Churches Tax Exempt A Matter Of Constitutional Right Religion Essay

The U.S. Supreme Court stated in Lemon v. Kurtzman in 1971 that non-taxation of churches is undergirded by “more than 200 years of virtually universal practice imbedded in our colonial experience and continuing into the present.”  Here is why:  There is a distinction between constitutionally separate “sovereigns.”  For one sovereign entity to tax another leaves the taxed one subservient to that authority.  This is true both in the symbolic statement of paying the tax and in the practical effect of supporting the sovereign party.  So, in our constitutional structure, states may not tax each other, and they may not tax property of the federal government.  The District of Columbia does not tax the property owned by foreign governments, and New York does not tax the property owned by the United Nations.

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While the church is not subservient to the government, neither is the government subservient to the church.  Although government can aid or support virtually all types of social or educational institutions which have a public purpose with the use of tax money, the Supreme Court stated in 1948 that “no tax in any amount, large or small, can be levied to support any religious activities or institutions.”  Thomas Jefferson coined the highly referenced “wall of separation” between church and state (but not in the Constitution, as many people assume).  The separation he referred to must be bilateral and reciprocal.  Whatever the degree of separation required by the Constitution, it is surely this:  the government may not make the church subservient by taxing its existence.
In Walz v. Tax Commission, the Supreme Court noted that the church’s “uninterrupted freedom from taxation” has “operated affirmatively to help guarantee the free exercise of all forms of religious belief.”  The much misunderstood “separation between church and state” is in truth designed to restrict the sovereignty of each over the other.  That is, it is designed to achieve a position for each that is neither master nor servant of the other.  Exemption from income taxation is essential for respect of the church as a separate sovereign entity.  Otherwise the government has the power to encumber and even terminate churches if such taxes are not punctually paid or cannot be so paid in full.  Indeed, as the high court noted many years ago, “the power to tax involves the power to destroy.”
The fact that the Constitution mandates a tax exemption for churches is one of the best reasons why churches are not taxed.
Historically, Tax Exempt Churches Have Benefited American Society
Even before the IRS (Internal Revenue System) ever existed, churches were tax exempt.  In fact, as the U.S.Supreme Court acknowledged in 1970 in the Walz v. Tax Commission case, exempting churches from taxation is an “unbroken” history that “covers our entire national existence and indeed predates it.”  Because of this unbroken history, churches have been included and recognized as tax exempt in every income tax code passed by Congress since the very first attempt to pass an income tax code in 1894.  In fact, the federal tax code recognizes this special exemption for churches because churches are the only organization not required to seek advance approval of tax exemption.  They are considered automatically tax exempt simply because of their status as a church.  This “unbroken history” of tax exemption for churches that predates our national existence is not something that is lightly cast aside.  And, as history demonstrates, churches have thrived and have benefitted society in many ways as a result of the freedom that flows from tax exemption.  It is a mythical caricature that most churches want to be tax exempt simply so they can unfairly hold on to more money than anyone else.  This is a falsehood promoted by those who simply do not understand the facts.
Churches have been at the forefront of many of the beneficial social movements throughout American history.  Historians agree that America owes its independence, in great degree, to churches and pastors who spoke freely and passionately from their pulpits in favor of independence.  Pastors during the revolutionary time period became known as the “Black Regiment” due to their black clerical robes and the fervor with which they supported independence.
Churches also led the fight to end child labor, promote women’s suffrage, and were instrumental in ending slavery.  Let’s not forget pastors like Henry Ward Beecher who spoke with great influence against slavery from his pulpit at Plymouth Church in Brooklyn.  And, of course, it was a pastor, the Rev. Martin Luther King, Jr., with the support of churches, who helped to end segregation.  A concurring opinion handed down by the U.S. Court of Appeals for the Ninth Circuit as recently as February 25, 2009, cites such examples and concluded:
“An unregulated, unregistered press is important to our democracy.  So are unregulated, unregistered churches.  Churches have played an important-no, an essential-part in the democratic life of the United States….  Is it necessary to evoke these historic struggles and the great constitutional benefits won for the country by its churches in order to decide this case of petty bureaucratic harassment?  It is necessary.  The memory of the memorable battles grows cold.  The liberals who applaud their outcomes and live in their light forget the motivation that drove the champions of freedom.  They approve religious intervention in the political process selectively:  it’s great when it’s on their side.  In a secular age, Freedom of Speech is more talismanic than Freedom of Religion.  But the latter is the first freedom in our Bill of Rights” (Canyon Ferry Road Baptist Church of East Helena v. Unsworth).
Since our country was founded, churches not only led great social movements, but also freely preached directly on political candidates’ qualifications for office.  That was no problem when the Constitution was signed, or when the first commissioner of internal revenue was appointed in 1862, or when the federal income tax was authorized by the 16th Amendment in 1913.  Nor were churches transformed into political machines.  Churches simply spoke when their moral voice needed to be heard-even during election season-and decided for themselves how they wanted their pastors to preach.
Tax exemption enabled churches to exist without unnecessary encumbrance by the government and to be the moral force in these great social movements in American history.  This historical record of tax exemption is an important reason churches should continue to be tax exempt.
Tax Exemption Protects the Free Exercise of Religion
Churches are tax-exempt under the principle that there is no surer way to destroy the free exercise of religion than to tax it.  If the government is allowed to tax churches (or to condition a tax exemption on a church refraining from the free exercise of religion), the door is open for the government to censor and control churches and the free exercise of religion.  But that’s not just an opinion.  It’s the understanding of the U.S. Supreme Court.
In Walz v. Tax Commission, the high court stated that a tax exemption for churches “creates only a minimal and remote involvement between church and state and far less than taxation of churches. restricts the fiscal relationship between church and state, and tends to complement and reinforce the desired separation insulating each from the other.”  The Supreme Court also said that “the power to tax involves the power to destroy.”  Taxing churches breaks down the healthy separation of church and state and leads to the destruction of the free exercise of religion.  As the Massachusetts State Tax Commission put it in 1897, “The general exemption of houses of worship is a fit recognition by the State of the sanctity of religion.”
For those concerned about an appropriate separation between church and state, no better way exists to ensure it than to keep churches tax exempt.  If the government were to begin to tax churches, it necessarily asserts sovereignty, power, and control over churches.
An example of how the government can abuse its power against churches in this area is in the passage of the Johnson Amendment, which prohibits churches and other non-profits from directly or indirectly supporting or opposing political candidates for office.  A church’s tax exemption has been conditioned on obedience to this mandate since 1954 when Lyndon Johnson was instrumental in adding this prohibition to the tax code.  Scholars agree that the Johnson Amendment was a revenge piece of legislation directed at two non-profit foundations opposing Johnson for Senate.  Johnson did not target churches, yet for 55 years, churches have been prohibited from preaching about candidates for office.  The Johnson Amendment perpetuates a system requiring government agents to monitor and parse the words of a pastor’s sermon to determine whether that sermon violates the law and punishment should be meted out.  That system is an excessive and unreasonable government entanglement with religion.
In 1943, the Supreme Court stated, “If there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in…religion, or other matters of opinion.”  The court didn’t add “…except when pastors address the subject of electoral candidates.”  Since 1954, the IRS and its petty officials have been able to prescribe for churches what is orthodox in matters of religion.  This is not religious freedom in any sense of that phrase.  Rather, this is religious orthodoxy mandated by the government, and it falls heaviest on those churches who believe their faith compels them to do what churches have done for centuries:  address the moral fitness of electoral candidates from the pulpit.
The Johnson Amendment provides a stark example of the power of the government to destroy the free exercise of religion.  The surest way to protect the free exercise of religion is to continue the healthy separation between church and state fostered by tax exemptions for churches.
Taxing Churches Involves the Government as Church Speech Police
Since 1954, the government has prohibited churches from speaking about a certain area of life in order to maintain their tax exemption.  Pastors are allowed to talk about anything they want to from the pulpit of their church except how Scripture applies to our electoral politics.  Called the Johnson Amendment, because of its sponsor Lyndon Johnson, this prohibition has enabled IRS agents to monitor and censor sermons preached from the pulpit for almost 55 years.  Allowing the government to condition tax exemption on a church refraining from preaching on a certain issue allows the IRS to act as speech police and monitor churches for compliance.
The Johnson Amendment allows government to determine when a pastor’s speech becomes too “political.”  That is an absurdly ridiculous standard.  A pastor’s speech from the pulpit that addresses candidates in light of Scripture is religious speech.  That speech doesn’t become political any more than a pastor’s speech becomes commercial when he addresses from Scripture the current financial debacle on Wall Street.  Allowing government agents to make that determination is as absurd as asking a first-grader to design and build NASA’s next space shuttle.
The Johnson Amendment also allows the government to parse the content of a pastor’s sermon to determine whether it violates the law.  That is called a content-based restriction on speech, which the Free Speech Clause prohibits unless the government has a compelling reason to censor speech based on its content.  And you would have to ignore reality to agree that any compelling reason existed for Johnson’s amendment.
Allowing the government to police speech is a bad idea that contains dangerous consequences for liberty-a principle that our nation’s founders understood most clearly.  The best way to preserve liberty, and specifically religious liberty, is to get the government speech police out of the business of reviewing a pastor’s sermon.  That is no place for the government in a free society.  Tax exemption for churches protects freedom of speech and gets the government out of the role of policing a church’s speech.
Taxing Churches Makes No Practical Sense
Under simple logic, churches and other nonprofit organizations are exempted from income taxes.  Though it’s very true that such organizations are beneficial to the public in many ways, that’s not what truly justifies their exemption, as is often argued; it is their existence as non-profit entities that does.  Taxation naturally applies to profit-makers, the generators of revenue upon which government depends.  As Professor Dean Kelley pointed out in his book, Why Churches Should Not Be Taxed, “Other entities would be pointless, since they are not in any meaningful sense producers of wealth.”  It is the very nature of a nonprofit organization that makes it tax exempt in that it does not produce wealth like businesses or other taxed entities.  So, it makes no practical sense to tax these organizations.
In fact, taxing such nonprofits discourages their existence and amounts to double taxation.  First, all citizens, whether or not involved in a church or other nonprofit, are taxed on their individual incomes.  As professor Kelley again pointed out, “To tax them again for participation in voluntary organizations from which they derive no monetary gain would be ‘double taxation’ indeed, and would effectively serve to discourage them from devoting time, money, and energy to organizations which contribute to the upbuilding of the fabric of democracy.”   The only thing a tax exemption for a non-profit organization like a church does is to ensure that all the money an individual puts into a non-profit goes to the purposes he intends without being diverted by the government, which the individual already supports in his individual capacity.
Charles Eliot, former President of Harvard, said it best in testimony before the Committee on Taxation in 1906 when he stated, “The things that make it worthwhile to live…anywhere in the civilized world, are precisely the things which are not taxed.”  Churches are one of the things that have made it worthwhile to live in the civilized world.  Churches, throughout history, have improved American society and have acted as agents of positive societal change, in addition to their purpose of providing meaning for people’s lives and ministering to the local community.  Even many federal court opinions, right up to the present day, have acknowledged this.  To tax churches is to discourage the important work they do in society and to double-tax the individuals who support the church.  This makes no practical sense.
Read more: Should Churches be Tax Exempt? | Answerbag Debates
Church Exemptions Imply Churches Benefit Society Merely by Existing
Many churches – too many – are taking advantage of the system, using tax exemptions for selfish or even antisocial goals (e.g., Branch Davidians, the “Holy Land” terrorist front, Scientology, and multi-millionaire televangelists). 
The fact is that a church is just another kind of club, but it gets special treatment because the club preaches about a mythology or religion (same thing). In order for any other club to gain tax-exempt status, they must adhere to rules and regulations, declare their income, and prove their worth to society as a whole. Religious clubs get treated differently ONLY because they talk about religion, instead of stamp collecting or today’s best-selling books.  This is clearly illegal, and it’s clearly wrong.
It’s illegal because it offers benefits to religious institutions but not to their secular counterparts; it’s wrong because it assumes that every religious institution benefits society by merely existing. Churches need not perform any service at all in order to get these massive exemptions; they merely need to declare themselves religious to be tax-free.
Let the Churches Choose!
By removing the automatic tax exemption for religious institutions from the IRS nonprofit code, one of the following two changes will take place at every religious institution:
1) They will pay their rightful taxes. This, in turn, will benefit everyone in the community by lowering the tax burden, producing more household income which taxpayers can then turn around and donate to the church of their choice. As an aside, this will also allow religious organizations to express political views, as many so desire.
2) They will EARN their nonprofit status by performing real charity work for the community at large (note: “outreach” is not charity, but merely another word for “marketing”). Many churches are already doing this, and as long as they can prove their charitable activity in the same manner as other nonprofits, this would continue. However, the possibility of losing tax exemption would be a strong stimulus for churches that are not earning their status to step up their charity work, again helping the community at large.
Churches have been and will continue to be useful to society on the whole, and such earnest organizations should keep their rightful place beside other tax-exempt organizations that serve community and country. By eliminating the religious exemption we would implement a fair and equitable tax provision that benefits everyone except those who abuse the system or leech from it.
Read more: Should Churches be Tax Exempt? | Answerbag Debates
Anton Tanquintic: uh
Anton Tanquintic: define the purpose of a tax and state that nothing is above the law
Anton Tanquintic: then defend
Anton Tanquintic: that’s one argument
Tax Exempt Churches: Religious Freedom vs Tax Exemptions
Should churches receive tax exemptions on their property? Should religious organizations be tax exempt in their businesses – even those which compete with for-profit companies? Should individuals receive tax deductions for expenses at private religious schools? It is important to understand what sorts of exemptions exist, why they exist, and how the various court cases have proceeded. The more you know, the better informed your judgment will be.
Religious Tax Exemptions: Overview of Current Laws
Tax laws are more complicated than the average person can readily understand; tossing into the mix various things tax-exempt organizations might or might not be allowed to do threatens to make the task of understanding superhuman in nature. In reality, however, the issue isn’t all that complicated and the restrictions on what churches and religious organizations can do aren’t hard to adhere to.
What are Religious Tax Exemptions for Churches?
To what extent, and even if, tax exemptions should be given to religious organizations and churches depends on why tax exemptions exist at all. If you think tax exemptions exist because charities provide public benefits, you may be suspicious of giving exemptions to churches. If you think tax exemptions exist because charitable organizations have no net income, then churches will should qualify.
Why Taxation of Religion Matters
Tax exemptions may not be the most common issue facing courts in arguments over the separation of church and state, it is one of the most fundamental. Initially it appears to be a form of government support for religions and religious activities; on the other hand, the power to tax is the power to restrict or destroy, so is exempting religions from taxation a means of ensuring their independence?
Do Churches Deserve Tax Exemptions?
Based upon court rulings on how tax exemptions for charitable groups work, we cannot be conclude that churches and religious organizations automatically deserve exemptions. Even if one believes that their religion and their church provide a necessary public service, it does not follow that all religions and churches necessarily provide a public service which merits support through tax exemptions.
Are Tax Exemptions a Church Subsidy?
One of the key arguments offered by those who oppose tax exemptions for churches and religious organizations is that tax exemptions constitute a type of subsidy for these groups. Subsidies for religious organizations are unconstitutional, however, because they represent a means by which churches are able to obtain public, taxpayer support for their religious goals.
Tax Exemptions vs. Church Political Activity
By not taxing churches, the government is prevented from directly interfering with how churches operate. By the same token, those churches are also prevented from directly interfering with how the government operates in that they cannot endorse any political candidates, they cannot campaign on behalf of any candidates, and they cannot attack any political candidate.
Church Tax Exemptions: No Political Campaigning
Not all churches and religious organizations have been content to live within the rules. Quite a few have attempted to evade the rules, either secretly or very openly, in order to allow churches and religious groups to participate actively in political campaigns even while retaining their charitable tax-exempt status.
Religious Tax Exemptions vs. Government Policies
Most people are aware that a church or religious organization can lose their tax exempt status for engaging in partisan political activity, like endorsing a political candidate. What many aren’t aware of, though, is that the same can happen for promoting or engaging in things contrary to government policy. Tax exemption is a privilege, not a right.
Backlash Against Religious Tax Exemption Laws
It is a fact of law that charitable organizations, including churches, which have tax-exempt status are not allowed to participate in political campaigns on behalf of political candidates. A focus of current efforts is to make a direct change in how the laws read in order to ensure that churches can become fully active in political campaigns.
Tax Exemptions Available to Churches
America’s tax laws are designed to favor non-profit and charitable institutions which presumably benefit the community. Churches benefit the most from tax exemptions because they qualify for many of them automatically, whereas non-religious groups have to go through a more complicated application and approval process. Why?
Commercial Tax Exemptions for Church Businesses
Tax exemptions on church property used for specific worship purposes or religious work may be most easily defended because of the charitable and community work performed. Serious problems come into play, however, when church property is used for commercial purposes. To what extent should the business activities of a religious organization be tax 
At a time when ordinary people are being told to tighten their belts and to expect massive reductions in public spending in order to repay the huge government debt incurred as the result of the financial crisis, there are two groups of people who continue to live it up:
1 – The greedy and incompetent investment bankers who caused the financial crisis in the first place and who, nevertheless, continue to use the governments’ recapitalisation handouts to pay themselves obscene bonuses.
2 – Religious organisations.
While the United States and the European Union are responding to the bankers’ abject failure to show self-restraint by imposing restrictions on their bonus payments, they have done nothing to redress the fact that religious organisations are ripping the rest of us off by not paying any tax. [1]
So while decent, hard-working families struggle to make ends meet, televangelists such as Creflo Dollar continue to swan about in their brand new Rolls-Royces [2] and Catholic priests carry on living the life of Reilly in their tax-free, all-expenses-paid parochial houses. [The YouTube clips are humorous, of course, but there is many a true word said in jest.]
And how many hard-working, God-fearing family men can afford to hire young sex-workers to accompany them on luxury, ten-day tours of Europe? Not many, but Baptist Minister George Alan Rekers can. [3] That’s partly because he doesn’t pay any tax. (In the interests of full disclosure here, by the way, I should point out that Rekers denied knowing that his companion was a male prostitute, even though he hired him from
To put this matter into perspective, The Church of England (CofE) rakes in £1 billion ($1.52 billion) every year tax-free and yet its own website states that even though “over £200 million is given tax-efficiently each year through Gift Aid” and “a further £60 million is recovered from the Inland Revenue in tax.” [4]
In other words, the CofE not only avoids contributing to the public purse, it is actually jewing £60 million pounds a year out of it!
And things are even worse in Germany where citizens are subject to the ‘Kirchensteuer’ (Church Tax) which nets protestant priests over EUR8 billion (£7 billion / $10 billion) every year. [5] A similar situation exists in Denmark, Sweden, Austria, Switzerland, Finland and Iceland where citizens are also forced by law to give a percentage of their income to the church.

