Impact Factor of Costs to the Tax System

Impact factor of costs to the tax system © ® 2018 Constantinos Challoumis Abstract: This paper is about the costs of the enterprises to the tax system. Thence, we have an analysis for the impact factor of the tax revenues of the countries subject to the costs of companies to the tax system. Thereupon from the view of the level of influence of the enterprises which participate in controlled transactions1 of transfer pricing to the global tax revenue, is plausible to identify the impact factor of costs, when there exists that factor with the case which that factor is avoided. Then the impact factor of costs in combination with the tax revenues is determined through the Q.E. method. Therefore, is clarified the behavior of the tax system subject to the capital of the tax system. I. Applied methodology to the analysis of the costs of enterprises in the tax system The quantification analysis of the costs of the tax system with the tax revenue from a global view is done by the application of the Q.E. method.2 On that ground of this method is determined the behavior analysis of mathematical equations. Thence, there we clarify two levels to the analysis of the Q.E. method which are those:  The analysis of the behavior of the model which stands on the scrutiny of the structural characteristics of each model accordingly allowing with that way the extraction of general conclusions about the model which is under examination.  The frequency analysis behavior scrutinizes the behavior of the dependent variables, but from the view of the number of appearances of a variable than another, estimating basically the impact that one independent variable has with one or more others independent variables. Thereupon, using the previous two axes of Q.E. method is plausible to extract conclusions about the behavior of mathematical equations, and the way that some factors react to changes. Consequently, is plausible the transformation of quality data to quantity data. This method is 1 Controlled transections are the transections which happen between companies that control their transactions with such way to have profits and control of their losses. 2 Challoumis, Constantinos, Quantification of Everything (A Methodology for Quantification of Quality Data with Application and to Social and Theoretical Sciences) (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=3136014. 1 Electroniccopy copyavailable available at: at: https://ssrn.com/abstract=3146573 Electronic https://ssrn.com/abstract=3146573 applied for the purposes of this study for controlled transactions and more precisely in the variables of the impact factor of the tax revenue. [1][2][3][4]The mechanism of Q.E. is based on the dependent variables which are modified for the generator. Thereupon, the generator produces values for the dependent variables. The extracted values of the generator permit the creation of magnitudes, which are the base for comparisons, and for the scrutiny of mathematical equations. Thus, is plausible to quantify quality data. In our analysis this method is used for the purposes of clarification the behavior of the impact factor of the global tax revenue. II. Impact factor of tax revenues The impact factor of tax revenues of countries which are tax heaves, 𝑠 according to the “Methods of controlled transactions and identifications of tax avoidance”3 is determined as that4: 𝑠= 𝑘+𝑙 (1) 𝑟+𝑐+𝑡+𝑖 Therefore are countries which receive the products that are taxed in different countries. This allocation of profits between profits and losses permits to the enterprises which participate to controlled transactions of the transfer pricing activities to maximize their utility. But, contemporaneously the tax revenue from global view is declined. Then, the loss of tax income from some countries is more than the profits that make the countries which are tax heavens. Thereupon, the symbol of 𝑠 the impact factor of tax revenue from a global view, and there are some coefficients which are 𝑘, 𝑙, 𝑟, 𝑡, i and 𝑐. [5][6][7][8] Thus, the symbol of 𝑘 is about the impact factor of capital, 𝑙 is the impact factor about the liability of the authorities on the tax system. The interpretation of the liability is about how much unbalanced it is the tax system. The parameter of r is about the risk, the t is about how much trustworthy is the tax system (bureaucracy). The symbol of 𝑖 examines the case of intangibles (the intangibles which charged to the subsidiaries) of the tax system. Additionally, the symbol of c is about the cost of enterprises. The symbols with the “~” are accordingly the same thing, but from the view of the 3 Challoumis, Constantinos, Methods of Controlled Transactions and Identification of Tax Avoidance (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3134109. 