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Tax Avoidance: Causes and Solutions

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Tax Avoidance: Causes and Solutions Tax Avoidance: Causes and Solutions Ling Zhang Master of Business 2007 The thesis submitted to Auckland University of Technology in partial fulfillment of the degree of Master of Business. Table of content 1.0 Introduction .............................................................................................. 3 1.1 Background Overview ................................................................................................. 3 1.2 New Zealand tax system .............................................................................................. 4 1.3 New Zealand Tax Policy .............................................................................................. 6 1.4 History of New Zealand income tax ............................................................................ 6 1.5 Tax avoidance in New Zealand .................................................................................... 7 1.6 Structure of the thesis ................................................................................................... 8 2.0 Defining tax avoidance ............................................................................. 9 2.1 Modeling tax avoidance – accounting analysis .......................................................... 10 2.2 Income splitting .......................................................................................................... 13 2.2.1 Description .......................................................................................................... 13 2.2.2 Case law .............................................................................................................. 14 2.3 Conversion ................................................................................................................. 16 2.3.1 Description .......................................................................................................... 16 2.3.2 Case law .............................................................................................................. 17 2.3 Deferral ...................................................................................................................... 18 2.3.1 Description .......................................................................................................... 18 2.3.2 Case law .............................................................................................................. 18 3.0 Current New Zealand approach ........................................................... 19 3.1 Overview .................................................................................................................... 19 3.2 Form approach ........................................................................................................... 20 3.3 Shams ......................................................................................................................... 22 3.4 Section BG 1 Income Tax Act 2004 .......................................................................... 23 4.0 Options for prevention of tax avoidance .............................................. 24 4.1 Judicial/administrative rule ........................................................................................ 24 4.2 Specific anti-avoidance rules ..................................................................................... 26 4.3 General anti-avoidance provision .............................................................................. 27 5.0 Judicial/administrative rule .................................................................. 28 5.1 Examples of judicial and administrative rule ............................................................. 28 5.1.1 United States ....................................................................................................... 28 5.1.2 United Kingdom .................................................................................................. 29 5.1.3 France .................................................................................................................. 30 5.1.4 China ................................................................................................................... 31 5.2 Designing rule for New Zealand ................................................................................ 31 6.0 Legislative – specific rules ..................................................................... 33 6.1 New Zealand .............................................................................................................. 33 6.2 Other jurisdictions ...................................................................................................... 39 7.0 Legislative – general anti-avoidance rule ............................................. 41 7.1 New Zealand .............................................................................................................. 41 7.1.1 History of general anti-avoidance provisions ..................................................... 41 7.1.2 Overview of section BG1 .................................................................................... 42 7.1.3 Concept of Arrangement ..................................................................................... 45 7.1.4 Tax avoidance ..................................................................................................... 48 7.1.5 The Choice Doctrine ........................................................................................... 56 1 7.1.6 Reconstruction .................................................................................................... 58 7.1.7 Recent developments .......................................................................................... 60 7.2 Other jurisdictions ...................................................................................................... 65 7.2.1 Australia .............................................................................................................. 65 7.2.2 Canada ................................................................................................................. 74 8.0 Recommendation and Conclusion ........................................................ 76 8.1 Tax system ................................................................................................................. 76 8.2 Administrative rules ................................................................................................... 78 8.3 Legislative rules ......................................................................................................... 78 8.3.1 Specific anti-avoidance provision ....................................................................... 78 8.3.2 Generally anti-avoidance rule ............................................................................. 79 8.4 Interpreting the law .................................................................................................... 80 8.5 Conclusion ................................................................................................................. 80 Bibliographic ................................................................................................ 82 2 Attestation of Authorship I hereby declare that this submission is my own work and that, to the best of my knowledge and belief, it contains no material previously published or written by another person (except where explicitly defined in the acknowledgements), nor material which to a substantial extent has been submitted for the award of any other degree or diploma of a university or other institution of higher learning. Zhang, Ling (Becky) Acknowledgements I would like to take this opportunity to thank Professor Chris Ohms who provided invaluable guidance throughout the research process, and also my family for their sacrifices, support and love. Abstract Tax avoidance is attracting more and more attention from the public. Different people have different understanding and definitions of tax avoidance. The purpose of this thesis is to review the causes of, and solutions to tax avoidance. The thesis assesses various definitions of tax avoidance, and then discusses different options for prevention of tax avoidance. In discussing of legislative rules, the thesis reviews the various applicable sections in the New Zealand Income Tax Act 2004, taking into account of leading cases, discusses the development in other jurisdictions, and in particular examines the development of Generally Anti-avoidance Rules in three jurisdictions. The thesis recommends the key elements for design a good tax system which will help to restrict the conditions that make tax avoidance possible for the future development. The recommendations also include: establishing effective disclosure and advanced rulings system, improving specific anti- avoidance provision, reinforcing generally anti-avoidance rule and developing a purposive interpretation of the law. 1.0 Introduction The purpose of this thesis is to critically review and analyse the causes and solutions of tax avoidance. The thesis reviews the relevant sections of the Income Tax Act, taking into account of leading cases, discusses the development in other jurisdictions and makes recommendation for the future development. 1.1 Background Overview The original concept of taxation was raising revenue for subsequent expenditures by the ruling authority. The government financing through taxation has a fundamental influence on the standard of living of all citizens.
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