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It seems to me that, with religious observance on the decline to a point where, according to the CofE’s own figures only one million people – just 1.6% of the British population – go to church on Sundays [5], the church is becoming increasingly irrelevant in today’s more enlightened society. And yet the churches are still growing fat at the expense of ordinary, hard-working citizens who have to make up the shortfall in tax receipts.
This is a scandalous and outdated state of affairs and I believe it is high time that churches paid their way and, therefore, I duly affirm that religious organisations should no longer enjoy their tax-exempt status.
Thank you.
[5]… (in German)
Report this Argument
Religious organizations, in my opinion, should not pay taxes from church collections and other donations. Money gotten through collections and donations has already been taxed (it comes from a group of people who have already have been taxed). Additionally, the majority of the money gained through collections and donations is used in the purpose of helping others (examples include Haiti, earthquakes, money used to organize soup kitchens, and so on). Additionally, you will note that in certain countries, such as Ireland, 85%[1] of the population attends church. That would mean the Church in Ireland does have significant impact on the population.
Religious individuals, on the other hand, should be taxed. I don’t believe that it is fair reverends who earn proceeds through televised programs ought to be allowed to keep any of it, or if they would be allowed, then that income ought to be taxed. Any actual business (such as mass selling, investments, and so on, also ought to be taxed as it is a method of earning). Collections and donations should not be taxed as they are gifts.
I apologize in advance for any spelling and/or grammar mistakes and for unclear sentences.
Additionally, I apologize for having such a short counter-argument, however, I am short on time. I beg your understanding.
Report this Argument
I would like to thank Bernardio for his considered comments to which I make the following responses:
Ideally, there would be no taxes, but a country must raise funds somehow.
In the past, if a king needed money he would assemble a fleet of frigates and galleons that would be bristling with guns and canons. He would load these ships with cargos of soldiers and send them across the Atlantic to the New World to rape and pillage newfound civilisations, and plunder their gold and have it repatriated back to Europe.
Unfortunately though, these days the United Nations take a dim view of such activities and it is, therefore, necessary for the government to collect money from the general populace instead.
This inevitably leads to the double-taxation my opponent referred to. You pay tax on the money you earn and when you buy something with the money left over the recipient pays tax on the profit from the sale.
But my opponent suggests that churches shouldn’t pay tax because they “help others” in places like Haiti.
I looked into this and discovered that a Baptist group from Idaho did indeed travel to Haiti in the aftermath of the earthquake to “help others” – they were arrested and accused of attempting to traffic 33 children out of the country. [1]
Presumably their intention was to sell the youngsters on to paedophiles rings in America and if they had not been caught they would have succeeded in their mission – their mission being to “help others” sexually molest vulnerable children.
Meanwhile the Jewish Orthodox Union uses their tax-free donations to fund the Institute for Public Affairs [2] which is an American lobby group that opposes humanitarian aid being sent to victims of military aggression in Palestine, rejects the United Nations and international law and supports the ethnic cleansing of Jerusalem and the illegal Jewish land grabs in the West Bank.
At the same time, there are widespread concerns that tax-free donations made to mosques may be channelled into the hands of Islamic terrorist groups. [3]
With regard to countries such as Ireland where church attendances are higher, the income from tax paid by the churches would be very helpful in reducing their budget deficits and allow them to spend more money on schools and hospitals.
In conclusion, the activities of religious organisations may seem worthy and noble by some: Christian paedophiles; racist Jews; Islamic terrorists and others; but not everybody welcomes having to pay more tax to make up for the shortfall in receipts from tax-exempt churches, temples, mosques and synagogues.
Thank you.
Report this Argument
Agreed, a country must raise taxes to run a government though I question my opponents comment on the fact that pillaging is now illegal is a bad thing. I, personally, enjoy the fact that people can’t run around burning and stealing.
I also concede that there was a, emphasis on a, single group of Baptists who were trying to use the situation in Haiti to there advantage. However, the information that did not get to the media were all the other parishes that collected and sent money for actual aid to refugees.
As far as the Jewish Orthodox Union using money for illegal activities is something that ought to be fixed, but you’ll note that the Catholic Church does not use their tax free status for illegal activities. If you suggest that one example of someone(s) doing something bad ought to influence laws for everyone, then we ought to all b

Can the Tax Industry Be Self-regulated?

