Tax Accounting Project

Corporate tax design and how it leads to tax

evasion

Done by:
Abdalkarim Al-Ajarmeh (1310085)
Ahmad Alam Eldeen

(1310358)

Taxes are obligation on the citizens and the corporations by the government.
The government applies taxation systems to collect money and to increase
the sources of income. There are two major parties in the taxation system
taxpayers and taxation agencies. The relationship between these two parties
has to be clear and applied fairly to accomplish the goals of the taxation
system. It is known that if you pay fewer taxes you will get more revenue or
profit as an individual or corporation. That is why some individuals or
corporations try to escape from paying their taxes by illegal techniques. Of
course if the government discovers these illegal techniques the individual or
the corporation will face troubles with criminal and economic issues. We are
going to discuss in this report the design of the tax in corporate and how it
leads to tax evasion. One of the biggest disadvantages of c corporations as
an entity is the double taxation (first time as an entity and the second time
as an individual) when the corporation distributes dividends and this
situation occurs when the company is taxed on the same income item two
times because it is considered an entity once and the shareholders will be
taxed one more time.. Moreover, in the C corporations the losses and gains
are not separated. They are taxed as a one number called taxable income. S
corporations are taxed one time because they are not taxed on the corporate
level, these corporation shareholders are taxed one time only on the
individual level
Normally when a corporation is established it will be considered as a C
corporation if it was not mentioned in the establishing papers anything about
if it is C or S Corporation. Usually small businesses try not to be taxed as a C
corporation because of the double tax. But on the other hand S corporations
have some disadvantages such as; they cant have more than 100
shareholders. We talked about the double taxation and why it is a big
disadvantage for the C corporations, but also C corporations have a good
structural advantage which makes this type of corporations the most popular
structure in the United States. Some of these advantages are the unlimited
growth in sales and capital, no restriction on the number of shareholders and
deductible business expenses.
From our point of view tax evasion can be done legally in some cases, and
one of the most popular situations to avoid paying high taxes and save the
income is to be taxed in another country where tax rates are lower than the
country you are really operating in. The international corporation tax system
stated that the income have to be taxed in the country where the real
activity was, by this law most multinational firms started to do their activities
in countries where the tax rates are lower and they kept some small sources
of income in their original countries because they will pay small taxes on it
and moving these small activities to the other countries may be more
expensive than paying the taxes in their original country.

Most multinational corporations are applying this strategy especially

because their taxable income is very big numbers and any lower percentage
even if it is a little decrease from their original country will make a big
difference in taxes paid. As stated this strategy to avoid taxes is legally in
the United States and other countries. The governments are not trying to
stop these multinational corporations from practicing this strategy although
there are many studies shows the big numbers of profits shifted out of the
United States and the big revenues that should have made if these revenues
where taxed in the US.

When it comes to the investment plan of a corporation the tax system plays
an important role in the decision making process because taxes have a major
effect on the income and the financial situation of the corporation. The
United States tax rate for corporations is considered one of the highest rates
in the developed world it becomes the second highest rate after France.
Absolutely the high tax rates will cause low private investments because the
investors will try to find a better environment for investment and as we know
tax margin rates is one of the most important factors for any investment or
project.
Here we can take an example to make this point more clear: Canada
corporate tax rates was very high, the Canadian government took a decision
to reduce the corporate tax rate in order to increase the demand on the
private investments in the country and this decision worked very good and
the results was that the private sector had a major increase in investment
and this caused a very high positive returns on the economy of the country
and caused an income growth for the Canadian people. If you take a look on
the strategy plans for most countries in the first world you will see that these
countries are trying to reduce the corporate tax to be more competitive in
between the countries by increasing investments. There is another
important factor which can affect the type of the corporations or the
industries this factor is the difference between the tax rates according to the
nature of the corporation or the type of the industry.
Some people looked at the U.S corporate tax system from another point of
view and they said that the U.S government should cancel the corporate
taxes completely. They justified this opinion for the reason of increasing
private investments in the states and they mentioned that the corporate
taxes are the most expensive expense on the economy. Actually when you
look on this opinion deeply you will find that this strategy is not going to
work for some reasons and you are going to discover that these laws and
policies have aims and goals. Any ways we can summarize these reasons in
the following points:

