Introduction
According to Prosser & Murray (2010), “tax avoidance” is the legitimate use of the taxation system to decrease the amount of tax payable within a regulatory framework. Tax avoidance should be distinguished from tax mitigation, which is generally used by tax advisers as an unconventional derogatory to tax avoidance. This is a critical provision as it interferes with the economic growth of a country as well as international relations. Tax mitigation has also been used extensively in the tax regulations of certain dominions to differentiate tax avoidance (forecasted by the policymakers) from those that take advantage of the loopholes existing in the current regulatory framework (Bartelsman & Beetsma 2000). According to Mainland China’s Supreme Court, the legitimate right of a person to reduce the sum of what would otherwise be his/her taxes or completely avoids them cannot be questioned. Another term that is common in relation to taxes is tax evasion. Tax avoidance and evasion are means of tax noncompliance since they designate several activities that are not appropriate to a county’s taxation system (Bracewell-milnes, 1980). In this essay, some of the worldwide tax avoidance strategies are discussed in regard to the UK and Hong Kong. It is vital to establish whether this is a new phenomenon or a reaction to the policy document signed in June 2010 and a draft consultation framework of December 2010, which was suggested by a coalition government (Siriwardana & Schulze 2000).
The relationship between Hong Kong and Mainland China
For the past decades, Hong Kong has been a Special Administrative Region (SAR) of the people of the Republic of China. It is evident that the mini-constitution created by the Chinese government provides Hong Kong its sole legislation, economic independence, and credible/trusted judicial systems (Braithwaite, 2003).
. In this context, it is vital to note that Beijing has been bestowed with the responsibility to deal with the defense and foreign affairs of China. A critical relationship between Hong Kong and mainland China is the basic constitutional provisions regarding the establishment of the Hong Kong SAR vividly setting out the legal frameworks of the Chinese government on Hong Kong. This also regards how SAR should be administered in diverse contexts. The aspects of tax avoidance in Hong Kong and mainland China are evident in regard to double taxation laws signed by both jurisdictions. Majorly, Hong Kong is a trading center within the Chinese territory. It also serves as a service center within the region. The region has limited natural resources compared to mainland China. This demonstrates the relationship (both legal and economic) that exists between Hong Kong and Mainland China. Additionally, Hong Kong executes its independent international trade affairs; however, it has maintained its border controls, custom procedures, and international trade provisions with China.
Agreement to Avoid – “Double Tax”
Hong Kong had no double taxation provisions until 2001. This provision obviated the global double taxation treaties that existed before. Under the provisions of “territorial principle,” the country realized the significance of double taxation treaties and has since then signed various agreements in concurrence with this. The government has entered into various agreements to streamline its taxation provisions. Nonetheless, the Basic Law’s Article 151 has a provision that grants Hong Kong an opportunity to legalize double taxation treaties (Weber, 2005). However, the country is required to use “Hong Kong, China” for legal purposes and other international provisions. Additionally, Hong Kong is not allowed to utilize any double taxation treaties that the Chinese government might enter into since only the mainland taxes are stipulated in such treaties or trade agreements. According to the Basic Law, China is under no obligation to enforce any double taxation treaties on Hong Kong. This is clearly elucidated in articles 106-108 of the double taxation laws in order to avert any mishap that might arise on international relations and other legal provisions. The provisions of double taxation laws gave Hong Kong the audacity to manage an autonomous taxation system without any obstruction from mainland China (up to 2047). By 7/9/ 2012, all-inclusive double taxation avoidance (DTA) treaties had been signed amidst Hong Kong and the countries like Austria, Belgium, Brunei, Czech Republic, France, Hungary, Indonesia, Netherlands, New Zealand, Portugal, Spain, Thailand, and the UK among others. Hong Kong has equally finalized double taxation treaties on aviation as well as shipping incomes with numerous countries (Malpert & Petersen 2000).
