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CHAPTER TWO21 Literature ReviewIn this chapter the previous Paper

Words: 2262, Paragraphs: 21, Pages: 8

Paper type: Review , Subject: Gdp

Categories: Gdp, Literature, Psychology


2.1 Literature Review

In this chapter, the previous relevant literature was reviewed. A study of literature review is an answer to the problem statement and supports the researcher to comprehend the results of the empirical study. A comprehensive literature overview of the effect of taxation in corporate financial policy is provided. It provided several definitions for the perception of the taxation and the effect.

2.2 Corporate Taxation

Multinational companies strategically locate ownership of their intellectual property at tax-havens, with the intention of minimizing their corporate tax burden (Karkinsky & Riedel, 2009 ) There is patent of multinational companies have quietly transferred their valuable intellectual property to low-tax locations (Karkinsky & Riedel, 2009 )The justification behind locating intellectual property at low-tax associates is two-fold. First, intangible assets are increasingly perceived to be important value-drivers within multinational enterprises (MNEs) which by locating them at low-tax affiliates is thus an attractive tax saving strategy as it implies that the intangibles’ profits become taxable at a low corporate tax rate. Second, the mutual good nature of intellectual property involves that it is used as an input factor by numerous operating affiliates within the multinational group which then pay a royalty or license fee to the intangibles-owner. (Karkinsky & Riedel, 2009 )

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In practice, it is difficult to differentiate between the effects of tax policy on levels and on growth rates of GDP. This is because in-between growth may be long-lasting and so it has not showed possible to discriminate effects on long-run growth from transitional growth effects, although some elements of the tax system are likely to influence long-run growth. (Arnold, et al., 2011) For example, it is possible that tax changes that encourage invention and entrepreneurship may have obstinate long-run growth effects, while those that affect investment also can have long-lasting effects on growth that fade out in the long run. (Arnold, et al., 2011) In the gap, tax changes affecting labour supply are expected to have only a temporary effect on growth. There is a considerable works on the effects of tax structures on efficiency and income distribution, including optimum tax design, the policy implications of which are discussed in Institute for Fiscal Studies (2010). However, a relatively small amount of this works is concerned with the impact of tax on economic growth and has mainly been concerned with the balance between the taxation of labour income, capital income and expenditure. (Arnold, et al., 2011)

The impact of tax on where firms choose to locate the legal ownership of patents, this could influence the decision because the legal ownership of the patent will be one of the determinants of where the income derived from the patent is taxed. (Griffith, Miller, & O’Connell, 2014) The profits earned from the manipulation of intellectual property will be the result of a number of activities, including the research and development (R&D) investment assumed to create the new idea, the financing of this investment and the subsequent commercialisation. When these activities take place in multiple countries, as is frequently the case for multinational firms, the returns must be allocated to individual authorities for tax purposes. Firms have a motivation to arrange their activities in such a way that, all else equivalent, profits accrue in the country in which they would pay the lowest tax. (Griffith, Miller, & O’Connell, 2014)

2.2.1 Corporate tax avoidance

Tax avoidance as an activity that a person or a business may undertake to reduce their tax in a way that runs counter to the spirit and the purpose of the law, without being strictly illegal. (Fuest & Riedel, 2009 ) Tax revenue losses due to tax avoidance and tax evasion be able to happen for a number of reasons included on the existing approximations of these revenue losses distinguish between a domestic and an international element of tax avoidance and tax evasion. (Fuest & Riedel, 2009 ) The domestic component of tax evasion and avoidance would include, for request, non-declared or under-reported income from work or domestic business activities. Tax avoidance includes activities which exploit excuses in the tax system but run counter to the purpose of the law whereas tax evasion describes illegal activities that involve elements of disguise. International income shifting by firms may include both tax avoidance and tax evasion. For instance, multinational firms have to set transfer prices for intra firm trade in order to separate incomes generated in different countries. There will always be some area for choices which firms may exploit to reduce their tax burden. (Fuest & Riedel, 2009 )

