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Effects of the Differences in Tax Systems

Essay Topic: ,

Of late, differences in the tax systems between countries have been a subject of debate and have occupied center stage in most forums. Due to this, we shall now focus on the various effects that have been generated by these differences. Notably, the essay will focus on Japan whose corporate tax rate is the second highest in the world.

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Disparities in the taxation systems between countries give the multinational companies an opportunity to interfere with their transfer prices.

For instance, a business man in Japan may chose to understate his sales revenue which is originating from an affiliate in a low tax country while at the same time overstate his purchases from the low tax country (Carroll, 20050). By so doing, the businessman will have shifted most of his reported profits to the low tax countries which will further translate into a reduction of the tax liability or will have participated in tax evasion.

Also, the disparities in the tax systems across countries encourage some multinational companies to report disproportionate profits to the low tax countries. In line with this, reports have shown that over 70% of countries with non U. S profits earned by U. S multinational firms are normally taxed at an effective tax rate of below 10%. Precisely, Japan has an effective tax rate of 2. 5%. In addition; the differences in the tax systems between countries give room for corruption (Carroll, 20050).

This is in most cases initiated by the tax officials who normally take advantage of the tax payers who are not aware of the procedures to be followed in tax administration. The differences in tax systems have also created an avenue for tax bureaucracy. This normally arise when the disgruntled, low salaried tax officials play a role in protecting the tax evaders who in turn avail some percentage of the tax evaded to them. This was the case in Japan back in 1993 when there was the tax evasion scandal involving Kanemaru Shin.

At this point, it is worth concluding with an opinion that numerous measures need to be undertaken to eliminate the negative effects of the difference in tax systems. For instance, countries should standardize the procedures which will make the tax systems to be more transparent and will enhance the integrity of the same (Carroll, 20050). Finally, the tax systems should introduce incentive reforms like the salary incentives which will definitely go a long way in eradicating the corrupt behavior of tax officials.