Worldwide Tax Avoidance (Focused on HK and the UK)
In most cases, Hong Kong is quoted as a model of tax virtue since it has a low and comparatively simple tax system (Toh & Tan 1998). This system is very meek for people who pay taxes who, in contrary to Americans, do not need the help of auditors to complete their tax forms and guarantee their compliance. However, the more wealthy an individual is the more likely it is that he or she will pay reduced proportions of their income in tax since there is no dividend or capital increases tax in Hong Kong (Wintzer 2007). Extremely wealthy individuals, who actually need accountants to handle their tax dealings, are very much conversant with ways of managing the system. This principle is also applicable to other individuals who own corporations and organize their affairs so that much of their revenue is obtained from dividends (Erasmus universities Rotterdam1978). Even though most rich people in Hong Kong avoid income tax liability, they still generate 60% of their total income from direct taxation. Much of the remaining proportions are obtained from stamp duty on assets and shareholding businesses. Hong Kong is a major proponent of the anti-tax brigade, though the scheme can result in distortions that can impact negatively on businesses (MacPherson, 2008).
Another strategy used to avoid tax is double taxation. Most nations enforce taxes on revenue earned or gains realized within their jurisdiction irrespective of the home country of the individual or company. Most nations have signed bilateral double taxation agreements with several other states to avoid taxing individuals twice, essentially where the revenue is earned and for a second time in the country of residence and possibly, for the citizens of Hong Kong, taxed once again in the nationality state (Prosser & Murray 2010). Nevertheless, there are comparatively limited double-taxation agreements with countries branded as tax havens. In these countries, taxes are enforced at a lower rate or never levied at all (Pagone 2010). People or companies can find it smart to create covering businesses or transfer to areas with lower or no taxation rates. This creates a state of tax opposition in different governments. Different countries inclined to be havens to diverse kinds of taxations, and for dissimilar groups of people or corporations (Tooma, 2008). Countries that are independent or are autonomous under international laws have hypothetically infinite powers to endorse tax laws influencing their regions, if not restricted by preceding international agreements. However, to avoid tax, it is generally not enough to merely relocate one’s assets or properties to a tax haven. An individual or a company also needs to relocate to the haven country to avoid tax (OECD, 1987).
Without moving from a country of residence, individual taxation can be legitimately avoided by the formation of a discrete legal entity to which an individual’s property is bestowed. In most cases, the detached legal entity is a corporation, trust, or establishment. These could as well be located overseas, like in the case of most reserved foundations (Palan, Murphy & Chavagneux, 2010). Properties/assets are eventually taken back to the person with consequent capital gains and taxation evasion valid to all returns. In addition, income tax would still apply on any income or dividend drained from the legitimate entity (Practicing law institute, 1993). For an individual who formed the trust to avoid taxation, there may be limitations on the kind, objective and recipients of the trust (Lapidoth, 1966). Tax shelters are also other methods of tax avoidance strategy. They are described as reserves that let or allow a decrease in an individual’s income tax liability. Possessions like home proprietorship, annuity plans, and individual retirement accounts (IRAs) can be generally be regarded as tax shelters since assets in them are never taxed so long as they are held within the specified duration of time (Reed, 1989). Initially, the term tax shelters were used to designate mainly some investments created in the form of limited partnerships, which were considered offensive by the Hong Kong internal Revenue Service (OECD 1987).
The Need for Further Reform
Actually, there is a critical need to avert the provisions of ‘taxation avoidance’ since it is a fundamental method through which governments lose revenues. An investor who has securities in form of real estate or any other kind of assets may opt to avoid taxation. This indicates why there is a need for further reforms in the taxation avoidance laws both in Hong Kong and China. However, for individuals holding cash, the units of decline in the worth of money suppose to be paid as tax (Woudernberg, 1991). This penalizes people holding money in form of cash (mostly small or medium scale earners according to the economists). Quite often, low-income earners have fixed pays, incomes or allowances. Consequently, they always look for ways through which they can avoid paying taxes. This is evident in Hong Kong and the UK where such initiatives are rampant. The loss of monetary value resulting from taxation avoidance is often indicated by the decline in the country’s revenues (CITAE 1980).
