Impact of Tax Evasion and Avoidance on Revenue Generation in Hong Kong (Research Paper Sample)

Impact of Tax Evasion and Avoidance on Revenue Generation in Hong Kong
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Impact of Tax Evasion and Avoidance on Revenue Generation Hong Kong
1 Introduction
Taxation is a significant component of macroeconomics that the government uses to generate revenues for economic growth and development. It can be defined as a process in which a government imposes a compulsory levy on all income, goods, and services as well as properties of individuals, trustees, partnerships, and companies. The proceeds from tax are used by the government to render their traditional functions that include protecting the country from internal and external aggression, provision of law and order, reducing income disparity levels among various citizens, and ensuring economic and social justice among its citizens (Obinabo, 2016). Taxation is a fiscal instrument used by the government to stimulate developments and economic growth in a country. However, tax evasion and avoidance have negatively impacted economic growth and development through the decline in revenue generation.
Recent developments in local and global economies shifted their focus on ensuring a sustainable source of income through taxation (Richardson, 2016). One of the biggest challenges facing Hong Kong is tax avoidance and tax evasion by the residents. Tax evasion implies an intentional act by an individual or corporate to fail to remit their tax obligations when they fall due as a way of reducing their tax burden ( Ojong, 2016). Such practices are normally in contravention of tax law and policies that govern tax collection. On the flip side, tax avoidance refers to the reduction or minimization of the tax liability of an individual by arranging the affairs of an individual to take advantage of the existing provisions of tax laws (Eja, 2016). It is an intentional act by the taxpayer to remit less than what was expected of him to pay by the tax authority. Tax evasion and avoidance are usually a result of complexity in tax laws, shortage of experienced tax experts, high rates of taxation, lack of integrity among the officers working with the revenue administration, and moral and psychological factors. Tax evasion and tax avoidance pose negative effects on revenue collection by the government (Collymore, 2020). Therefore, the study will aim to examine the impacts of tax evasion and avoidance on the generation of revenue by the Hong Kong authorities.
2 Research Questions
The following research questions will be examined to assess the impacts of tax evasion and tax avoidance on revenue generation in Hong Kong:
1 Is there the existence of loopholes within the Hong Kong tax law systems an opportunity for tax avoidance?
2 What are some of the factors considered to ascertain whether a taxpayer has avoided taxes or evaded taxes?
3 Are there repercussions for tax avoidance and evasion?
4 What are some of the measures the authorities can put in place to reduce tax avoidance and tax evasion among the taxpayers?
3 Literature Review
3.1 Concept of Taxation
Taxation acts as a wire life for any nation. This implies that the level of economic growth and development of many economies relies on the amount of revenue generated through taxation. Aliyu (2016), defines taxation as a mandatory levy that the government imposes on its people as a mechanism of raising revenues. The revenue generated by the government is used in the provision of basic social amenities such as affordable health care and education, security to the citizen properties, and creating an enabling environment of economic well-being to allow businesses to thrive and attract more investors (Nangih, 2018). Such a conducive environment created by the government promotes the establishment of new business and the infrastructures developed are significant determinants of the economic, political, and social wellbeing of the structured tax system. A good tax system entails tax administration, tax laws, and tax policies. The tax system in Hong Kong comprises indirect and direct taxes (Beredugo, 2019). There are various shortfalls within the Hong Kong tax system that pose a challenge to its application as a regulating tool for macroeconomics. In Hong Kong, taxation creates a platform in which revenues are raised for various development projects. Tax is money that should be remitted to the government for it to be utilized in paying for public services. Therefore, taxation implies a form of levy imposed on both residents and non-residents living in a given nation and conducting their businesses within the tax jurisdiction (Wang, 2020).
