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A Legal And Ethical Examination Of Corporate Tax Shelters

3369 words - 14 pages

Abstract
This paper seeks to glean an understanding of corporate tax shelters, in respect to legal and ethical considerations. Tax shelters are often viewed with negative connotations, yet the general public holds different perceptions of the various classifications of tax shelters, tax avoidance, tax evasion, and tax flight (Kirchler, Maciejovsky, & Schneider, 2003). While this suggests a tolerance based on legal concerns, there exists a growing accountability for corporate social responsibility, “whereby organizations consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities, and others ...view middle of the document...

The public is questioning the ethicality of tax reduction, not asking whether corporations can reduce their tax liability, but rather, whether they should.
Corporate Tax Shelters
The term corporate tax shelters refers to a variety of tax reducing strategies, whose “main goal is to lower the corporate tax liability by exploiting discontinuities in the law” (Lisowsky, 2010, p. 1694). This is not limited to illegal or abusive practices. Dennis (2010) claimed that “lawful tax shelters advance a legitimate endeavor. The IRS deems a shelter illegal if its only economic purpose is tax avoidance” (p. 96). Tax shelters are often characterized by “innovative financial instruments or tax-indifferent parties, extremely complex structures, and typically thwart the intended purpose of the various tax statutes. The international arena is particularly rife with such exploitation” (Kaye, 2010, p. 586). While the government works to develop regulations of tax shelters, tax shelters continue to adapt so as to continue their exploitation of tax law.
Deductions & Investments
The IRS offers a variety of legal means of reducing tax liability through the availability of deductions and reduced tax rates on capital gains. Tax deductions allow for the reduction of tax liability by adjusting the amount of income on which taxes are paid. Tax investments can reduce tax liability, as the income from investments is taxed at a lower rate than other taxes. Currently, “‘[t]he top rate on gains held longer than a year is 15%” (O’Neill, 2012, p. 230). By strategically placing assets, or by designing partnerships as partnership pass-through or profits only partnerships, income will be taxed at the capital gains rate, not the typical corporate tax rate (O’Neill, 2012). Deductions and investments are both legal methods of reducing tax liability, available to individuals and corporations. While they qualify under the definition of tax shelters, they are not often perceived as tax shelters.
Tax Havens
Tax havens are “‘financial conduits that, in exchange for a fee, use their one principle asset – their sovereignty – to serve a nonresident constituency of accountants and lawyers, bankers and financiers, who bring a demand for the privileges that tax havens can supply’” (as cited by Fisher, 2014, p. 343). They are often “characterized by extremely low tax rates for nonresidents and banking secrecy laws” (Fisher, 2014, p. 343). Tax havens serve as the location for a variety of other tax sheltering strategies, such as offshore shell corporations, bank accounts, and transfer pricing (Fisher, 2014). Typically, the term tax shelter “conjures up images of ‘sun-kissed exotic islands reminiscent of the Garden of Eden where a few billionaires, Mafiosi and corrupt autocrats hide their ill-gotten gains’” (Fisher, 2014, p. 344). However, Fisher (2014) stated “many tax havens are developing nations, where a lack of centralized taxation prevents the formation of a beneficial tax...

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