Question

Case Study Report

The last 40 years in Australia has seen a blurring of the three categories (between tax planning, tax avoidance and tax evasion), in particular, the distinction between [what constitutes] tax avoidance and tax evasion” (Xynas, 2011). Alongside economic globalization, the recent decades have witnessed the rise of transfer pricing that facilitates the free movement of capital and tax avoidance (Hampton & Sikka, 2005; Sikka, 2017). In conventional accounting literature, transfer pricing is portrayed as a technique for optimal allocation of costs and revenues… Such representations… simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the light of capital” (Sikka & Willmot, 2010, p.342).

REQUIRED: (1) Discuss the overlaps and distinctions among tax planning, tax avoidance, and tax evasion, with particular reference (but not limited) to Xynas (2011). (500 words excluding bibliography).

(2) Explain and evaluate the concept of transfer pricing and how it relates to the above quotes. You should address the issues including (but not limited to) the social, political, financial and ethical implications on business and broader society (1500 words excluding bibliography). Students are required to reference at least ten (10) academic journal articles.

Suggested readings: Hampton, M.P. & Sikka, P. (2005), ‘Tax avoidance and global development’, Accounting Forum, vol.41, no.4, pp.245-248.

Sikka, P. & Willmott, H. (2010), ‘The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness’, Critical Perspectives on Accounting, vol.21, no.4, pp.342-356.

Sikka, P. (2017), ‘Accounting and taxation: Conjoined twins or separate siblings?’, Accounting Forum, vol.41, pp.390-405.

Answer 1

1) Distinction Between Tax Planning, Tax Evasion and Tax Avoidance

Basis of Difference	Tax Planning	Tax Avoidance	Tax Evasion
Nature	Tax Planning is allowed and legal	Tax Avoidance is also legal.	Tax Evasion is not allowed and is illegal.
Objective	The objective of Tax Planning is to save tax.	Its object is to dodge tax.	The illegal objective is the concealment of tax.
Consequences	There is no negative consequences of tax planning.	It leads to deferment of tax.	Tax Evasion is results in imposing penalty of fine or imprisonment.
Permissibility	Tax Planning is permissible.	Tax Avoidance is also permissible	Tax Evasion is not permissible.

2)Concept of Transfer Pricing

Transfer Pricing is the transaction entered into between related parties whic is paid for goods/services. There are several international transactions whic are governed by Transfer Pricing Rules:

• Sale of Finished Goods
• Purchase of raw materials
• Purchase of fixed assets
• Sale or purchase of fixed assets,
• Sale /purchase of intangible assets
• IT services,
• Support services etc.

There are several methods to evaluate transfer pricing :

1. Comparable Uncontrolled Price (CUP) Method
2. Resale Price Method
3. Cost Plus Method