4 Caution: The section I and the section II are the same for five papers, because are the base for the analysis of each factor of equation (1). Then sections I, and II are the preliminary requirements for the the analysis of each factor by separate papers. 2 Electroniccopy copyavailable available at: at: https://ssrn.com/abstract=3146573 Electronic https://ssrn.com/abstract=3146573 uncontrolled transactions5. Thus, the numerator is proportional with the income of taxes, as the investments and the stable tax environments, with liability enhance the tax income. On the other hand the denominator is inverted proportional with the tax income, as the risk, the cost, and the unbalance of taxation cause less tax income. Moreover, for 𝑠̃ we have that: ̃ +𝑙̃ 𝑘 𝑠̃ = 𝑟̃ +𝑐̃+𝑡̃+𝑖̃ (2) Inasmuch as equation the equation (3) is determined the aggregate impact factor of tax revenues, which is symbolized by 𝑠̂ , and is defined by the next equation: 𝑠̂ = 𝑠 + 𝑠̃ (3) Based on the prior equations we could proceed to the identification of the behavior of the impact factors of tax revenues in the case tax heavens, and in the case of the non-tax heavens. Consequently, using the prior equations is plausible to examine the controlled and the uncontrolled transactions. Then, 𝑠 is a factor which allows the comparison between the controlled with the uncontrolled transactions. Thence is able to have a standalone behavior analysis of controlled transactions and a combined behavior analysis between the controlled transactions with the uncontrolled transactions. In the next section is analyzed the impact factor of tax revenues with the rest impact factors. III. Determination of costs of tax system The determination of costs of tax system is established by the impact factor of costs which shows the level of influence of costs in the business plan of the enterprises. To clarify the way that costs affect the global tax revenues, we proceed with the following diversion:  In the first application of Q.E. methodology are applied all the factors of the global tax revenue, 𝑠. In that case is plausible to the obtain the behavior of the global tax revenue using the completed for of the equation (1) 5 Uncontrolled transactions are the transactions which happen between companies free of control and allocation of profits and losses. 3 Electronic copy available at: https://ssrn.com/abstract=3146573  In the second application of Q.E. methodology are applied all the factors except from the factor which is under review. Thereupon, in that case is avoided the factor of costs of tax system, 𝑠. This methodology is illustrated below: All factors of tax revenue Global tax revenue All factors of tax revenue except from costs of tax system Figure 1: Steps of Q.E. application In the previous scheme is shown the methodology which followed by the Q.E. method to determine the behavior of the global tax revenue in the case that there exist the costs in the controlled transactions of the transfer pricing and the case that we have an absence of the impact factor of costs. [2][9][10] IV. Impact factor of costs to the revenues of the tax system The costs of tax system is in interaction with the impact factor of tax revenues. In this behavioral analysis is determined the model which explains the behavior of the impact factor of tax revenues with the existence and with the avoidance of the impact factor of costs. [11][12][13][14] All the necessary equations have referred in the previous sections, except from one condition. Then, for the application of the Q.E. method we use the following condition, which is: 𝑡>𝑙>𝑖>𝑟>𝑘>𝑐 (4) Therefore, is plausible to proceed to a quantity analysis using equations (1), (2), and (4). The examination of tangibles with the costs is critical for the transfer pricing theory. The examination of capital is used many times from the enterprises of controlled transactions to reach the arm’s 4 Electronic copy available at: https://ssrn.com/abstract=3146573 length principle.6 Thence, applying the Q.E. method and choosing the appropriate values for the coefficients of global tax revenue, we have that: Factors Values of s Values of s’ k 0,4 i 0.6 0.6 l 0.7 0.7 r 0.5 0.5 c 0.3 0.3 t 0.8 0.8 fs <0.3 <0.3 fsi <0.3 <0.3 Table: Compiling coefficients Thereupon, using the previous factors is able to determine the behavior of the model through the generator of Q.E. method. The factors of the prior table have as an upper limit the 1, and as a lower limit the 0. But, 𝑠 and 𝑠̃ are plausible to receive values greater than one as their mathematical structure allow this. After 461 