Tax Security Methods Implemented in Selected OECD Countries

Tax Security Methods Implemented in Selected OECD Countries

Ahmet Tekin (Eskisehir Osmangazi University, Turkey) and Serhat Gözen (Dumlupınar Universitesi, Turkey)
DOI: 10.4018/978-1-7998-1188-6.ch013

Abstract

Taxes have the most significant share among the usual income sources of states. Taxes, the most important part of public revenues, are considered as a burden on taxpayers and therefore this leads taxpayers to try some tax base erosive practices to minimize the tax burden. This situation necessitated states to take tax security measures to prevent revenue losses. Tax security measures are the institutions established to prevent tax base erosion primarily through taxpayers' declaration in fair manner by also including the autocontrol mechanism. Therefore, it is inevitable for the states which do not want to lose and suffer due to an erosion in their revenues to implement some tax security measures. In many countries today, various tax security measures are implemented. This chapter analyzes the tax security methods implemented in USA, Germany, and UK.
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Tax Security Measures Implemented In The Usa

Distribution of Hidden Income Through Transfer Pricing

The first essential regulation in transfer pricing field was performed in 1954 and it was aimed to prevent companies to decrease their tax burden through transfer pricing as it is in today (Nazalı, 2007:115). Because legislative regulations are one of the results of the conflict between the company management that desires to maximize the profitability and the state authority taxing depending on the power of sovereignty (Kapusuzoğlu, 1999: 57).

In the studies conducted in the United States, which is one of the countries where transfer pricing is the most common, the reasons for taking hard measures regarding transfer pricing are that approximately 40% of the whole trade of the USA consists of the trade by affiliated companies with other affiliated foreign companies, i.e. creating commercial activities between partners (Clausing, 2003:2207).

Transfer pricing which is an important issue in terms of taxation in the meaning of state sovereignty in the USA was regulated by US Revenue Act. In 1963, Puerto Rico protested US Internal Revenue Service (IRS) against the unlimited distribution of revenues between companies, and therefore the United States issued a revenue distribution guide with regard to the companies in Puerto Rico. Therefore, the first guide used even today as transfer pricing guides was published (Işık, 2005: 67).

According to the Article no. 482 which still maintains its influence “the ministry may divide or allocate total revenues, expenses, credits for two or more organizations that are directly or indirectly owned or controlled by the same interests association. For this, it is sufficient to consider that the distribution or allocation of the distribution in question is necessary to prevent tax avoidance or to reflect the income clearly.” The prevention of company’s tax base erosion can be indicated as the reason for it (Kapusuzoğlu, 1997: 57).

Later, with the arm’s length principle Comparible Uncontrolled Price Method, Free Sale Price Method and Cost Plus Methods were recommended by the regulations in 1962 and 1968 (Biyan, 2007: 82). Following the official report issued in 1988, various regulations were made in the section numbered 482 for transfer pricing. The methods about material and non-material rights were determined in 1994 and cost-sharing regulations were made in 1995 (Bayram, 2006: 54).

The penalties calculated by implementing on goods and services in the USA are as the following (Biyan, 2007: 84):

  • If the price based on the report is 200% or more, or 50% or less than its equals, 20% rate of the underpaid tax is fined.

  • If the price is 400% or more or 25% or less as compared to its equals, the fine is increased to 40% rate.

  • The underpaid taxes below 10.000 $ are not fined.

The penalty practice will be as the following if the corrections in 482nd section are performed:

  • If the correction in taxable revenues is more than 5 million $ or more than 10% of total invoices, 20% of the understated revenues is fined.

  • If the correction in taxable revenues is more than 20 million $ or more than 20% of total invoices, the fine is increased to 40%.

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