Tax Summative: Critically discuss the assertion that the tax industry cannot be trusted to regulate itself.

Introduction, how is UK Tax Industry regulated? HMRC
What ways have HMRC been successful?
PwC scandal FOR Assertion
Final Opinion

It is well known that tax advisory work within the UK is a legally unregulated profession, therefore in order to uphold high standards, the profession depends heavily upon self-regulation by the professional bodies. It is understood that the accounting profession is more prevalent than the legal profession within the market for large business tax advice in the UK. The efficacious tax advisory role of accountants in the UK may, to a certain extent, be explained by the sound working relationships that conventionally exist between the accountancy firms and HMRC, the UK tax authority. It can be argued that that strong relationships with the UK tax authority have corroborated the advising position of the UK accountancy profession.
The direct regulations of the tax advisory profession in the UK include a professional code of conduct that warrants professional conduct by incorporating aspects such as due care, integrity, confidentiality and objectivity, tax advisers who are affiliates of the CIOT (Chartered Institute of Taxation), ATT (Association of Taxation Technicians), or accountancy professional bodies are under obligation to follow this code. Consequently, affiliates who disregard the professional code may be scrutinised by the Taxation Disciplinary Board, which is an independent body established in 2001 by the CIOT and ATT. In addition, a percentage of tax advisers are bound by supplementary codes, for instance member firms of KPMG International practice a Global Code of Conduct which discloses the internal governance affairs of all KPMG firms. As a result of the investigations lead by the US Department of Justice into the US member firm of KPMG International with regard to the trade of tax shelters in the US between 1996 and 2002, KPMG UK (as of 2004) now apply the UK Principles of Tax Advice which summarises the governance operations of KPMG UK in relation to taxation. The unfavourable perception of the UK tax advisory profession has encouraged the implementation of professional codes by the UK tax advisory bodies that highlight a high level of societal accountability of the tax profession, going past perceptions that stick to the definition of the law.

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Alongside direct regulations of the tax industry, indirect regulations of the tax advisory profession in the UK also exist. In spite of heated discussions in recent years, the UK Government has abstained from putting into effect legislation that would directly regulate the tax industry. However, UK policymakers have acknowledged tax avoidance schemes by introducing new legislation. Rules regarding the Disclosure of Tax Avoidance Schemes, or more commonly referred to as DOTAS, introduced new reporting obligations for both taxpayers as well as their advisors commencing from 2004. In addition, following detailed examination, the General Anti-Abuse Rule (GAAR) was implemented, in hopes of confronting abusive tax avoidance, the effects of which are yet to be seen as the legislation was only introduced in 2013.
Consequential to the investigations led by the Public Accounts Committee (PAC), a select committee of the British House of Commons, the success and usefulness of the tax industry being able to regulate itself has become an area of intense political dispute in the UK. The investigations were triggered by the leak of almost 28,000 documents, evidencing the involvement of over 1,000 business, demonstrated the promotion of Luxembourg-based tax-avoidance schemes by PwC. Margaret Hodge, Chairman of the PAC, deemed the actions of PwC to be the “promotion of tax avoidance on an industrial scale” and called for the UK Government to take the initiative to have a more active role regarding the regulation of the tax industry ‘as it evidently cannot be trusted to regulate itself’. Members of Parliament demanded that the Government present a code of conduct for all tax advisers and proposed that submission to this code would govern whether or not companies delivering this service can attain both government and public sector jobs (House of Commons Public Accounts Committee 2013). In addition to this, the Public Accounts Committee demanded that the professional bodies take on a greater lead and be more accountable for their actions with regard to tax avoidance. It is apparent that tax advisers play a very large part of the global issue of tax dodging, the effect being that it costs developing countries billions of pounds annually. The Public Accounts Committee’s 2013 report underlined the role that the Big 4 accounting firms play in tax avoidance as they generate billions of pounds a year as income from tax planning business in the UK alone, cash generated from worldwide clients is vastly greater. Tax Research UK director Richard Murphy claimed that accountancy firms are essentially the “back-bone” of the tax avoidance industry and that the act of tax avoidance would not be able to happen without accountancy firms as “they are the key suppliers of tax avoidance practices”. The PAC now have reason to believe that large accounting firms have been advising their clients of different and more complex forms of tax avoidance, such as developing intricate business operating models that are not limited to a certain group of countries, which impose on the lowest international rates of taxation. In contempt of the evidence submitted by PwC negating the allegations, the PAC concluded that the tax schemes displayed all the “characteristics of a mass-marketed tax avoidance scheme”.
However, there is still cause to debate whether PwC had genuinely done anything wrong other than legally reduce the tax liabilities of its clients. It is important to distinguish the difference between tax avoidance which involves planning affairs within the given framework of the tax legislation in an attempt to reduce tax liabilities, and tax evasion which involves refusing to pay tax liabilities by suppressing knowledge or information from HMRC, or by providing dishonest information.
Following the 10 year marker since HMRC was established from the merger of Inland Revenue and HM Customs and Excise, the ruling on the expanded division’s relative success or failure credibly lies somewhere in between. The merger to create HMRC was intended to improve customer service, coordinate strategies and construct efficiencies through economies of scale. We can conclude that the latter point has clearly been a success, however the former point disputably less so.

PWC proves time to end tax abuse by big firms of accountants has arrived

D. de Widt, E. Mulligan, L. Oats Regulating Tax Advisers, FairTax WP-Series No.6, 2016

Advantages and Disadvantages of Income Tax

An income tax is a rate charged on the income of individuals as well as business (companies or other legal entities). Individual income taxes often tax the total earning of the individual, while corporate tax often taxes net profit of the company. Different tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional or regressive. Tax systems define income differently such as inclusion of windfall earnings, and often allow notional reductions of income such as a reduction based on number of children supported.

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Generally the income tax is employed in a progressive manner, meaning as one earns a higher salary a higher proportion (percentage) of his income is taxed. The idea of a progressive income tax has garnered support from economists and political scientists of many different ideologies, from Adam Smith in The Wealth of Nations to Karl Marx in The Communist Manifesto. Income taxes used in most countries around the world are characterized by a progressive scheme, but are not without criticism.
The Disadvantages of Income Tax
The implementation of an income tax system is very complex, especially when trying to regulate the rich and the corporations. So complicated in fact that an entire industry exists to simply monitor and control the system. The government must enforce every line of the tax code, for example in the US the IRS requires 90,000 tax accountants. The IRS and tax audit industry might do more for the economy if they were retrained to in some other manner.
Another part of the same industry of tax accountants consults the big corporations and the rich on ways how to exploit tax policies’ loopholes. Tax evasion and deceitful avoidance favours the wealthy as they are the ones able to pay for costly tax ‘advice’. As legendary investor Warren Buffet has been known to say, it is unfair that his secretary pays 30% in taxes while his accountants manage for Buffet to only have to pay 17% on his income.
Some argue that for those in the lower middle class and lower classes, an earnings tax may be a financial hardship, regardless of the amount. In cases where households are just living by their means any deduction even the smallest may result in a significant decline in the standard of living, unlike income deductions to high grossing households who save the majority of their income.
Others believe that income tax is a violation of a citizen’s individual freedom. Especially Libertarians, argue that tax on earnings violates the individual’s right to decide how to use the money he earns. They also state that a progressive tax code is unfair to the wealthy and favours the poor, by calling it a tax on success. In the US in 2007, half of all income tax revenue was paid by the richest 5% of the country.
An income tax that gets progressively more burdensome the more money you make reduces the incentive to work harder and be productive the higher you move up the ladder. While income tax disincentives working more and incentivizes working less at the same time, the Laffer curve portrayed below highlights the trade-off between work and tax revenue.
The Advantages of Income Tax
The income tax allows for progressive taxation on the amount of money you make. A person making €15,000 a year will pay less (percentage wise) than someone making €150,000 a year. This is an effective strategy to distribute the wealth. Considering most of the population fits into the lower brackets, most of the population should favour such a program. Without income tax, personal and corporate profits would be out of control and unregulated. Unscrupulous individuals and greedy corporations could earn heaps of ill-gotten money, since they would not have to account for their earnings.
This current system also allows for a stable income stream for the government. For example, even at 10% unemployment, 90% of the workforce is still making money. As the workers make money, the government can maintain an income stream, even in a depression. Income tax helps the government build a superior infrastructure, which otherwise would be probably impossible to finance through expenditure tax only.
By comparing income tax to its expenditure counterpart others argue that not all people consume at the same rate, therefore tax on earnings is a more equitable way of assessing tax than with a consumption tax. People with lower incomes would be the most impacted by a straight tax on consumption, since even necessary items like cars would be significantly more expensive. On an individual basis income is an easier way to levy taxes and decide deductions. While people may deal with a few pay slips they have to save, in consumption tax, people might have to save receipts for every purchase they made during a year in order to qualify for tax breaks. In this sense income tax is more flexible because it allows people to claim deductions on their tax returns, such as childcare expenses, losses of a personal property and other financial challenges.
Albeit differently implemented, income tax is present everywhere throughout the world. Low personal income tax countries such as the US and Japan promote their highly consuming economies through low personal rates but limit their colossal corporations through a high corporate rate. Scandinavian countries, Belgium and France need abnormal tax revenues to finance their government expenditure and social benefits. Places like Ireland, Poland Hungary and the Slovak Republic stimulate their much needed development by attracting investment with low corporate taxation.
Lately, pure tax economists argue that a consumption tax is superior to an income tax because it comes closest to attaining the so called “temporal neutrality”. Although impossible in reality, a tax would be considered to be temporal neutral if it did not alter spending habits, change behaviour patterns or affect the natural allocation of resources. Since an expenditure tax only taxes consumption, the good or service being consumed is largely irrelevant in reference to the allocation of resources.
An income tax creates a discrepancy between the value of a person’s work and what they actually receive (disposable income). This is weighs on the economy because it causes people to work less and pursue more leisure activities than would otherwise be the case if income taxes did not exist. The barrier created by income taxes also produces fewer saving because capital is taxed. This reduces investment, discouraging innovation and ultimately contributing to a lower standard of living when compared to a pure consumption tax. In other words, income taxes will actually cause greater consumption in the present while reducing future savings and future consumption.
A well planned consumption tax is more neutral and does not affect the allocation of resources as dramatically as an income tax. Taxes are only assessed on any income that is consumed (spent on goods, services, etc.) while not taxing savings. This eliminates any deterrent to savings and actually would encourage people to save more, increase available capital, and ultimately produce a more solid, robust economy.
The main argument against a consumption tax is that it would raise less revenue than an income tax if the two rates were the same. This is certainly true because capital is not taxed in the consumption-based system. While true, the long term effects of a consumption tax would be a greater accumulation of savings, more capital to invest, and an economy that is fundamentally stronger than one using an income tax system.

