Overview of Tax Avoidance: Triggers and Counterstrategies

SUBANG, DDTCNews - In concept, the practice of tax avoidance is legal as it does not violate tax provisions. However, the practice of tax avoidance may erode tax revenues.

Assistant Manager of DDTC Fiscal Research Awwaliatul Mukarromah states that tax avoidance is a tax avoidance scheme to minimise the tax burden by taking advantage of the loopholes of a country’s tax provisions.

“Although tax avoidance does not violate the provisions of the law, this practice, in essence, undermines the spirit of the law. For now, the government’s objective is to counter the aggressive tax avoidance scheme,” said Awwaliatul, on Tuesday (7/9/2021).

Three points, continued Awwaliatul, encourage tax avoidance opportunities. First, the jurisdiction to tax & tax treaty that lead to the practice of treaty shopping. Second, a separate accounting approach that treats companies from the same group as separate entities.

Third, the deductibility of interest that leads to the practice of hybrid financial instruments. Governments in various countries also provide incentives that encourage profit shifting. For example, there is competition to provide the lowest rates to attract investment and connections with tax havens.

Awwaliatul added that the practice of treaty shopping and hybrid financial instruments is a form of tax avoidance. According to her, the digital economy is increasingly encouraging the emergence of tax avoidance practices. She cited the issue of tax avoidance in the business models of Amazon, TaskRabbit and celebgrams.

Further, Awwaliatul outlined the latest policy developments to address various implications due to the rapid development of the digital economy. There are multilateral policies, such as Pillars 1 and 2 of the OECD, bilateral policies, such as Article 12B of the UN Model and unilateral policies, such as significant economic presence (SEP) and digital service tax (DST).

In addition, Awwaliatul outlined 2 types of provisions formulated to tackle the practice of tax avoidance. First, specific anti avoidance rules (SAAR), such as transfer pricing, thin capitalization, controlled foreign companies (CFCs). Second, general anti avoidance rules (GAAR).

In today’s webinar titled Tax Avoidance: Concept, Case and Research Opportunities, Awwaliatul also outlined the implications of tax avoidance practices, the OECD/G20 BEPS Project, alternative minimum tax (AMT), institutional framework and efforts to address tax avoidance in the Draft General Provisions and Tax Procedures Law.

“The Draft General Provisions and Tax Procedures Law already contains a proposal to apply GAAR and AMT. These two arsenals may serve as fairly effective instruments to address tax avoidance,” she claimed.

Kolej Universiti Islam Antarbangsa Selangor (KUIS) lecturer, Malaysia, Noor Suhaila said that the practice of tax avoidance emerges after the implementation of the self-assessment system (SAS) because the system allows taxpayers not to report themselves or conceal their income.

“Thus, substantial tax avoidance occurs throughout the SAS, tax avoidance is legal as long as not against the law,” Noor remarked.

Noor explained that the practice of tax avoidance also triggers the shadow economy phenomenon. According to her, the value of the shadow economy in Malaysia in January 2020 reached RM300 billion. In addition, Noor said tax avoidance practices are increasing in online businesses.

This is because online entrepreneurs may not register their businesses and it is difficult for tax authorities to track these transactions. Moreover, online businesses also allow foreigners to transact with residents without physical presence, thereby, they cannot be taxed.

Noor also agreed that the practice of tax avoidance erodes potential tax revenues. she pointed out that the potential tax revenues from individual business owners in Malaysia reached RM15,904 million. However, only RM5,000 million in taxes were successfully collected from this sector.

In the webinar held by the Sutaatmadja College of Economics (Sekolah Tinggi Ilmu Ekonomi Sutaatmadja, hereinafter referred to as STIESA), Noor said 3 factors trigger tax non-compliance. The three factors include non-compliance, opportunities to avoid or evade paying taxes and tax knowledge and awareness. (sap)