3.2 Tax Evasion
According to Enofe, (2019), tax evasion refers to an attempt to escape the tax liability whether partially or wholly which results in the violation of tax laws. It is a criminal offense as the taxpayers intentionally make a false declaration about his true affairs and position. This is achieved through overstating relief and capital allowances and understating the revenues. Tax evasion is an act that violates the tax laws in which an individual who obtains income is subject to tax decides to remit less or no payment concerning the outstanding tax liability by failing to disclose the true amount of income derived from the business venture (Drogalas). Tax evasion can also be defined as the omission of commission of an act knowingly with an intention of deceit in a way reported amount by the taxpayer is less compared to the tax payable concerning the tax assessment done (Nnadi, 2018). Failure to remit taxes to the tax authorities is considered one of the most common tax evasion practices in which taxpayers are involved. According to a report published by Hong Kong Stock Exchange Market, more than 80% of tax revenues from companies in the country originate from 2,538 companies that are listed by the exchange as compared to 11,060 companies under the company registry of Hong Kong (Jiang, 2020). A big chunk of Hong Kong’s revenues is robbed through tax evasion and avoidance.
3.3 Tax Avoidance
Tax avoidance is defined as an attempt to reduce or escape tax liability by utilizing some of the loopholes existing within the tax laws (Amah, 2018). This implies circumventing the law without necessarily going to its contravention. A taxpayer may decide to legally reduce his tax liability which is considered as tax planning. Tax planning, therefore, entails some of the techniques used by the taxpayer to either minimize or escape the tax liability (Kwok, 2018). Most of the taxpayers work in hand with tax experts to take full advantage of deductions, rebates, allowances, as well as other tax reliefs or benefits granted by the tax laws.
3.4 Causes of Tax Evasion and Avoidance
Increased taxation: It is one of the main factors that cause tax evasion and avoidance. The high tax rates within the bracket of high-income earners are tolerated because of the high tax evasion taking place (Young, 2016).
The complexity of tax laws: provisions of direct taxes are complicated and therefore not well grasped by the taxpayers. Most of the average taxpayers have to seek professional guidance from tax experts to enable them to evade and avoid paying taxes (Noked, 2018).
Most of the officers of the Revenue Department do not uphold integrity when executing their duties: Lack of integrity among the enforcement officers is part of the reasons responsible for tax avoidance. The officers should not only be honest but also execute their duties in a manner that their selfish interests do not override the interests of the administration when it comes to tax collection and enforcement of tax laws and policies (Fadipe, 2018).
Loopholes in Tax Laws: This promotes the practice of tax avoidance whereby the taxpayers circumvent tax laws to minimize their tax liabilities.
Lack of qualified experts: The correctness in terms of tax assessments and prompt collection relies on the quality and efficiency of the staff within the revenue department. Most of the revenue departments are understaffed with competent and qualified employees. This creates joy for taxpayers who are not willing to pay taxes whenever a revenue officer conducts an incorrect tax assessment on their gods and services (Bello, 2017).
3.5 Methods of Perpetrating Tax Evasion and Avoidance
Common forms of practices that aids tax evasion and avoidance of tax evasion and avoidance include:
* Providing incorrect information with regards to the true financial position of a corporate or individual.
* Understating of incomes and overstating business expenses.
* False claim of contribution to the pension scheme.
* False claims on capital allowances and life insurance premiums being paid.
* Reduction of tax liabilities through the filing of fraudulent tax returns (Lau, 2016).
3.6 Effects of Tax Evasion and Avoidance on the Hong Kong Economy
Taxation is an important fiscal tool that any government uses to generate revenue to spur economic growth and development. This is also a common practice by the Hong Kong government. The country’s annual expenditure budgets are derived based on the project tax revenue of a given fiscal year (Ganyam, 2019). Therefore, in scenarios where tax evasion and avoidance are common practices among people, the tax authorities find it difficult to meet their annual target revenue collections. This results in less revenue to the country which impacts negatively on Hong Kong’s economy. One of the main impacts of tax evasion and avoidance experienced by Hong Kong authorities is the decline i...