2.2.2 Tax haven

An Emerging Global Issue, the OECD defined characteristic features to identify tax havens with the aid of recognised criteria. The aim is to identify common practices of tax regimes that favour financial or other economic activities in particular locations and consequently misrepresent trade and investment or generally challenge the trust in tax systems. (Otto, Michael, Philipp, Martina, & Martin, 2015) This risky tax competition not only has negative effects on the individual country states but, got in a global context, on the one hand the competition between states to cut tax rates is difficult and on the other hand tax incentives and tax exemptions discriminated according to sector are offered as investment incentives. Many countries have established special economic zones for this purpose, for example, which offer this incentive effect in the field of real production, as part of so-called production zones. This is used in particular in dawn countries, facilitated by the low level of social regulations, of labour protection or environmental limitations. (Otto, Michael, Philipp, Martina, & Martin, 2015) Trade union organisation is delayed, with the assistance of the countries themselves, who in this way however continue the curved of manipulation in their own countries and cannot respond the pressure from the rich countries and corporations. The utilisation of the international tax differences through the diversion of transactions in order to adventure tax reductions and exemptions is interpreted only as legal tax planning. A tax haven is a state or also just part of a country that offers low tax rates or even no taxes at all for foreign investors. The tax havens themselves are in competition for the far more mobile finance capital. (Otto, Michael, Philipp, Martina, & Martin, 2015)

2.3 Double Taxation

The phenomenon of double taxation occurs, not because of the different structures of the tax systems, but due to the separate concepts that cause the imposition. (R, 2009) In general, where the marvel (legal or economic double taxation) appear, are determined by the fact that Governments apply taxes on the income of those zones by the subjects of taxation, local and foreign, and furthermore subject to taxes and income from its own citizens abroad. (Radu, 2012 ) Within the framework of agreements concluded between parties to international tax avoidance of double taxation or of clarification regarding the way in which the real will be imposed with reference to exact definition scope of applicability of the Convention in regard to the matters of taxation, but in all of the residence and citizenship; the laying down of profit taxation of businesses and ways or/and limits the deduction of expenses arising from parent firms to management only to subsidiaries, which operates in other countries; tax rates that we can use the country of origin of income in the form of interest, royalties and dividends. total relief-according to this method, income derived by a resident in a foreign country and subject to taxation in that country shall be deducted from the taxable income of the bulk in the country of residence shall take into account all revenue earned by taxpayers. (Radu, 2012)

Double taxation can take different forms and occur in different situations based on agreement with counties. Infrequently, double taxation is being well-known based on the number of taxpayers intricate. Cases where the same income is being taxed twice in the hands of the same taxpayer are being referred to as juridical double taxation in recent time. (Radu, 2012) The spectacle of double taxation happens, not because of the different structures of the tax systems, but due to the distinct perceptions that underlie the obligation. (R., 2009)

Double taxation take place when multinational/corporate companies (MNC) pays tax on the same corporate income earned from economic activity in a foreign country twice: which once to the tax authorities of the foreign country; multitude to the economic activity, and another is to the tax authorities of the home country, in which the company is addressed. (Neumayer, 2006) Investing at foreign country is burdening economic activity, double taxation can indicate difficulty or barrier to foreign investment, therefore altering the efficient allocation of uncommon financial resources across countries of the world. (Neumayer, 2006)

Increases of foreign direct investment (FDI) in most of countries are required policy goal for most policy makers. (Barthel, Busse, & Neumayer, 2009) However, frequently the factors influencing the invasion of FDI are not easily agreeable to policy, either because they are permanent, such as natural legacy of physical resources, cultural and geographic closeness to major source countries, also because changing the policy is a very long-term process, as in the event of the competence of political institutions, market size, or the education and productivity of the local labour force. Though, there are still a sum of measures which can be taken to enter in the rivalry for foreign investment: the profit return can be one-sidedly eased, red tape or corporate taxes can be reduced, and on the other hand, bilateral measures can be taken, such as double taxation treaties. (Barthel, Busse, & Neumayer, 2009)

2.4.1 Theory of Planned Behaviour

The theoretical foundation for this study was based on the human behaviour theories. Specially, behavioural theories such as planned behaviour theory and tax compliance theory were applied in this study to better understand how individual`s behaviour patterns towards GST could be transformed through the implementation. These theories have been successfully applied in education and economic sector to influence behaviours.

