Chapter 11 Taxation and Social Accounting Contemporary issues

Chapter 11: Taxation and Social Accounting Contemporary issues in Social Accounting

Chapter Structure • Introduction to Taxation and Social Accounting • Taxation and Tax Systems • Taxation and Social Responsibility • Accountability and Transparency • Future Directions

Tax and Social Accounting Is tax “an essential element in the social contract between government and citizens” or an unpleasant intervention by government which should be minimised?

Taxpayers • Taxation is paid by – Organisations – Individuals • Tax is collected and utilised by the Government

Accountability and Transparency • Governments create and enforce tax systems • Taxpayers are accountable for the tax they pay • Taxation behaviours should be transparent

Taxation and Tax Systems • What is taxation? • Objectives of taxation • Tax systems • Taxation bases and categories • Taxation expenditures / incentives

What is Taxation? “A compulsory levy, imposed by government or other tax raising body, on income, expenditure, wealth or people, for which the taxpayer receives nothing specific in return” (Lymer and Oats, 2015)

Is taxation always compulsory? • Are there alternative perspectives? • Is there any voluntary element to taxation?

Objectives of Taxation 1. Reclaiming money the government has spent into the economy for re-use 2. Ratifying the value of money 3. Reorganising the economy 4. Redistributing income and wealth 5. Repricing goods and services considered to be incorrectly priced by the market such as tobacco, alcohol, carbon emissions etc 6. Raising representation (Murphy, 2016, p. 77)

Tax Systems • A tax system encompasses who and what is taxed, at what rate, how it is collected, and how compliance is assured • Taxes interact with each other • Taxes can distort consumer choices and behaviours (efficiency ‘losses’)

Taxation policies • Conflicting interests – Society needs – Public and private sector • Complexities versus simplicity – Impact on monies raised and compliance • Budgetary requirements • Compliance

Appropriate tax system • Four ‘canons of taxation’ – Proportional – Certain, not arbitrary – Convenient – Efficient

Principles and objectives • Achieving both objectives and good principles are important • Factors to consider – Properly targeted – Regularly reviewed – Competitive • System design • Purpose of taxation

ICAEW Tenets • Taxation systems require improvement • Systems should be: – – – – – Statutory Certain Simple Easy to collect and calculate Properly targeted Constant Subject to proper consultation Regularly reviewed Fair and reasonable Competitive

Taxation bases and categories • Taxation base – A base upon which tax is calculated or charged • Taxation base qualities – Clear and distinct – Measurable and unavoidable

OECD key sources of taxation • Income and profits • Compulsory social security contributions paid to general government • Payroll and workforce (none for UK) • Property • Goods and Services • Other

Taxation and Social Accountability • Taxation on profits • Payroll / Social Security taxes • Property taxes • Environmental taxes • Other taxes • Is there a link between visibility of taxes and behaviour?

Taxation on profits • Profits generated by businesses • Business structure and taxation rules • Classification of profits • Business expenses • Incentives and savings available to different organisation structures • Fair incentives

Payroll / Social Security taxes • Classification of employees • Employees versus contractors • Location of employees

Property taxes • Taxation on purchase of property • Taxation on disposal of property • Definitions of property • Land & Buildings taxations – Land & Buildings Transaction Tax (LBTT) – Stamp Duty

Environmental taxes • Carbon emissions • Landfill • Wastage • ‘Green’ incentives • Renewable and energy efficient incentives

Other Taxes • VAT (Value Added Tax) • Service / sales tax • Local taxation • Import / export duties • Insurance premium tax

Tax Expenditures / Incentives • What isn’t taxed • Structural incentives – excluding items from tax base, setting a zero or reduced rate of tax • Ad hoc incentives – waivers of tax on certain types of income, temporary increases in relief for expenditure • Tax expenditure – cost to the government of the tax foregone by the use of the incentives • Difficult to measure the costs and benefits

Tax behaviours • Tax compliance • Tax avoidance • Tax evasion

Tax Compliance • Compliant with requirements • Definition of requirements • ‘Reasonable’ tax planning – Legal reliefs

Tax Avoidance • Advanced tax planning • Utilisation of legal loop-holes or schemes • Moderate to aggressive utilisation of law • Potential significant tax savings • Socially acceptable? • ‘Letter of the law’ versus the ‘spirit of the law’

Tax Evasion • Aggressive tax planning extending beyond laws • Deliberate non-compliance • Manipulation of bases and liabilities • Fraud and corruption • Illegal activities

National Tax Differences • Similar for similar economies? • Differences for low income countries: – Tax revenues a lower % of GDP – Traditional reliance on international trade tariffs – Less sophisticated structures for collection / compliance

Tax in the Global Digital Economy • What to tax and where? • Whose tax rules apply? • Intangibles can be ‘located’ anywhere • Group structures increasingly complex • Inter-company transactions can be manipulated

Tax Havens • Jurisdictions with very low levels of tax and often high levels of secrecy • Little or no actual economic activity actually takes place in the jurisdiction • Significant profits may be ‘located’ in the jurisdiction

Taxation and Social Responsibility • What is the relationship between tax and social responsibility? • Tax and social responsibility in the private sector • Tax and social responsibility in the public sector • Tax and social responsibility beyond the private and the public sector

Responsible Taxation • Social contract between State, organisations and individuals • Legal versus ethical • The legal framework of taxation • Scope for ‘moral’ decisions within that framework • Does transparency encourage ethical behaviour?

Taxation and Sustainability • Taxation is used to fund society • Organisations choose other social responsibility activities and investment • Governments utilise taxation receipts – Organisations cannot control how taxation paid is utilised • Taxation is required to fund Government sustainability

Tax and social responsibility in the private sector • Who benefits from tax avoidance? • Who suffers because of tax avoidance? • Stakeholder perspectives – Who we consider to be stakeholders • Paying a fair share – What is fair?

Tax and social responsibility in the public sector • Governments are responsible for creating a tax system • Balancing different objectives across society • Tax as a ‘charge’ for public resources • Challenges of designing a fair system

Tax and the social responsibility of other organisations • Do social enterprises meet their social obligations through other means than tax? • Should the tax system be different for the not for profit sector? • Do these organisations have a different attitude to tax?

Cooperatives and Family Businesses • Often small and simple – Tax savings schemes are unavailable and/or unappealing • Family owned firms less aggressive in tax planning (Chen et al, 2010) • Cooperatives owned by members – Ethical objectives – Community beliefs • Cooperatives support and pioneer the ‘Fair Tax Mark’

Fair Tax Mark • Method to promote fairness and transparency surrounding taxation • Organisations may display the ‘Fair Tax Mark’ once they are an approved member • Applications are subject to evaluation against criteria surrounding tax policies, accounting and tax behaviours and responsibility

Summary and Future Directions • Taxation is a social contract between governments, organisations and individuals. • Legal tax planning is legally acceptable but socially unacceptable to many members of society. • Fairness in taxation is increasingly important to society • Ethical and moral behaviour is expected as part of compliance • Raising or reducing taxes in one sector may equally advantage and disadvantage.

Summary and Future Directions • Taxes must raise enough funds to avoid austerity, whilst also achieving competitive sustainable economic activity. • Tax systems should be clear, fair and effective. • Increased tax transparency is required locally and globally