Consider the following terms:
1. Share buyback
2. Round Tripping
3. Profit Shifting
4. Debt dumping
Which among the above can be used for tax avoidance?
Avoidance means an attempt to reduce tax liability through legal means. Tax evasion is illegal means to reduce tax liabilities. Methods of tax evasion are falsification of books, suppression of income, overstatement of deductions, etc. Meaning of various terms related to tax avoidance is as follows:
Route profits through subsidiaries located in tax havens.
No Repatriation of Profits
Companies headquartered in the US give a declaration to the tax a authorities there to not repatriate non-US profits, avoiding tax in their home country
Use transfer pricing to allocate expenses to high-tax countries and profits to low-tax countries
Commonly used for intellectual property rights. For example, US parent sells patent to its sub-sidiary in Netherlands, a low-tax country. The Dutch subsidiary received royalty payment from the US parent.
Parent invests in Indian company through Mauritius. Since dividends are taxed in India, the Indian company buys back the shares. Profits are repatriated to Mauritius, where capital gains tax is zero.
In Treaty shopping, a resident of a third country invests by taking advantage of a fiscal treaty between India and another contracting state. This has greatly contributed in encouraging FDI in the country but has been a medium of tax evasion
Allocation of income and expenses between related corporations or branches of the same legal entity (e.g. by using transfer pricing) in order to reduce the overall tax liability of the group or corporation.
Transferring a bad debt to a group company located in a higher-tax rate country in order to write off the debt in that.
This question is a part of GKToday's Integrated IAS General Studies Module