tax policies?
  • 4. Tax evasion practices • Shifting profits to low tax jurisdictions—abusive transfer pricing is often raised as a concern, but there are many other devices too: these include the direct provision of services from, and location of intellectual property rights in, low tax jurisdictions; • Taking deductions in high-tax countries…—by, for example, borrowing there to lend to affiliates in low-tax jurisdictions; • And as many times as possible—passing on funds raised by loans through conduit companies may enable interest deductions to be taken several times (without offsetting tax on receipts);
  • 5. Tax evasion practices • Exploiting mismatches—tax arbitrage opportunities can arise if different countries view the same entity, transaction, or financial instrument differently; • Treaty shopping‟—treaty networks can be exploited to route income so as to reduce taxes; • Delay repatriating earnings—countries operating worldwide systems defer taxing business income earned abroad until it is paid to the parent.
  • 6. DETERMINANTS OF TAX EVASION • Tax collector’s point of view, it is revealed that • The statements shadows of exempted incomes, political influence ad non-payment of taxes form political leadership have been supported by the respondents i.e. tax officers /officials. • The statements; lack of education, lack of counseling campaigns by governments, political will and commitment of government and underground / un-documented economy has been negated by the respondents
  • 7. DETERMINANTS OF TAX EVASION • Tax payer’s point of view, it is concluded that; • All the variables /factors regarding determinants of tax evasion are correct. • Further, on the basis of arithmetic mean the factors can be ranked as; unproductive expenditures / misuse of funds is at first, anti tax culture at two, corrupt tax administration at three, multiple & higher tax rates at four, complex tax system at five and amnesties and incentives for tax evaders at six number.
  • 8. TAXATION EFFECTS ON ECONOMY OF PAKISTAN • Economic activity is examined through real GDP, consumption and investment, and for each of the said proxies a different econometric model is developed for analysis. • Tax to GDP ratio for growth model, sales tax for consumption model and income tax for investment model are used. Real GDP, total investment and household consumption expenditures are used as dependent variables.
  • 9. TAXATION EFFECTS ON ECONOMY OF PAKISTAN • Time series data from 1973 to 2010 are used for empirical analysis. • We found negative effects of tax to GDP ratio on real GDP, negative effects of income tax on investment and negative effects of sales tax on household consumption expenditures. • Finally, we concluded that the present level of taxation in Pakistan needs to be revised carefully as this has negative effects on economic activity in Pakistan.
  • 10. ROLE OF TAXATION IN FORMULATION OF MONETARY POLICY • The paper concluded that tax collections are highly and positively correlated with the monetary assets available in the country. • Meaning that when tax collection base is exactly planned or implemented, monetary collection will improve and this will lead to more money available in the economy for the leading the country towards growth and development.
  • 11. TAX REVENUE COMPARATIVE STUDY: INDIA & PAKISTAN • This sample ranges from 1999-2000 to 2008-2009. • The results show that Pakistan is generating more tax revenue through indirect taxes whereas India is from direct taxes. The results of these two types of fiscal policies can be very different and the more the indirect taxes in country, the more will be increasing gap between rich and poor and thus the more will be the exploitation of labor class.
  • 12. TAXING THE INFORMAL ECONOMY • The informal sector consists of firms and individuals who are not fully registered and regulated, and therefore not in the standard tax net. • Taxing the informal sector can be through registration and formalisation to push these firms and individuals into the tax net, or it can be through taxing them indirectly. In most countries there are several types of business registration and varying degrees of formalisation.
  • 13. TAXING THE INFORMAL ECONOMY • An economic modelling study suggests that full enforcement of taxation on the informal sector would increase labour productivity and output through reducing economic distortions. • However, it is unlikely that taxing the informal sector through formalisation of all firms would bring in significant tax revenues at least in the short- and medium-term To tax firms while they remain informal, government should tax the goods and services that they buy and sell . • Another approach is to delegate the role of collecting tax to trade unions, and to business or other associations.
  • 14. TAX HAVENS: CONS • Secret bank accounts and offshore trusts in tax havens provide wealthy elites and companies with the means to escape their tax obligations. • Multinationals’ ability to substantially lower their tax burden by routing capital flows through mailbox companies in tax havens provides them with unfair competitive advantages vis-à-vis their – often smaller – competitors in developing countries.
  • 15. TAX HAVENS: CONS • Banking secrecy and offshore trusts offered by financial institutions in tax havens make it possible to launder the proceeds of political corruption, illicit arms deals, and other crimes. • Tax havens have contributed to the rising incidence of financial crisis that can destroy livelihoods in poor countries.
  • 16. TAX HAVENS: PROS • Minimum tax on transactions as well as person • Maximum privacy of both transactions and person • Security of both transactions and establishment • Convenience for business and person
  • 17. PAKISTAN TAX REFORMS • A good tax system should be fair, adequate, simple, transparent, and administratively easy to adopt and comply. • Tax-GDP: 12.2 % in TY 2016 (estimated 17.7% in TY 2020). • 800,000 Cos and individuals out of 180 million pay taxes, 100 companies pay 82% of Sales Tax, Taxes by ONE tobacco company = Taxes by the salaried individuals, 25% tax comes from POL at various stages, 3.1% Tax comes from Salaries Class, 61% of Parliamentarians do not pay income tax.
  • 18. PAKISTAN TAX REFORMS • Exemptions and preferential treatments (called the tax expenditure) reduce tax collection by between 2 and 3 percent of GDP each year. • Agriculture sector that contributes 21 percent in GDP, contributes less than 1 percent in taxes. • Manufacturing sector, that has a share of 13 percent in GDP, contributes around 52 percent in taxes. • Services sector that contributes to 58 percent in GDP, contributes to 37 percent in taxes.
  • 19. BASED ON THE ABOVE, WRITE BRIEF NOTES ON THE FOLLOWING: • Can Pakistan hope to achieve positive economic indicators on the basis of tax reforms only? • Identify potential determinants of tax evasion/avoidance and how to plug them? • Determinants of tax regime in the present and future global economic scenario.