iterations extracted the next diagrams: Figure 2: (a) Impact factors of 𝑠 (series 1) and 𝑠′ (series 2), (b) frequencies of 𝑠 and 𝑠′ In the prior figure we used the 𝑠̃ , which here is the same for the case that we have the costs and in the case that we have avoided costs. Then with 𝑠 (blue line) is symbolized the case that we have the impact factor of 𝑐 which symbolizes the costs which have the enterprises in the environment of the tax system. With 𝑠′ (red line) is symbolized the case that we have avoided the costs, 𝑐. The global tax revenue is higher in the case that we don’t have the costs (red line) than in the case that the impact factor of costs exists (blue line). As we expected the absence of costs As arm’s length principle is determined the compliance between controlled transactions with the uncontrolled transactions. The arm’s length principle is used as index that companies of controlled transactions comply with the tax requirements of the tax authorities. 6 5 Electronic copy available at: https://ssrn.com/abstract=3146573 increases the global tax revenues. The reason for the diminished global tax revenues in the case of 𝑠 is because the costs make the companies of controlled transactions to reduce their activities. Should be mentioned that for the purpose of the comparison analysis we used 𝑠̃ as constant to be able to compare 𝑠 with 𝑠′. Additionally, from the diagram (b) of the figure 2, we obtain that the frequency of the 𝑓𝑠 (black line) is higher than the frequency of 𝑓𝑠 ′ (blue line). Therefrom, the enterprises which participate in controlled transactions of transfer pricing with costs are more than in the case that we do not have costs [blue line of diagram (b)]. The interpretation of this economic situation is that the costs make the enterprises to increase their business activities. As cost are not considered the tax obligations, but the investments of companies for the enforcement of their commercial activities. Then, the costs increase the spending of the companies, but this comes back as feedback to the profits of the companies. This means companies which don’t spend they will not have extend profits. Also, the same time the global tax revenue increased when the capital is increased. The increasing costs for the scopes of the business activities of companies help them to grow. Simultaneously the low costs increase the global tax revenue. This situation shows that the tax authorities should try to reduce the costs for the companies, and the same time the companies should try to enlarge their activities through more spending which will come back from the market profits. 6 Electronic copy available at: https://ssrn.com/abstract=3146573 References 1. Challoumis, Constantinos, Quantification of Everything (a Methodology for Quantification of Quality Data with Application and to Social and Theoretical Sciences) (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=3136014 2. J.D. Wilson A theory of interregional tax competition Journal of Urban Economics, 19 (3) (1986), pp. 296-315 3. Feinschreiber R.,2004, Transfer Pricing Methods An Application Guide (John Wiley & Sons, New Jersey). 4. Hines, J.R., Rice, E.M., 1994. Fiscal paradise: Foreign tax havens and American business. Quarterly Journal of Economics 109, 149–182. 5. Mansori, K.S., Weichenrieder, A.J., 1999. Tax Competition and Transfer Pricing Disputes. 6. McFadden, D., & Train, K. (2000). Mixed MNL models for discrete response. Journal of Applied Econometrics, 15(5), 447–470. 7. Meier, B. D., & Rosenbaum, D. T. (2000). Making single mothers work: Recent tax and welfare policy and its effects. National Tax Journal, 53(4), 1027–1061. 8. M.A. King, D. Fullerton The Taxation of Income from Capital The University of Chicago Press, Chicago (1984) 9. Hoynes, H. W. (1996). Welfare transfers in two-parent families: Labor supply and welfare participation under AFDC-UP. Econometrica, 64(2), 295–332. 10. H. Grubert, J. Slemrod The effect of taxes on investment and income shifting into Puerto Rico Review of Economics and Statistics, 75 (1998), pp. 365-373 11. Challoumis, Constantinos, Intangible Controlled Transactions (March 13, 2018). Available at SSRN: https://ssrn.com/abstract=3140026 12. Challoumis, Constantinos, Controlled Transactions Under Conditions (March 10, 2018). Available at SSRN: https://ssrn.com/abstract=3137747Challoumis, Constantinos 13. Methods of Controlled Transactions and Identification of Tax Avoidance (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3134109 14. Challoumis, Constantinos, Intangible Controlled Transactions (March 13, 2018). Available at SSRN: https://ssrn.com/abstract=3140026 7 Electronic copy available at: https://ssrn.com/abstract=3146573