Impact of Tax Cuts on Australian Small Business

A number of interesting developments has been introduced by 2015-2016 Federal Budgets to the tax landscape of Australia. Number of incentives including two significant tax cuts has been introduced by the Australian government to allow small business to improve their cash flows, encourage competition and growth, and allow for hiring of additional employees.
The first is Abbott Government hands 1.5% tax cut to the companies with an aggregated annual turnover of less than 2 million which are said to be the small business companies. This means that small companies will have their tax lowered from 30% to 28.5% that is the lowest small business tax rate in more than 50 years. It is expected to be applied from 2015-16 income year.The second is the individual tax payers with business income from an unincorporated business will get a small business tax discount. These are for business that has an aggregated annual turnover of less than 2 million. 5% of the income tax payable on the business income received from an unincorporated small business entity will be the discount. The discount will be delivered as a tax offset and capped at 1000$ per individual for each income year.

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Australian government understand the feelings of people in small business. They are the heart of the economy and fell disadvantaged as compared to big business entrepreneurs. Small businesses employ nearly half of Australia’s private sector workers. Small businesses are the part of the community in a way that big businesses can never be. For all companies, maintaining the existing arrangements for investors, including self-funded retirees, the current maximum franking credit rate for a distribution will remain at 30%.
“Australia is among the fastest growing economies in this era of developed world. Despite the whole series of unexpected challenges over the past twelve months (example- sharp falls in iron ore price, drought in large parts of New South Wales and Queensland etc.) Budget and economic position has improved in Australia” says the Finance Minister. Despite the fact that in expected tax revenue the country has lost $90 billion, the Budget Surplus is unchanged from last year. He also said that they are reducing the size of the government as a share of the economy.
Along with the tax cut, tax deductions were also extended by the government to drought ravaged farmers for water facilities and fencing. The Treasurer said “this is about getting on with it, getting people to have a go”. In his opinion if it works then he would predict that the businesses just needed that trigger to go out and buy things and they already had cash ready.
Prime Minister’s Opinion
Mr.Abbott said that only the incorporated entities will receive the small business tax cut. The small business tax cut will be effective in many ways as it will boost productivity, stimulate investment, make existing jobs more secure and also generate more jobs. Also the offsetting effect of all new spending would be responsible and fair savings. The push to extend the new 28.5% tax rate to the first $5 million of profit for all companies is rejected by the Abbott’s government. Top corporate tax rate will still be paid by big businesses on every dollar they earn.
According to the Prime Minister, part of the jobs package will be formed by the tax cut for small business. “The small businesses of today are likely to start the new industries of tomorrow. The best antidote to sunset industries is sunrise ones and these are most likely to emerge from an enterprising small business” said the PM. Of the two tiered structure he said it would be fundamentally popular and good for employment and also it won’t cost the budget too much.
What does tax reduction mean for small business?
A small business with $50000 profit could save roughly $5700 a year. This is the combined effect of two measures that is 28.5% tax rate and tax deduction
The number fewer than 20 are defined as small business. But here these cuts can only be accessed by businesses turning over upto $2 million. Even if much profit doesn’t arise from a business and profit is just a fraction of 2 million, this tax cut could add up to thousands of dollars per year. Treasurer’s wants the small businesses to grow and a step can be taken towards it by using these thousands of dollars a year. For Example meeting interest payments and borrowing money.
What people think?
“After the Reserve Bank cut interest rates the Treasurer said now is the time to have a go, to borrow some money and invest whether you are a household or small business.”
“None of my people get excited about the tax break” said the Council of Small Business of Australia executive Peter Strong. He says reintroduction of an investment allowance is what the Council wants to see and it’s all about spending. The average small business considers it to be more meaningful. 50% of the cost off the tax bill could be claimed by businesses in the last investment allowance which was basically a tax deduction and not a tax cut in late 2009. Under that, deductions could be claimed for essential equipment worth over $1000.
Info about the budget that Australian small businesses need to know
Australian small businesses are expected to fulfil the hopes of the government which is banking on them to boost the economic growth of the country over the next few years.
Tax cuts for company owners and companies
Tax cut of 1.5% was announced before the budget but it was not well known that same reduction will be provided to the business owners on the personal income tax they pay on the earnings from their company.
When a business owner’s income tax is calculated, the same tax credit is received that they would have received if instead of 28.5 cents that they actually paid their company had paid 30 cents in the dollar is the effect of this. This is because the franking credit rate will remain at 30%. So the 1.5% tax cut will be pocketed by the business owner.
Faster Depreciation
Immediate tax deduction will be given to all small business for individual assets that they buy costing less than $20000 each.
Previously only the assets that cost less than $1000 were covered under this. Rather than spreading the deductions over several years as previously, full tax deductions for vehicles, tools, IT equipment and so on will be received by the business for the year they’re purchasing. Businesses can reinvest this money in growth or pass on to the owners. Also the businesses can claim unlimited number of purchases.
Less tax for sole traders
Small businesses operate as a sole trader, as a trust or as a partnership instead of operating as companies. This is recognized by the government which is also providing tax cuts to unincorporated businesses with annual turnover less than $2 million.
For Example -A sole trader would be entitled to receive a discount of 5 per cent coming to $800 if he pays $16000 in tax. Therefore, 5 per cent of the tax they pay, capped at $1000, will be received by these businesses which can be claimed as a tax credit in their tax return.
Share Schemes
Even if the employees had not made any money and sometimes even if shares are worthless, it was essential to pay the income tax on the options to buy shares that the employees received as soon as they received them under the old tax laws. Therefore, the share schemes were unworkable.
But under the new transformed budget, if the employees can realise a benefit from their options, by using them to buy shares only then they will have to pay tax.
Offering shares in the business is the best way for a start-up without much cash to attract top-talent.
Digital Upgrades
Over the next four years, $255 million is decided under the government plan for updating its computer systems and the way it interacts with businesses and individuals. This will be good news for the small businesses which often indulge in an interaction with the government online to do things (example-paying taxes, registering a business name, etc.)
With the pace of program progresses over the coming years, these things should also get faster and easier.
Start-up Costs Deductions
For many of the professional expenses immediate deduction can be received by new businesses for setting up new businesses such as legal, professional and accounting advice.
Currently for these new enterprises, the changes should provide the much needed cash flow and deduction is required from some of these costs over the next five years.
Wage Subsidy
To employ the young, the old and the long-term unemployed, about $1.2billion will be provided in wage subsidies to help businesses. According to the government, to meet employer demands there will be more flexibility for the job seekers even if it replaces several other wage subsidy programs of that total the same amount.
$6500 is the subsidy for employing a young job seeker and $10000 is the subsidy for the mature-aged job seeker.
Crowd Funding
By seeking small amounts of capital from a large number of investors online, a new way of raising funds is called crowd funding. It is often for a specific purpose such as new product development. Now small businesses can access a wider pool of investors to help them to grow. Many of the restrictions and red tape associated with crowd sourced equity funding are removed by the new laws introduced in the budget.
GST on Digital Imports
The goods and services tax will also be imposed by the government on the digital products and services that are bought from overseas. It will also be applied to the software, so the businesses need to be aware. They will be able to claim most of the GST that they pay. For common people it will apply to the movies, games and songs that they buy from overseas companies.
Tax Relief for Changing Business Structure
The capital gains tax will no longer have to be paid by the small businesses which change their legal structure. The capital gains tax can potentially hit the small business such as a partnership or a company when it changes it legal structure under current laws. Now without incurring a capital gains tax bill these businesses can easily change their legal structure. Established businesses now have a chance to assess their current business structure whether it is best for tax and succession planning or not so that they can change it.
The policies of the old parties invariably promote the interests of the big business and their lobbyists. The small business sector is always taken for granted by these parties.
Tax cut will benefit in several ways:

Acknowledge the administrative costs for small business.
Encourage growth in the small business sector.
Free up extra income for investment, innovation and business expansion.
Small businesses will be relieved from pressure.

Australian government recognises that strong Australian economy lies in healthy small business sector. It is completely feasible to lower the tax rate for small businesses. Countries like Belgium, Canada, France, Japan, UK, South Korea, US, Netherlands and Spain already have a lower company tax rate for small businesses than big businesses. Australia’s unemployed will have the skills and they will get the support that they need to move in future careers. A further boost to energise small business growth and employment will be provided by the budget’s small business and job package. Therefore, the people behind the small businesses will get a fairer go by the government’s decision to lower the company tax for small businesses.
There is a fully cost plan for a tax cut for small businesses including being up-front about how it will be paid. The government is prepared to stand up to big businesses and raise the revenue to support the people behind small businesses by taxing the record profit-making big banks and the mining corporations which are mostly overseas owned.

Effectiveness of Carbon Tax on Per Capita CO2 Rates

Has the carbon tax implemented been effective on reducing per capita CO2?

Using Synthetic Control Method


1. Introduction

Nowadays, global warming is an incontrovertible fact and its negative effects on our lives are becoming a serious threat. The greatest greenhouse gas is CO2 and its density is increasing largely due to fossil fuel consumption. Faced with the climate change challenge, the attempt to find a way-out for diminishing CO2 emissions is inevitable.

Various policies have been implemented to decrease CO2 emissions, including emission standards, emissions trading systems, and tax carbon. Amongst these policies, carbon tax is often recommended by economists and international organizations (EEA, 1996).

To decline the consumption of fossil fuel and carbon emissions, carbon tax is set on fossil fuels and related products such as oil, gas, jet fuel, and coal. Carbon tax can encourage the use of substitutes of fuel products and hence it can change energy production and consumption structure. Otherwise stated, carbon tax encourages investment in energy efficiency improvement and energy saving. It also affects consumption and investment behaviours via the redistributing of the collected carbon tax revenue (Lin and Li, 2011).

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Notwithstanding, carbon tax unavoidably has its own disadvantages. In the short term, carbon tax can increase the prices of related products, raise the production costs and impose negative effects on economic growth. Essentially, the final effect of carbon tax is uncertain. The producers may transfer increased costs to consumers through higher prices. In other words, higher price elasticities cause carbon tax costs not to transfer to consumers and to reduce its effectiveness.

Indeed, carbon tax revenue should be returned to producers to reduce income tax or to subsidize development of technology. Hence if the revenues from carbon tax are not redistributed, carbon tax will impose a higher cost on polluters, which might decline its social acceptance (Baranzini et al., 2000). In fact, carbon tax revenue is often absorbed into the governments’ budget (Lin and Li, 2011).

Above and beyond, if developing countries do not take responsibility for CO2 mitigation, implementation of carbon tax in developed countries will lead to the immigration of carbon intensity industries to developing countries with liberal environmental control policies. Consequently, the carbon leakage problem arises (Lin and Li, 2011). Moreover, developed countries tend to impose carbon tariffs on developing countries to maintain the competitiveness of domestic industries and consider carbon tariffs as a new way of supporting trade (Lin and Li, 2011). Thus, the question of how to benefit from the advantages and avoid the disadvantages of carbon taxation is a serious concern of policymakers.