** As we know people who have corporations or are part of them have their
own income which is separate than the corporation income, according to the
opinion stated above people will start keeping their money and revenues in
their corporations and will not take any of the money out of the corporation
and by this the government will not be able tax these individuals by the
corporate tax or even by the individual income tax.
** There are many foreign corporations and investments in the United States
and the U.S government is collecting taxes from these corporations. From our
point of view when a business starts in a country and succeeds in the field it
will take the place of another competitor in the market and this competitor
may be a local corporation. When this foreign corporation starts gaining
money and revenues of course the shareholders will transfer big amounts of
their revenues to their country and by the strategy of not applying any
corporate taxes in the United States the economy of the States will be
damaged and the country will suffer from a major economic crises.
** The last reason is that the government cannot estimate 100% the cost of
the public services that the corporations make use of such as transportation
and labor training. By corporate taxation the government collects the
amounts that were not estimated in the cost of these services.

Tax evasion is wide a spread phenomenon between corporations in the

United States. There are many reasons lead corporations to try to avoid
paying taxes and at the end lead to tax evasion. We can define tax evasion
as follows: tax evasion is an illegal practice by the federal law this practice
could be done by individuals or corporations. By laws in the United States
and most country tax evasion is a criminal practice. In this practice
corporations try to not pay their obligations to government by falsification of
the documents and the financial statements or by any other means.
One of the main reasons behind corporate tax evasion is that the corporate
income tax design on the United States is a progressive style. The
progressive style of tax means that if the corporation revenues are higher
the corporation will pay more taxes and as we know the main goal for all
profitable organizations is to make profits and raise their revenues. The
progressive design of corporate income tax is working against the main goal
for the profitable organizations without taking any considerations to
stimulate these organizations.
There is another reason leads to tax evasion which is transferring the money
to banks in other countries such as Switzerland and the Bahamas because
banks and financial departments in these countries are secured and other
governments cannot have any access to it. Here we can see a disadvantage
in the U.S tax system, this disadvantage is that it is legal to have bank
accounts outside the United States and transfer the revenues of a

corporation to these bank accounts. Corporations with bank accounts outside

the States are usually more exposed to tax evasion.
There is a big sample from the nation in most countries think that the
government is corrupted especially when it comes to money issues. This
reason is preventing many corporations from paying their obligations to the
tax department because they believe that this department is corrupted and
the money they are collecting from people is not invested in the projects that
the tax department shows in the strategies.
From our point of view after discussing tax structure in corporations and tax
evasion we can propose some modifications to the tax system as follows:
**Corporate income taxes have to be imposed fairly without any bias to any
type corporations or any type of industry because this bias will create a
recession in some of the industrial sectors.
**To keep the door open for the corporations to finance charity projects or
any activities that benefit the community and deduct the amounts they pay
for these projects and activities from their yearly taxes. We think that if this
method is applied it would help the governments to convince people that it is
not corrupted.
**the last point we thought is related to the progressive tax structure. From
our point of view this structure cant help the ambition of a corporation
because it is simply (The more you have the more we will take). We think
that this design of tax is very frustrating to small new business or an
entrepreneur, also it is not helpful to large corporations but for sure the
effect will be a minor effect if it is compared with a small corporation.

References:
**http://taxfoundation.org/article/us-corporatetaxation-prime-reform. (U.S Tax Foundation
website)

**How Changes in Corporate Tax Rate Can Affect

Choice of C vs. S Corp. (Ebsco Article)
**http://ftp.zew.de/pub/zew-docs/dp/dp13078.pdf
(Article)
**Risk perception and risk attitude on a tax evasion
context (Ebsco Article)
**Curbing tax evasion through offshore bank
deposits in Swiss banks (Ebsco Article)
**Taking the long way home U.S tax evasion and
offshore investments in the U.S (Ebsco Article)