According to economists, in this case, the concerned country would let pass a lot of cash unnecessarily. This is quite devastating to the developmental provisions embraced within a country. This money might be put into unnecessary projects rather than helping the government to fund its projects. It’s a devious manner of evading taxation since it occurs gradually while nobody notices. Also, it is concealed because there are no taxation forms to be filled or levies added to bills or procurements. In contrary to other taxes, where an individual is obliged to pay at a certain rate, nobody is asked to remit any cash. Practically, people feel wealthier since there is an increment in their wages or house costs and they have even more cash but with very low value. Upon avoiding taxation, inflation might occur so covertly since there are no laws to be either passed or voted down (International Bar Association 1982). However, taxation normally advances the financial position of persons who have unresolved fixed interest obligations such as credits and loans. This also demonstrates why there is a need for further reforms in the taxation avoidance laws both in Hong Kong and the UK (Mo, 2003).
Just like any other kind of revenue, the Hong Kong government levies taxation to cater to its expenditures. Rather than increasing tax rates or borrowing money from other federal financial agencies to raise enough cash, the government might opt to print more money in order to fund its projects. In this context, as the amount of money in circulation increases compared to the creation of goods and services, costs also rise. Families and corporations are left poorer since they now have less power to purchase with their available cash and governments can hardly meet their expenditures due to taxation avoidance (Smith 2008). An individual can easily evade taxation just avoiding holding cash. According to economic theories, there is a peak taxation rate. At this rate, the amount of taxable income gets to the maximum point. Any rate above this maximum rate causes the amount of cash held to decline to the extent that tax income obtained from the inflation tax starts to reduce its buying power (Kostova & Roth, 2002).
Government’s Attempt to Prevent Acceptable Tax Planning
The government’s attempt to prevent acceptable tax planning is evident. Currently, there are several options of raising cash by the government than there were during the revolutionary period. Banks, financial institutions and financial markets let the government borrow cash without evading taxation. Since the ownership of resources is transferred to the public sector, this liability is paid by somebody. If more cash is borrowed by the government, higher rates of taxation will soften. Borrowing by the government is one of the numerous issues affecting interest rates. Since interest rates influence other variables like savings and also considering that the cost of bonds varies inversely with rates of interest, it is quite difficult to ascertain accurately the persons affected by the government shortfall through tax avoidance (Peebles & Wilson 2002). As indicated earlier, it is vital to understand the meaning and context of tax avoidance in regard to Hong Kong and the UK among other governments (Khan, Phang & Toh, 1995). This demonstrates the government’s attempt to prevent acceptable tax planning within the concerned territories. When governments combine different regulations for expenditures and taxes, they can easily induce inflation. Nonetheless, when this takes place, political business persons tend to avoid taxation despite the implementation of policies to stop this crisis (Koh & Mariano, 2006).
Suggestion and Recommendation
Hong Kong and the UK’s government can establish and embrace viable double taxation laws so as to enhance their taxation provisions. It is evident that the double taxation agreements established between Hong Kong and other countries are viable for the global trade provisions (Kaynak, Bloom & Leibold, 1994). This is a critical legal aspect that might influence international trade and foreign exchange provisions between the concerned countries if not managed properly in the provision. There are extra ways in which taxation can help the government to make money despite the previously mentioned avoidance. One of the means of gaining surplus tax incomes is by making taxpayers pay more taxes (Woudernberg1991). Taxation evasion also shrinks the attuned sum of debt owed by the government. Generally, there are no systems or even extra tax collectors required to gather tax. For instance, without taxation avoidance, an individual having $1000 in a reserve account and netting an interest of $30 per year gets $30 since no tax is paid to the government (Brown, 2012).
Conclusion
In Hong Kong and the UK’s context, “tax avoidance” can be described as the legitimate use of the taxation system to decrease the amount of tax payable within the regulatory framework in a country. On the other hand, taxation avoidance should be distinguished from tax mitigation used by tax advisers as an unconventional derogatory to tax avoidance. It’s tricky to evade taxation; however, it occurs gradually and nobody notices. Also, it is concealed because there are no taxation forms to be filled or levies added to bills or procurements. In contrary to other taxes, where an individual is obliged to pay at a certain rate, nobody is asked to remit any cash. In most cases, Hong Kong is quoted as a “model of tax virtue” since it has a low and comparatively simple tax system. This system is very meek for people who pay tax and, contrary to Americans, do not need the help of auditors to complete their tax forms and guarantee their compliance.
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