As shown in Table 1, 25 countries have imposed the carbon tax policy by 2018, and 3 countries Argentina, Singapore, and South Africa put carbon tax on the agenda for 2019. The countries which imposed the carbon tax include Australia, Chile, Colombia, Denmark, Estonia, Finland, France, Iceland, Ireland, Japan, Kazakhstan, Sought Korea, Latvia, Liechtenstein, Mexico, New Zealand, Norway, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, UK, and Ukraine. Furthermore, a common property of their implementation is an exemption and tax relief for industries with high energy consumption (Ekins and Speck, 1999). Nonetheless, during recent years, the upsurge of energy prices and the serious issue of energy security, and the negative effects of CO2 emission have forced other countries to put carbon tax on the agenda.

These raise a questions. Does carbon tax have affected CO2 emission reduction? If so, how significant are the affects?

Table 1. Carbon taxes around the world


Year of Introduction

 Tax rate (US$ / tCO2)












25 to 29

































0.8 to 3

New Zealand





4 to 64


















8 to 101







Source: World Bank, 2018

2. Literature

The theoretical underpinning of carbon tax is the Pigouvian tax. The Pigouvian tax is a tax that is imposed on any commodity that has negative externalities. In fact, the purpose of the Pigouvian tax is to equalize the price of the commodity with the social marginal cost.

Manne and Richels (1990) besides Whalley and Wigle (1991) estimated the impacts of carbon tax on global CO2 emissions, and all their results revealed significant mitigation effects of carbon tax in spite of the different settings of tax rates.

Symons et al. (1994) studied the scenarios of levying carbon tax in the UK, and their results showed that carbon taxes would impact the price of fossil fuels and consequently has an effect on the final demand which determines CO2 emissions.

Gotos (1995) results suggested that with a carbon tax rate of $200 per ton of CO2, CO2 emissions in 2010 can be retained at 1990 levels, with only a 0.1% of GDP loss

Aasness et al. (1996) concluded that when CO2 emissions are taxed at $ 65 per ton, Norway’s CO2 emissions in 2020 can be maintained at the 1989 level, whereas the tax rate should be increased to $200 per ton of CO2 to obtain a 10% decrease in the CO2 emissions in 2020 relative to the 1989 level.

Nakata and Lamont (2001) applied the partial equilibrium approach and concluded that energy and carbon taxes would reduce CO2 emissions to a proposed target, whereas carbon taxes cause a shift in resources used from coal to gas.

Floros and Vlachou (2005) studied the manufacturing industry in Greece, they indicated that when manufacturing industry is taxed at $50 per ton of carbon, the CO2 emissions can be diminished by 17.6% compared to the 1998 level; what is more, they concluded that carbon tax could lead manufacturing industries to more use of natural gas and renewable energy and to reduce CO2 emissions.

Wissema and Dellink (2007) indicated that imposing carbon energy tax of 10–15 Euros per ton of CO2 in Ireland could decrease its energy related CO2 emissions by 25.8% compared with the 1998 level, and it could also encourage the development of renewable energy.

Lu et al. (2010) used the dynamic general equilibrium model to simulate the effects of carbon tax on the macroeconomy of China, and the results implied that carbon tax could reduce the carbon emissions which is effective with limited reduction to GDP. For instance, carbon tax at 300 Yuan per ton of CO2 could diminish 17.45% of carbon emissions with only a 1.1% decrease in GNP.

Nevertheless, some other studies results indicate a minimal effect of carbon tax on CO2 mitigation. Bolin’s (1998) research has shown that in Sweden the effects of carbon tax on CO2 emissions vary in different sectors. In particular, the impact on the transport sector was significant, whereas in the industrial sector, carbon tax did not reduce natural gas and oil consumption owing to the much lower carbon tax rate. Overall, the carbon tax policy in Sweden has reduced carbon CO2 emissions by about 0.5 to 1.5 million tonnes.

Lin and Li (2011) comprehensively surveyed the mitigation effects of carbon tax in five countries, Denmark, Finland, Sweden, Netherlands, and Norway by using the method of difference-in-difference (DID). Their results showed that in Finland carbon tax imposed a significant and negative impact on CO2 emissions. In the meantime, the effects of carbon tax in Denmark, Sweden and Netherlands are negative but not significant. They concluded that in these countries the mitigation effects of carbon tax are weakened as a result of the tax exemption policies on some energy-intensive industries.

In fact, most of existing studies on carbon tax have carried out the simulation in different scenarios and set uniform tax rates for all sectors; only limited studies have used empirical analysis on the effects of carbon tax. Hence, the true impact of carbon taxation on CO2 emission reductions is still controversial. More study is needed, especially a comprehensively study in all countries that have enacted the carbon tax policy.



Aasness, J., Bye, T., Mysen, H.T., 1996. Welfare effects of emission taxes in Norway. Energy Economics 18, 335–346.

Baranzini, A., Goldemberg, J., Speck, S., 2000. A future for carbon taxes. Ecological Economics 32, 395–412. Barker, T., Baylis, S., Madsen, P., 1993. A UK carbon/energy tax: The macroeconomics effects. Energy Policy 21, 296–308.

Bohlin, F., 1998. The Swedish carbon dioxide tax: Effects on biofuel use and carbon dioxide emissions. Biomass and Bioenergy 15, 283–291.

Ekins, P., Speck, S., 1999. Competitiveness and exemptions from environmental taxes in Europe. Environmental and Resource Economics 13, 369–396.

European Environment Agency, 1996. Environmental taxes, implementation and environmental effectiveness. European Environment Agency, Copenhagen. EEA, Annual European Union greenhouse gas inventory 1990–2008 and inventory report 2010.

Floros, N., Vlachou, A., 2005. Energy demand and energy-related CO2 emissions in Greek manufacturing: Assessing the impact of a carbon tax. Energy Economics 27, 387–413.

Goto, N., 1995. Macroeconomic and sectoral impacts of carbon taxation. Energy Economics 17 (4), 277–292.

Lin, B., and X. Li (2011): “The Effect of Carbon Tax on Per Capita Co 2 Emissions,” Energy Policy, 39, 5137-5146.

Lu, C., Tong, Q., Liu, X.M., 2010. The impacts of carbon tax and complementary policies on Chinese economy. Energy Policy 38, 7278–7285.

Manne, A.S., Richels, R.G., 1990. CO2 Emission limits: An economic cost analysis for the USA. The Energy Journal.

Nakata, T., Lamont, A., 2001. Analysis of the impacts of carbon taxes on energy systems in Japan [J]. Energy Policy 29 (2), 159–166.

Symons, E., Proops, J., Gay, P., 1994. Carbon taxes, consumer demand and carbon dioxide emissions: A simulation analysis for the UK. Fiscal Studies 15 (2), 19–43.

Wissema, W., Dellink, R., 2007. AGE analysis of the impact of a carbon energy tax on the Irish economy. Ecological economics 61, 671–683.

World Bank, 2018, State and Trends of Carbon Pricing 2018, Washington DC, May 2018 World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA.


Tax Avoidance: Ethics, Examples and Effects

The Ethics of Tax Avoidance
Tax avoidance is a legal way to reduce taxes. However, many people think it is an unethical activity, because tax avoidance is usually used by large companies and wealthy people to minimize their tax liabilities. Corporations have many ways to avoid taxes, and the most common way they used is accounting operation. Many large corporations can avoid tens of millions of dollars taxes by hiring experienced accountants or accounting firms. The purpose of the paper is to demonstrate some accounting operations for avoiding taxes and introduce the ethical dilemma that accountants or accounting firms face when they help companies avoid taxes.

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Have your ever tried to avoid your taxes? Being difference with tax evasion, tax avoidance is a lawful method used by individuals and organizations to reduce tax liability. However, tax avoidance is regarded as unethical behavior, because it takes advantages of loopholes in the laws. Very early on, tax avoidance has been developed to a global problem. Many multinational corporations seek a tax avoidance by hiring experienced accounting firms such as “big four”, PwC, Ernst & Young, KPMG and Deloitte. And the “big four” also offer tax avoidance schemes to help their clients avoid taxes. In UK, the “big four” provided the government with their advanced accountants to draw up tax laws, and on the other hand, they advised their clients on how to exploit of loopholes of tax laws. (Syal, 2013) The spokesman of HMRC, a non-ministerial department of UK responsible for collection of tax, said, “Tax avoidance is bending the rules of the tax system to gain tax advantage that Parliament never intended.” In United States, more than $90 billion tax was avoided in 2008. (Drange, 2013) On the other hand, the US federal government announced a deficit of $454.8 billion in 2008. In China, the government lost more than $30 billion tax revenue each year due to tax avoidance. And, because tax avoidance is lawful, it is very difficult to punish these companies and accounting firms through justice. But, despite the legality of tax avoidance, the individuals and entities who avoided tax would be questioned from ethics. The primary purpose of the paper is to analyze the ethical dilemmas of tax avoidance and to provide several suggestions for resolving the tax problem. The rest of the paper includes four parts. In the first part, I will introduce the accounting operations that commonly used to avoid taxes. I will present three tax avoidance schemes used by multinational corporations. In the second part, the ethical dilemma faced by the accounting firms and companies will be analyzed. I will introduce Utilitarian Approach and Deontological Approach and applied these approaches to tax avoidance. Then, I will briefly discuss about the effects of tax avoidance. Finally, I will give some suggestions to government for resolving the tax avoidance problem. To get evidence of tax avoidance and produce solutions, I reviewed above 10 academical papers and news reports including Chinese and English. I also reviewed several famous legal rulings of tax avoidance. Based on evidences I gathered, I expect that the tax laws will be modified and improved in the future and most governments around the world will work together to against tax avoidance.
Accounting Operations for Tax Avoidance (Tax Avoidance Schemes)
Large corporations, especially the multinational corporations have many methods to avoid taxes. They usually get some “tax advices” from their audit firms. The “big four” can make £25 billion every year by selling their tax avoidance schemes. (Sikka, 2015) In this part, I will introduce three tax avoidance schemes which commonly used by corporations.
WorldCom Inc.
WordCom was one of the largest telecommunication corporations in United States. However, on July 21, 2002, WordCom declared bankruptcy and was acquired by Verizon Communication on February14, 2005. From 1998 to 2001, WordCom avoided $350 millions of dollars in state taxes through its tax avoidance schemes which was designed by KPMG (Petersen, 2004). According to the tax avoidance schemes, which was internally referred as a “tax minimization program”, WorldCom classified the “foresight of top management” as an intangible asset, which can be licensed to the subsidiaries of WordCom. Because all subsidiaries needed the “foresight of top management”, for getting the license, they paid $20 billion in royalty fee to WordCom for the period 1998-2001. The subsidiaries then got tax relief for hundreds of millions of dollars by counting the royalty as business expenses deductible on state taxes. (Gross, 2004). Furthermore, to minimize its taxes, WordCom channeled the royalty income into operations in states, such as Mississippi, that do not tax royalty income was registered in a favorable tax jurisdiction, so even if the income of WorlCom increased a lot due to royalty received from its subsidiaries, it paid very little taxes on its income (Petersen, 2004). This tax avoidance scheme is still used by many companies today. Especially for the companies with subsidiaries in many different jurisdictions, it helps the companies transfer the tax obligation to lower-taxed jurisdictions. 