The theory of planned behaviour (TPB) was developed by Ajzen and Fishbein in 1988. The theory proposes a model which can measure how human actions are guided. (Ishak, Othman, & Omar, June 2015) The Theory of Planned Behaviour explains all behaviours over which individuals can exert self-control. Specifically, The Theory of Planned Behaviour (TPB) was applied in this research to understand how individual`s behaviours outline towards GST could be transformed through self-concept and attitude. Originally, The Theory of Planned Behaviour (TPB) began with the Theory of Reasoned Action in 1980 to expect an individual intention to engage in a behaviour at a specific reason, time and place. (Kennedy, 2013) According to Theory of Reasoned Action behaviour is predicted use attitudes towards specific behaviour and subjective norms to form a behavioural intention (Kennedy, 2013)

Figure 1: Theory of Planned Behaviour

There are three factors existed in directing the behaviour intentions which later will be the cause of the deceptive behaviour. Those three factors are attitude, subjective norms and perceived behavioural control. (Ishak, Othman, & Omar, June 2015) Attitude can be well-defined in terms of the individual’s findings themselves. It is how they feel about performing certain behaviour, either positively or negatively. This can be found through the valuation of one’s belief regarding the consequences arising from behaviour and an evaluation of the attraction of these consequences. (Ishak, Othman, & Omar, June 2015) Subjective norms are individual’s perception of whether people that are important to the individual think the behaviour should or should not be perform. This contribution from the norms or the surrounding society will be the basis for an individual to form an opinion and motivation. It is also can be view as the social pressure to perform the target behaviour. (Kennedy, 2013) Perceived behavioural control indicates people’s perception of their ability to perform a given behaviour. This factor can lead directly to the individual behaviour which has control over the behaviour and how confident a person feels about being able to perform or not perform the behaviour. (Ishak, Othman, & Omar, June 2015)

2.4.2 Tax Compliance Theory

The main theoretical approaches to tax compliance have commonly been separated into the ‘economic deterrence’ approach, and the wider behavioural approach which incorporates both social and fiscal psychological approaches. (Devos.K, 2014) The economic deterrence model has been commonly used to examine tax compliance from a theoretical perspective. Factors that have been examined in this study is the economic deterrence model include: Complexity of the tax system; Level of revenue information services; Withholding and information reporting; Preparer responsibilities and penalties; Probability of receiving audit coverage; Progressive and actual level of tax rates, and Penalties for non-compliance. (Devos.K, 2014) Economic Deterrence Model which have been based on the economic theory of compliance generally focus on deterrence. Deterrence can be achieved through many approaches, disciplinary and persuasive. That is, prevention may take on the form of increasing the probability of detection, increasing the tax rate or by the imposition of tougher penalties. (Devos.K, 2014) Alternatively, it may take on the form of better education, increased advertising/publicity and incentives. The economic definition of taxpayer compliance views taxpayers as ‘perfectly moral, risk-neutral or risk-averse individuals who seek to maximise their utility, and chose to evade tax whenever the expected gain exceeded the cost.’ (Devos.K, 2014) Fiscal and Social Psychology Models Fiscal psychology models blend together aspects of economic deterrence models and social psychology models. (Chen & Taib, 2016) The essential thrust of this approach is that individuals are not simply independent utility maximises rather individuals are recognised to contain an array of attitudes and beliefs which interact and respond to social norms. Social psychology models inductively examine the attitudes and beliefs of taxpayers to understand and predict human behaviour. (Devos.K, 2014)

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