Grey Maze of Tax Evasion and Tax Avoidance vs. Corporate Governance

The degeneracies of taxable money have been as old as the human civilization itself. The veracity of the sacred principles of accountability, transparency and fairness vis-à-vis to corporate governance of any corporate entity, survives on a system of set of rules and policies, on which that company’s actions are directed and controlled. Taxation acts as a time-tested and as an inevitable instrument by every government, for serving the needs of socio-legal ecosystem, in which a company function. Nevertheless, the loopholes of taxation and allied laws often become the breeding ground for the mal-practices of tax-avoidance and tax-evasion across the globe. With the rise of digital economies, the modes and means of tax-avoidance and tax-evasion are no-more restricted to traditional money-laundering methods. Cryptocurrency, Blockchain and Artificial Intelligence (AI) driven means are gaining momentum in this contemporary age of internet boom. This paper is an attempt to overview the potentials of tribulations of tax-evasions and tax-avoidance vis-à-vis to corporate governance in general; and to understand the trepidations of emerging technology, in contributing as well as curbing the usage of contemporary delinquencies in variants of grey shade, in masquerade of a virtuous corporate governance in particular.

Governance of a state is not a recent concept. Since the days of Kautilya’s Arthshastra, the rules of conduct of a king towards the people it served were prescribed and executed accordingly. Similar establishment and modus-operandi of governance were also followed in the other civilizations of the world. With the advent of joint stock companies, which has been comparatively recent in its origin; the governance of such companies also became an essential component of today’s economies. As a responsible corporate entity, each company is liable to return some part of its revenues, in form of taxes and duties to its government, which gave them approval and authority, to operationalize their respective corporate objectives. Therefore, irrespective of the varied operations and domains, in which a company may be involved, the assurance of transparency and safe returns on invested funds, majorly emerges from the separation of management from ownership. The very balancing act of trade-off between the profit maximization and wealth maximization, puts owners as well as the board of director viz. the management, in a kind of economic tug-war, which at times may sacrifice as well as compromise on the very ethical values, on which the good governance of a company is founded.

The categories and volume of distinctive stakeholders have been growing. They are no more, merely the shareholders, employees, customers, financers, creditors, tax authorities and the government. They can very well be just the conscious citizens of the society, in which a company may operate. Thus, compliance implications in the areas of accountability, transparency and fairness vis-à-vis to corporate governance are mounting, especially when more and more people are getting digitally connected in the contemporary age of internet economy.

Without venturing in to the unending depths of varied domains of implementation and practices of the various principles of good corporate governance, this study restricts its purview towards understanding the complex relationship and implications and repercussions of the lapses in corporate governance, majorly due to mal-practices of the corporates for tax evasion and tax avoidance of their respective tax liabilities. Besides, with advent of digital economy and the emergence of internet-based platforms like blockchain and Internet of Things (IoT), some newfangled apprehensions of technologies like AI, data privacy and cryptocurrency are also surfacing unprecedently. This study shall also observe and comment upon how these technologies have worked in favor or against the principles of Good Corporate Governance.

Broadly put, this paper primarily seeks to recognize and substantiate the existence of a clear relationship between the very principles of taxation in direct reference to the principles of a good corporate governance.

Secondly, this paper also attempts to understand and bring out to light, the plausible causes and rationality of taxation malpractices like tax avoidance and tax evasion, which serve as the bases for compromising the ethos and values of corporate governance.

Sometimes it is not the tax, but merely an anxiety of being taxed causes distress to an assessee (including a corporate one). Nevertheless, tax being an inevitable revenue earning component of every government around the globe, the taxation is levied throughout the ages under various principles and forms. All taxation structures in essence originate from the primary motive of collecting the revenues and end up with redistribution of those revenues among the members of the state. Essentially, each taxation directive is based upon a certain doctrine.

The classical taxation cannons proposed by the economist Adam Smith in his book “The Wealth of Nations” (1776) were equity, certainty, convenience, and efficiency; which may have well served just sufficient, as the guiding light towards maintenance of public finance and framing of economic policies. However, the contemporary decades, with the rise of multinational culture in the age of globalization, the world has observed a dramatic rise in the onus of justifying the rationale and bases of taxation policies, on the part of the government; which are often influenced by the political will of the governing and developing state, rather on the genuine rationale of taxation.

Looking at the recent turn up of events, especially post political-economic scenario of the 2008 financial recession at the global scale, the world-wide economic crisis triggered the economies of the world, to reboot their taxation practices, in such a manner that the taxation malpractices due to seepage of unaccounted and suppressed taxable incomes could be traced and curbed. Besides, a major swift of global-political power games between the developing and developed nation governments, has also pushed the taxation mal-practices to the next higher orbit. This has also induced in to a clear and steep fluctuations in the tax slabs in those countries, who are competing against each other in one economic platform or the other.

Eventually, the malpractices of tax-avoidance and tax-evasion were no more restricted to only wealthy and corrupt individuals, but it has also found its cohorts in the boardrooms of the companies. Due to a steep rise in the taxation rates, motivated by the political will or under the pretexted requirements of national development projects like infrastructure, defense, technology advancement etc., the profit margins of companies started to shrink considerably world-wide. As a result, the burden on the Board of Directors (BoD) of every company kept mounting profoundly, to do the balancing act for maintaining the promise of maximizing the profit as well as wealth of its shareholders; and at the same time, not to compromise on the principles of good corporate governance.

Needless, to say the very ethical principles of accountability, fairness and transparency; which create an essence of every good corporate governance, have been going for a testing time since then. Leave apart any expansion plans, even maintaining a very nominal growth rate, in such a heavily taxed and inflation hit economy, have become a survival challenge for many marginal sized companies.

A mandatory push on the Corporate Social Responsibility agenda in the recent years, has added more fire to the already compromised ethos of corporate governance. Inefficient tax policies, corrupt tax administration and selfish motives of the governments as well as the governed, both have ended into a never-ending blame game.

The indecisiveness, inability to form a consensus and non-conformity with multi-lateral taxation policies of the governments across the globe; on the standardizations of the digital currency norms (like Cryptocurrency) for online transactions and money transfers, have further instigated, the malpractices of tax-evasion and tax-avoidance. With lack of clear policy framework and administration on cryptocurrency, the transparency of such online monetary transactions is under severe suspicion, especially that where and to which purpose the transferred money is applied to. The companies as well as individuals are either completely under ignorance of its tax implications or are completely unaware of the government’s next move on digital currency standardization norms.

Irrespective of the umpteen reasons and rationales of mind-baffling taxation policies of any economy a few genuine precepts applicable to the current scenario can certainly be thought of, before levying the ill-planned tax policies and mindless pushing up of tax rates. These principles may very well be interpreted as a rational sense of implementing an effective and efficient tax system; besides maintaining the ethical values of a good corporate governance as well. These precepts may not be exhaustive but most certainly can serve as a catalyst for a better taxation framework.

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