General Electric
General Electric
(GE) is the national largest corporation, which ranked as the 14th most
profitable company in 2011. GE had a consolidated net income for $15 billion in
2014; for $13 billion in 2013; for $13 billion in 2012 and for $14 billion in
2011. (SEC 10K, 2014) However, it is astonishing that GE paid no federal income
taxes from 2008 to 2013. “In fact, GE got tax refund of $3.2 million in 2010.” (Courant,
2015) GE avoided its taxes by sending its profits to the offshore subsidiaries
which located in tax havens. In 2013, GE owned 18 subsidiaries in tax havens
and maintained $110 billion offshore. (Smith, 2014) In its 2013 10-K, GE said,
“At December 31, 2012 and 2011, approximately $108 billion and $102 billion of
earnings, respectively, have been indefinitely reinvested outside the United
States.” Shifting the profits to subsidiaries in tax havens is the most common
method for multinational companies to avoid taxes. Because U.S. tax law
stipulates that corporations do not have to pay its income tax on its overseas
profits until they are brought into the United States (Drawbaugh, 2014), many multinational
corporation including Microsoft, Apple and GE hold their earnings offshore for
many years to avoid American taxes. The most commonly used technique for
transferring profit is “Double Irish With A Dutch Sandwich”, which was first
used in 1980s by Apple Inc. A private research firm reported that in 2013, the
foreign profits that held overseas by American corporation to avoid taxes was
up to $2.1 trillion. (Drawbaugh, 2014) And, by transferring the profits to
subsidiaries which registered in tax havens, the US multination corporations
can avoid about $90 billion in federal taxes each year. (Phillips, 2014)
Facebook is the
biggest social networking service company in the world, which was founded in
2004 by Mark Zuckerberg. Facebook also is one of the most profitable companies
in the world. In 2016, the profits of Facebook were $10.28 billion. However,
similar to General Electric, Facebook also paid very small federal taxes. Between
2010 and 2015, “Facebook only paid 16.5% in U.S. taxes and official corporate
tax rate in U.S. is 35%.” (ITEP, 2017) On the one hand, Facebook, like most
multinational companies, transferred its profit to overseas subsidiaries. On
the other hand, Facebook also avoided its tax by “stock option loophole”. Stock
option was granted by companies to employees and executives as compensation. The
employees and executives who receive stock option can exercise the stock option
before expiration date (Wikipedia, 2017). Facebook reported that its aggregate
intrinsic value of the option exercised in the years ended December 31, 2015, 2014
and 2013 was $403 million, $624 million, and $4.58 billion, respectively. (SEC
10-K, 2015) And, when those options were exercised, Facebook was allowed to
deduct from its taxable income the difference between the stock’s fair value
and the dollars amount paid by employees for the stock (Bickley, 2012). Taking
advantage of the loophole, Facebook saved $5.8 billion in taxes between 2010
and 2015. (ITEP, 2017) Some corporations including Facebook disclosed the
deduction of tax in “excess stock-option tax benefits”. Some company did not
disclose it. The tax benefit can be very high. For example, Godman Sachs
reported $1.6 billion of tax benefits between 2008 and 2012. And there is a few
corporation recorded only tiny amounts. (Mclntyre, 2014) 
The Ethical Dilemma
Human being needs
to make many decisions every day. And, once the decision is about ethics and
neither of two choices is unambiguously accepted or preferable, the ethical
dilemma comes up. When people face the ethical dilemma, they need ethical
standards to support their minds about what is right and what is wrong. After a
long period of development, the ethical discipline has exhibited four
fundamental ethical standards or approaches: Utilitarian Approach,
Deontological Approach, Virtue Ethics and Communitarian Ethics.  In this paper, I will primarily introduce two
of them, Utilitarian Approach and Deontological Approach.
For the
accountants and management, they also faced the ethical dilemma when they are
making decisions about whether they should avoid taxes. If they decide to avoid
taxes, they can reduce the tax liabilities and get more money, but the public
interest will be damaged and they may be blamed by the government and citizens.
Especially for the CPAs, they may be revoked the license because of tax
avoidance. However, if they decide not to avoid, the companies then need to pay
more taxes. Next, I will analyze the ethical dilemma by Utilitarian Approach
and Deontological Approach.
Utilitarian Approach
Utilitarian approach
(Utilitarianism) was developed by Jeremy Bentham in 1780. Utilitarianism is a
kind of Consequentialism, which means the consequence of one’s conduct provides
an ultimate basis for any judgement about the rightness or wrongness of the
conduct. (Bentham, 1780) The Utilitarian motto is “The greatest good for the
greatest number”. Note that Utilitarian approach takes into account all
affected individuals and communities. In this paper, both taxpayers and society
are affected by tax avoidance. Under the Utilitarian approach, we evaluate only
the results of tax avoidance for both taxpayers and society. If tax avoidance
can create more utility for both taxpayers and society, then tax avoidance is
ethical under the Utilitarianism. Vice versa.
For taxpayers, it
is easy to judge that avoiding taxes is a favorable and profitable action.
Taking advantage of the tax avoidance schemes can help these taxpayers reduce
liabilities, thus increasing the taxpayers’ utility. For society, it is obvious
that tax avoidance reduces the revenue of government, and then the government
does not have enough money to provide better lives to the citizens. In a word,
the reduction in government revenue because of the use of tax avoidance schemes
resulted in a reduction in societal utility. (Cottrol, 2014) The question at
this point is to compare the increase of taxpayers’ utility and the deduction
of societal utility, which is determined by quality of the government
administration. If the government can perform its duty well and use the tax
revenue effectively and efficiently, then tax avoidance is unethical under the
Utilitarianism because the overall utility is lower. However, if the quality of
the government administration is bad, for example, many governmental officials
are corrupt and appropriate the tax revenue for their own private use, the
deduction in societal utility will be little, thus the tax avoidance is ethical
under the Utilitarianism.
Deontological Approach
Approach, also called Duty-based Ethics, was proposed by Immanuel Kant. Kant
was very dissatisfied with the Utilitarianism. He believed that “people cannot
predict the future consequence with any substantial degree of certainty and the
motives of behaviors is more important than the consequence”. According to
Deontological Approach, people are ethical when the behavior is well-motivated.
And, when a person acts out of respect for the moral law, he has a good will.
(Kant, 1785) Kant’s definition of moral law includes three formulations:
“Act only according to that maxim by which you can also will that it would become a universal law.
in such a way that you always treat humanity, whether in your own person or in
the person of any other, never simply as a means, but always at the same time
as an end.
rational being must so act as if he were through his maxim always a legislating
member in a universal kingdom of ends.”
 In this paper, we only talk about the first formulation,
which is more related to tax avoidance. To analyze it, we should first define
the maxim and then decide that weather it can become a universal law. The maxim
that used by these tax dodgers should be defined as: “taxpayers always try to
avoid their taxes to reduce tax liabilities” (Cottrol, 2014). And, can this
maxim become a universal law? The answer is no. The tax dodger does not desire
all other taxpayers use tax avoidance scheme to reduce tax liabilities.
(Cottrol, 2014) If all tax payers avoid their taxes, then the government would
lose major revenues, which may even lead to government shutdown. To prevent it,
the government would raise tax rate, create new taxes and punish tax dodgers
very harshly. Therefore, even if the taxpayers reduced their tax liabilities,
they still did not get any benefits because they have to pay new taxes and get
punishment from government. So, it looks impossible that all taxpayers would
avoid their taxes and the maxim would become a universal law. Therefore, tax
avoidance is unethical under the Deontological Approach. 
The Effects of Tax Avoidance
Shareholders’ Value
Tax avoidance is
able to help companies reduce tax liabilities and increase after-tax earnings.
Therefore, tax avoidance strategy transfers the wealth from government to
shareholders (Kim, 2012). According to Semaan’s study about tax reformation of
South Korea, firms with high levels of tax avoidance experience a statistically
lower drop in shareholder value. Semman interpreted that investors believe
corporate tax avoidance, on average increase value. (Semaan, 2017) However,
another study did by Santa in 2014 indicated that tax avoidance activities do
not always increase shareholder value. The effects of the activities should
also consider the corporate governance.
Managerial reputation
In most cases,
companies can increase the firm value by avoiding taxes. But in fact, many
companies do not take advantage of tax avoidance schemes used by others (Kim,
2012). The major reason is that tax avoidance also affects managerial
reputation. The tax strategy of company cannot only use to reduce the company’s
tax liability, but it should also consider about the company’s long-term value.
When a company is avoiding taxes, it is actually avoiding its social
responsibility. The companies who avoided taxes are vulnerable to accusation of
greed and selfishness, thus damaging the reputation (Philippa, 2013). For
example, the reputation of Amazon and Starbucks was damaged very seriously
because of both companies paid low levels corporate taxes in recent years.
According to a new survey, Amazon’s reputation score falls from 80 out of 100
to 74 and Starbuck’s reputation score fall from 61 out of 100 to 56 (Chapman,
Perfect Tax Laws
The weaknesses of
tax laws are the major reason for tax avoidance. Because the tax laws have some
deficiencies, the taxpayers can take advantages of the loopholes to avoid
taxes. Therefore, an effective tax laws can be the most powerful weapon in
fighting tax avoidance and the root to reduce tax avoidance transactions
(Zhang, 2017)
Lower Tax Rate
Tax rate is most key
factor that can influence tax avoidance, because most multinational
corporations avoid taxes by transferring their profits to the jurisdictions
which has a very low tax rate, such as Caribbean, the most famous tax heaven.
Reducing the tax rate is an effective method for government to collection taxes
On November 2rd,
2017, the U.S. government released The
Tax Cut and Job Act (“Act”), which reduced the tax rate significantly for
both individual and corporate. Under the Act, the corporate was lower from 35%
to 20% and it is much easier and less costly for multinational corporation to
bring foreign earning back United States. The Act is win-win for both
government and corporations. The government can collect more tax revenues
because more corporations will repatriate their foreign profit to the United
States. And, such repatriation can also create jobs and increase paycheck for
U.S. citizens. On the other hand, the corporation can pay less income taxes.
Escalate Anti-Avoidance Rule
When tax avoidance
become more and more popular, the government should establish anti-avoidance
rules to counter such abused behavior. Currently, many countries include United
States, China, New Zealand and others have established General Anti-Avoidance
Rules (GAAR) which are targeted at the arrangement or transactions made
specifically to avoid taxes (Wikipedia, 2017).  
US GAAR had five principle
rules includes ‘substance over frim’ doctrine, ‘business purpose’ doctrine,
‘step transaction doctrine’, ‘sham transaction’ doctrine and ‘economic
substance’ doctrine. Besides these doctrines, U.S. Tax Code also allows the
Internal Revenue Service (IRS) deal with many specific situations associated
with tax avoidance. (Cottrol, 2014) Here, I will introduce the most important
two doctrines.
substance-over-form doctrine arose from the Supreme Court case Gregory v.
Helvering. In this court, judge announced that, “as general rule, the incident
of taxation depends on the substance rather than from form of transaction.”
(Klasing, 2014) This doctrine helps the government recognize the situation
where taxpayers mischaracterized a transaction to avoid taxes on purpose.  For example, some corporations may
mischaracterize its equity as debt. By alleging an “interest expense”, the
corporation can decrease its tax liability. The substance-over-form doctrine
helps court re-characterize the debt as equity, preventing tax avoidance
(Klasing, 2014).
Second, business
purpose doctrine, which also developed from the Supreme Court decision in
Gregory v. Helvering, said that taxpayers must prove that the transaction has a
business reason or commercial sense other than only to avoid taxes. (Cottrol,
2014) For example, WordCom classified the “foresight of top management” as its
intangible asset and licensed it to the subsidiaries. The transaction between
the WordCom and its subsidiaries was just for avoiding taxes instead for
improving profits. Therefore, this transaction violated the business purpose
The European
Commission (EU) published the Anti-Tax-Avoidance Package (ATA Package) on Jan
28, 2016. The ATA Package is used to prevent tax avoidance schemes used by
Multinational Corporations and increase tax transparency. The ATA Package
includes many rules such as GAAR, switch-over clause and otehrs. And one of the
most important rule is Controlled Foreign Company (CFC) rule, which prevent
multinational companies from transferring their most profits to low-tax
jurisdictions for tax avoidance. Under CFC rule, the undistributed earnings of
foreign companies need to be transferred to the parent companies. Currently,
many multinational corporations avoid many taxes by indefinitely reinvesting
its foreign earnings. For example, Apple hold $252.3 billion “cash” outside of
United States and announced that most of these “cash” was planned to be
indefinitely reinvested. The CFC rules from ATA Package can help to prevent
such activities.
3. Chinese GAAR
The oldest Chinese
GAAR was released by State Administration of Taxation (SAT) in 2008. So far,
the Chinese GAAR has been escalated several times and became more complete. For
example, in 2014, SAT issued Administration Regulations for the General
Anti-Avoidance Rule, which provides a more comprehensive and transparent legal
environment for GAAR implementation in China (Bloomberg, 2017). And, in 2017,
Wang Jun, the Commissioner of the SAT signed the BEPS Action 15 Multilateral
Instrument on Tax Treaty Measures to Tackle BEPS ((Bloomberg, 2017). The
Chinese GAAR helped the Chinese government collect lots of tax revenues. During
2012, the total tax collection contributed from GAAR amounted to approximately
$5.6 billion, representing about 74 times the 2005 amount (International Tax
Review, 2013)
Although most
countries around the world established GAAR and the GAAR has been developed for
long time. There are still some deficiencies in the GAAR. For example, there
are very less penalties for using tax avoidance schemes, which there is little
or no disincentive to tax avoiders (TUC, 2013)
Taxation is the
primary source of government revenue. In 2015, more than 95% U.S. federal
revenues came from tax revenues. On the other hand, individuals and
corporations in general are not willing to pay more taxes. However, refusing
pay taxes or paying less taxes is illegal, so many individuals and corporations
try to take advantages of tax avoidance schemes which are lawful. This paper
introduces some tax avoidance schemes include WordCom, General Electric and
Facebook. In addition, the paper also does ethic analysis for tax avoidance.
Under Utilitarian Approach, the quality of government administration is the
primary factor to decide whether tax avoidance is ethical or not. And, under
Deontological Approach, the tax avoidance is unethical because it cannot become
a universal behavior. Furthermore, this paper briefly analyzes the effects of
tax avoidance. The shareholder value of the companies which can avoid much
taxes, in general, increase in short term. But, the reputation of corporation
and management will be damaged by avoiding taxes. Finally, this paper also
gives three suggestions for decreasing tax avoidance. To prevent tax avoidance,
many countries published GAAR. However, escalating the GAAR is needed because
there are still many deficiencies. Besides the GAAR, the government also should
perfect the tax laws and reduce tax rate, which can help to prevent
multinational countries from tax avoidance. 
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S., & Wintour, P. (2013, April 26). ‘Big four’ accountants ‘use knowledge
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January 26). Bankruptcy examiner: WorldCom avoided state taxes.
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June 02). GE’s Record Of Tax Avoidance. Retrieved
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(2012). Employee Stock Options: Tax Treatment and Tax Issues. CRS Report for
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The Deficiencies in the General Anti- Abuse Rule. TUC

Comparison of Tax Implications of Selling Shares vs Assets

Executive Summary
Option 1 – Selling the Shares
Option 2 – Selling the Assets
Option 1 – Selling the Shares
GST Implications
Income Tax Implications
Option 2 – Selling the Assets
GST Implications
Income Tax Implications
Table – Summary of GST and Income Tax Implications

This report has been prepared for Fiona Chan, the sole shareholder of Fiona’s Foods Limited, and is designed to inform Fiona of the tax implications (GST and Income Tax) relating to selling the shares versus selling the assets in Fiona’s Foods Limited.
Fiona is GST registered and a New Zealand tax resident.
The following information will focus on the two options available to Fiona regarding selling her business. It will cover both the income tax implications and GST implications of selling the shares in Fiona’s business or selling the assets. The differences will be presented in a table in the conclusion.
The recommendation will be based on research compiled, which included reading publications, articles, cases and tax legislation. The tax and GST implications of each option will then be investigated and presented.
This report is limited to income tax and GST implications only. No consideration for non-tax issues, imputations credits or dividends, or sale price is provided for.
Selling shares is usually the preferable choice for Vendors. When a business is sold by selling the shares, the proceeds of the sale are paid directly to the shareholder(s) of the company. The buyer then takes over control of the company including all responsibility for any risks the company may have now or in the future. (Finnigan, n.d.)
Generally, the proceeds of a sale of shares are tax exempt which will minimise tax issues for the vendor. (Finnigan, n.d.)
Most purchasers will prefer to purchase assets of a company, rather than shares. By selling the assets of the company it leaves the vendor with a company that can be used in the future, held for tax purposes, or liquidated.
Selling the company’s assets involves selling some or all of its assets. This can include fixed assets such as land and buildings, plant and equipment and stock. It can also include intangible assets such as goodwill, intellectual property, etc. (Finnigan, n.d.)
Depending on what the objectives of each party are will determine what is involved with the asset sale. For example, a purchaser may only want to purchase the retail side of the business or specific assets such are specialised machinery. In this case, if the part sold cannot be operated as an independent separate business then GST will be charged with the part sale. (Finnigan, n.d.)
Based on the research completed and the information provided above I have come to the following conclusions.
Selling the shares in Fiona’s company would not incur and GST as the sale would not be considered a taxable activity due to it not being the activity that the company does on a regular basis. It would also not be liable for GST as Fiona’s shares are of an equity nature and therefore considered a financial service.
Selling the shares in Fiona’s company would also not incur income tax. This is because the shares are of a capital nature and any amount derived from the sale of the shares would therefore not be liable for income tax. As New Zealand does not tax capital gains derived from the sale of investments, this also confirms that there would not be any income tax incurred.
As the assets and liabilities can be used outside of Fiona’s company for a taxable activity, they would be considered a going concern. A going concern is considered zero-rated for GST purposes.
The sale of the assets and liabilities would incur income tax. The amount paid of the inventory would be considered income and liable for income tax. Also, any amount over and above the adjusted tax value at the date of the sale for the assets would be considered depreciation recovery income. That amount over the book value would incur income tax.
My recommendation for Fiona is to sell the shares in her business. Doing so means she will not be liable for GST or income tax on the sale allowing Fiona to maximise the amount she receives.
As Fiona no longer wants to keep the business, selling the shares would also allow for a clean break from the business as opposed to selling the assets, where Fiona would still have the shares in a Company which no longer had any assets or taxable activity.

This report has been prepared for Fiona Chan, the sole shareholder of Fiona’s Foods Limited, and is designed to inform Fiona of the tax implications (GST and Income Tax) relating to selling the shares versus selling the assets in Fiona’s Foods Limited.
Fiona is GST registered and a New Zealand tax resident.
The following information will focus on the two options available to Fiona with regard to selling her business. It will cover both the income tax implications and GST implications of selling the shares in Fiona’s business or selling the assets. The differences will be presented in a table in the conclusion.
The recommendation will be based on research compiled, which included reading publications, articles, cases and tax legislation. The tax and GST implications of each option will then be investigated and presented.
This report is limited to income tax and GST implications only. No consideration for non-tax issues, imputations credits or dividends, or sale price is provided for.

Option 1 – Selling the Shares
Selling shares is usually the preferable choice for Vendors. When a business is sold by selling the shares, the proceeds of the sale are paid directly to the shareholder(s) of the company. The buyer then takes over control of the company including all responsibility for any risks the company may have now or in the future. (Finnigan, n.d.)
Intangible assets are more likely to be transferred via a sale of company shares when they form a substantial portion of the asset value of the company. (Finnigan, n.d.)
Generally, the proceeds of a sale of shares are tax exempt which will minimise tax issues for the vendor. (Finnigan, n.d.)
When a company is sold by way of share sales the business the company does, is not affected. Employee relationships are not affected, the business continues as normal, and the ownership of the business remains with the company. Once the sale of shares has been completed the purchaser(s) will become the shareholder(s) of the company. (Finnigan, n.d.)
Section 8 of the Goods and Services Tax Act 1985 states that GST is to be applied to any goods or services that are supplied in New Zealand by a GST registered person in the course of their taxable activity. (Goods and Services Act, No 141, 1985)
Section 6 of the Goods and Services Tax Act 1985 states that a taxable activity is any activity that is carried out on a regular basis by any person, whether or not for economic profit. (Goods and Services Act, No 141, 1985)
As Fiona’s Company is in the business of importing Asian foods for distribution in New Zealand, this would be considered the Company’s taxable activity. As such the sale of shares falls outside the parameters of what would be considered the Company’s normal taxable activity, given the fact it is not an activity that it is carried out on a regular basis, and therefore, zero-rated for GST purposes.
Section 14 of the Goods and Services Tax Act 1985 states that the supply of financial service is exempt from tax. (Goods and Services Act, No 141, 1985)
According to Section 3 (1) (d), and for the purposes of the GST Act, the term financial service means the transfer or issue of ownership of an equity security or participatory security. (Goods and Services Act, No 141, 1985)
The shares Fiona owns in her company are considered equity and based on the abovementioned sections, Section 14 and Section 3, therefore selling the shares in the company would be exempt from GST as Fiona would be transferring the ownership of the equity in the company.
Under Section CB 3 of the Income Tax Act 2007, any profit that arises from carrying on or carrying out an undertaking or scheme is deemed to be income. (Income Tax Act, No 97, 2007)
Section CB 4 states that any amount obtained from disposing of personal property that was acquired with the intention of disposing of it is deemed to be income. (Income Tax Act, No 97, 2007)
According to Section CB 1 (1) any amount derived from a business is deemed income. However, Section CB 1 (2) states that if the income is of a capital nature then subsection 1 does not apply, and it is, therefore, exempt income. (Income Tax Act, No 97, 2007)
As Fiona’s shares in her Company are not of a personal nature Sections CB 3 and CB 4 do not apply. Also, due to the shares being of a capital nature, Section CB 1 (1) also does not apply.
There is the potential for capital gains tax, however in New Zealand, according to the Income Tax Act, Section CX 55 (2) (a), which states that the income derived from the disposal of shares in a company is exempt income, provided that the company fits into subsection 3, which according to subsection 3 the company needs to be a New Zealand tax resident. (Income Tax Act, No 97, 2007)
As Fiona’s company is a New Zealand resident for tax purposes any amount derived from the sale of Fiona’s shares in the business would not be liable for capital gains tax.
Option 2 – Selling the Assets
Most purchasers will prefer to purchase assets of a company, rather than shares. By selling the assets of the company it leaves the vendor with a company that can be used in the future, held for tax purposes, or liquidated. If the company is solvent and liquidated, then this allows for the company profits to be distributed tax exempt. If the company is insolvent and liquidated, then this allows an independent party to come in and ensure that any creditors are paid in the correct priority and order. (Finnigan, n.d.)
Selling the company’s assets involves selling some or all of its assets. This can include fixed assets such as land and buildings, plant and equipment and stock. It can also include intangible assets such as goodwill, intellectual property, etc. (Finnigan, n.d.)
Depending on what the objectives of each party are will determine what is involved with the asset sale. For example, a purchaser may only want to purchase the retail side of the business or specific assets such are specialised machinery. In this case, if the part sold cannot be operated as an independent separate business then GST will be charged with the part sale. (Finnigan, n.d.)

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When a company sells assets the proceeds of the sales are paid directly to the company. Once creditors have been paid the shareholder(s) are able to remove the balance of the proceeds. If the company has insufficient funds the shareholder(s) will be left with a company that needs to be liquidated in order to settle any disputes or liabilities the company may have. If the company is able to clear all debts, then the capital gain is extracted by the shareholder(s) and is tax-free.
According to Section 11 (1) (m) of the Goods and Services Tax Act, the supply of goods that would normally be taxable must be zero-rated when those goods are supplied to a registered person of a taxable activity or part thereof, and the supplier and recipient both agree in writing that the supply is a going concern and is capable of continuing to be a going concern. (Goods and Services Act, No 141, 1985)
To be considered a going concern, there must be a supply of a taxable activity or part thereof which is capable of operating separately from the business. Also, everything required for the continual operation or part thereof, of the taxable activity needs to be supplied to the purchaser. Lastly, the supplier needs to be carrying on the taxable activity continuously until the time it is transferred to the purchaser. (Coleman, et al., 2019)
As the assets and liabilities of Fiona’s Company are required for the company to continue its taxable activity, selling the assets and liabilities would be considered as selling a going concern and as long at it is agreed in writing with the purchaser. The assets and liabilities would, therefore, be exempt from GST.
Section CB 2 of the Income Tax Act 2007 states that when a person owns or carries on a business and sells some or all of the assets pertaining to that business, and the sale is made to put an end to the business, plus the sale includes inventory, then the amount derived from the sale of the inventory is considered income and would, therefore, incur tax. (Income Tax Act, No 97, 2007)
The assets in Fiona’s company contains inventory and therefore the sale price of the inventory would incur income tax.
Section EB 24 of the Income Tax Act states that the sale price of the assets needs to be apportioned at the fair market value between the fixed assets and the inventory. The amount apportioned to the inventory is deemed the price paid for it by the purchaser. (Income Tax Act, No 97, 2007)
Also, in the Income Tax Act, Section EE 48 states that any amount derived from the sale of the assets which is over and above the adjusted tax value of the asset on the date of the sale is deemed to be depreciation recovery income. (Income Tax Act, No 97, 2007) This income is liable for income tax.

Option 1 – Selling the Shares
Based on the research completed and the information provided above I have come to the following conclusions.
GST Implications
Selling the shares in Fiona’s company would not incur and GST as the sale would not be considered a taxable activity due to it not being the activity that the company does on a regular basis. It would also not be liable for GST as Fiona’s shares are of an equity nature and therefore considered a financial service.
Income Tax Implications
Selling the shares in Fiona’s company would also not incur income tax. This is because the shares are of a capital nature and any amount derived from the sale of the shares would therefore not be liable for income tax. As New Zealand does not tax capital gains derived from the sale of investments, this also confirms that there would not be any income tax incurred.
Option 2 – Selling the Assets
GST Implications
As the assets and liabilities can be used outside of Fiona’s company for a taxable activity, they would be considered a going concern. A going concern is considered zero-rated for GST purposes.
Income Tax Implications
The sale of the assets and liabilities would incur income tax. The amount paid of the inventory would be considered income and liable for income tax. Also, any amount over and above the adjusted tax value at the date of the sale for the assets would be considered depreciation recovery income. That amount over the book value would incur income tax.
Table – Summary of GST and Income Tax Implications


GST Implications

Income Tax Implications

Sale of Shares

None – Per Sections 3, 6, 8 and 14 of the GST Act

None – Per Sections CB1, CB3, CB4 & CX55 of the Income Tax Act


Sale of Assets

None – Per Section 11 of the GST Act

Liable for Income Tax – Per Sections CB2 and EE48

My recommendation for Fiona is to sell the shares in her business. Doing so means she will not be liable for GST or income tax on the sale allowing Fiona to maximise the amount she receives.
As Fiona no longer wants to keep the business, selling the shares would also allow for a clean break from the business as opposed to selling the assets, where Fiona would still have the shares in a Company which no longer had any assets or taxable activity.

Coleman, J., Davies, S., Elliffe, C., Gupta, R., Hodson, A., Maples, A., . . . Tan, L. M. (2019). New Zealand Taxation 2019 – Principles, Cases and Questions. Thomson Reuters New Zealand Ltd.
Finnigan, P. (n.d.). Business Sales – Advantages and Disadvantages of Asset Sales and Share Sales. Retrieved March 27, 2018, from McDonald Vague:
Goods and Services Act, No 141. (1985). Retrieved from
Income Tax Act, No 97. (2007). Retrieved from
Inland Revenue. (n.d.). Business Sale or Purchase – Common Tax Issues. Retrieved March 27, 2019, from Inland Revenue:
Inland Revenue. (n.d.). GST (Goods and Services Tax). Retrieved March 27, 2019, from Inland Revenue:
Sharp Tudhope Lawyers. (2018, November 13). Business Purchase – Shares of Assets? Retrieved from Sharp Tudhope Lawyers:
Strettell, N. (2017, June 29). Buying a Business – Assets or Shares? Retrieved from Saunders Robinson Brown:


Overview of the Caterpillar Tax Fraud Scandal

An accounting fraud is the manipulation of financial statements in order to benefit the business financially or to create a false appearance of financial health. In the situation of Caterpillar Inc. (CAT) – a manufacturer of heavy construction and mining equipment, diesel-electric locomotives, diesel and natural gas engines, and industrial gas turbines – the payment of federal income taxes on their earnings was avoided to boost the company’s financial status, saving the company billions of dollars and keeping its stock price high. CAT, having more than 500 locations worldwide – including the Americas, Asia Pacific, Europe, Africa, and the Middle East – is vast in size and in economic standpoint, with sales and revenues of $53.9 billion in the year 2019 (Caterpillar, 2020). However, a lawsuit against Caterpillar Inc. for inadequate tax disclosure had greatly impacted the company from the time period of 2013 to 2017.

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A great portion of Caterpillar Inc.’s investigation focused on a Switzerland-based parts subsidiary, known as Caterpillar SARL (CSARL). Over the span of 13 years, the company had cut its tax bills by approximately $2.4 billion through the taxation of their profits in Switzerland, where the tax rate had not reached nearly as great as the U.S. top corporate rate of 35% (Drucker, 2017). Although the vast majority of CAT’s sales occurred in the U.S., 85% of the company’s part sales were recorded to CSARL (Grayson, 2018). The company’s scheme had been revealed when an anonymous employee, later revealed as tax-department employee Daniel Schlicksup, threatened to tip off the International Revenue Service. He accused the company for using what he referred to as the “Swiss structure” and the “Bermuda structure” through the transportation of their profits to offshore shell companies to avoid the payment of U.S. taxes, which were incomparable to the effective tax rate as low as 4% in Switzerland and Bermuda (Grayson, 2018). From February 12, 2013 to March 1, 2017, the lawsuit sought class action status and was dismissed without prejudice, which gave Societe Generale the authority to bring it again if it was thought to be necessary (Reilly, 2018). On March 2, 2017, law enforcement officials, including the IRS, raided three of the company’s Illinois-based facilities, confiscating electronic records and documents. The day following these raids, the lawsuit against Caterpillar Inc. was filed on March 3, 2017 (Stempel, 2018).
As CAT was seen to have violated the Sarbanes-Oxley Act, which protected investors by reviewing legislative audit requirements and improving the accuracy and reliability of corporate disclosures, the lawsuit was put in order (Newswires, 2018). Due to this, stakeholders – including stockbrokers, creditors, and customers – feared a loss, affecting the stock price and the corporation overall negatively. Caterpillar Inc.’s stock market value sank over $2.4 billion after the company’s facilities and headquarters in Peoria, Illinois were raided by the Department of Commerce, Federal Deposit Insurance Corp and International Revenue Service a total of three times (Drucker, 2017). Following the report by Leslie A. Robinson, an accounting professor at the Tuck School of Business, on the New York Times’ report, CAT’s shares were down by another 3%, causing the dollar value of the scandal to be approximately $2.5 billion. As a result of the case, David Schlicksup, the global tax strategy manager, accountant and whistleblower of this case, is expected to receive about 30% of what the government is able to recover (Yu, 2017). As a result of IRS audits of its 2013 to 2017 tax returns, Caterpillar Inc. faces $2.3 billion worth of back taxes and penalties (Stempel, 2018).
CAT’s lawsuit is a reflection of the government’s capability of finding businesses that manipulate their financial operations to improve their financial status. As GAAP Principles and legislations enacted to protect stakeholders are often violated, operations such as the International Revenue Service, the Department of Commerce, and the Federal Deposit Insurance Corp. are very effective to detect and inspect these issues. Caterpillar Inc.’s manipulation is just another example of the significance of auditors and a reminder to other businesses of the necessity to be honest and cooperative with the GAAP Principles and accounting legislations.
Works Cited

Caterpillar. 2020, Accessed 1 Mar. 2020.
Drucker, Jesse. “Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud.” The New York Times, 7 May 2017, Accessed 27 Feb. 2020.
Grayson, Wayne. “Cat Slapped with $2.3B Penalty by IRS for Avoiding Taxes.” Equipment World, 15 Feb. 2018, Accessed 27 Feb. 2020.
Newswires, Dow Jones. “Caterpillar Clashes with IRS.” Fox Business, 2 Jan. 2018, Accessed 28 Feb. 2020.
Reilly, Peter, J. “Lawsuit against Caterpillar for Inadequate Tax Disclosure Dismissed.” Forbes, 4 Oct. 2018, Accessed 28 Feb. 2020.
Stempel, Jonathan. “Caterpillar Wins Dismissal in U.S. of Post-raid Lawsuit Tied to Tax Probes.” Reuters, 26 Sept. 2018, Accessed 1 Mar. 2020.
Yu, Roger. “Caterpillar Shares Fall after Tax, Accounting Fraud Report.” USA Today, 8 Mar. 2017, Accessed 1 Mar. 2020.