In this analysis, historical tax payment in the last five years (from 2011 to 2015) of ten insurance companies in the UK are investigated and analysed thoroughly in order to answer the question, whether they were evading taxes over the course of this time period. All of these companies are among the top 14 insurance companies in the UK in terms of assets.
In the current age of expanding globalisation and increasing international integration, large corporations and individuals may hold stream of incomes and expenses in multiple countries with different legislation all around the globe. As a result, the matter of tax practices become more and more complicated. In the case of insurance companies, the issue becomes even more complicated due to the nature and characteristics of the streams of income and expense in this industry. Despite advanced complicated tax legislation in developed nations and reports by specialists, the concern for whether companies such as insurance companies are avoiding taxes or not is growing.
In order to answer the aforementioned question, firstly, a quick overview over an important study of tax payments and the definition of so-called tax heavens are given. Secondly, the work's methodology, which is mainly based on the analysis of profitability ratios and linear regression analysis is laid out. Lastly, the results of the analysis are discussed and put into context.
Table of Contents
1 Introduction
2 Literature research
2.1 Study on tax practice
2.2 Tax havens
3 Methodology
3.1 Tax and profitability ratios
3.2 Linear regression analysis
3.3 Limitations
4 Results and discussion
4.1 Subsidiaries in tax havens
4.2 Tax and profitability ratios analysis
4.3 Linear regression analysis
5 Conclusion
6 References
Research Objective and Focus Areas
This paper examines the potential tax avoidance practices of 10 major insurance companies in the UK by analyzing their financial data from 2011 to 2015, specifically investigating the relationship between profitability ratios and historical tax payments.
- Identification of subsidiaries located in tax havens among the top insurance corporations.
- Calculation and comparative analysis of Tax on Return (TOR), Return on Sales (ROS), and Return on Average Equity (ROAE) ratios.
- Evaluation of tax payment consistency and identification of suspicious volatility in financial reporting.
- Application of linear regression analysis to determine if profitability metrics predict tax payment behavior.
Excerpt from the Book
2.1 Study on tax practice
According to Institute of Business Ethics (2013), companies minimise their tax payment by “tax planning”, making the most of legal tools including all allowances, deductions, rebates, exemption, etc. These are considered as compliant behaviour. Companies can engage with tax avoidance which refers to bending the rule of the tax system, although legitimate, to obtain tax result not intended by the government. Company directors often argue that they are responsible for maximising shareholder’s value, including keeping tax cost as low as possible under legislation. In a study of tax planning effects, (Ifada & Wulandari (2015) stated earning management can take advantage of tax rate by shifting profit before changes in corporate tax rates to a year after the change takes place. Under accounting rule, this follows the principal of accrual basis (revenues are reported in income statement when they are earned, whereas under cash basis, revenues are reported when cash is received).
Although tax avoidance is different from tax evasion, which is illegally reducing tax liabilities by falsely reporting income or expenditure (Hall, 2015), it is considered as unethical. Paying a fair amount of taxes is sociable responsibilities of companies, as it provided fund for public service such as education, healthcare and public infrastructure. Avoiding taxes can detriment company’s image and sociality’s trust in them. Her majesty's Revenue and Customs (2016) estimated that there was £3.7bn of corporate tax gap for 2014-2015 period (£3.3 billion in 2013-2014), which is the different between the amount should be collected, in theory, by HMRC and the actual collected amount. This represents 10% of the overall tax gap. Companies such as Google, Starbucks and Amazon faced negative criticism for tax avoidance and lack of transparency (Barford & Holt, 2013). In 2011, Google’s UK unit made a profit of £395m but pay only £6 million of tax. Starbucks paid almost no corporation tax while making £400m of profit. Amazon paid £1.8m over £3.35bn of return. Despite these small tax payment on return, all of these companies business activities are legal.
Summary of Chapters
1 Introduction: Provides an overview of the challenges in monitoring corporate tax practices in the insurance sector and defines the scope of the empirical analysis.
2 Literature research: Explores the conceptual differences between tax planning, avoidance, and evasion, and examines the role of tax havens in corporate financial strategy.
3 Methodology: Details the mathematical formulas used for calculating tax and profitability ratios and explains the linear regression model applied to the dataset.
4 Results and discussion: Presents the findings regarding subsidiary distribution in tax havens and evaluates the statistical correlations between company profitability and tax payments.
5 Conclusion: Summarizes the findings, suggesting that while evidence of suspicious tax behavior exists, a wider study is needed to draw definitive conclusions.
6 References: Lists the academic and industry sources used for the analysis.
Keywords
Tax avoidance, Insurance industry, UK, Tax havens, Financial ratios, Tax planning, Profitability, Corporate tax, Regression analysis, Subsidiaries, Financial statements, Return on Sales, Return on Average Equity, Tax practice, Economic analysis.
Frequently Asked Questions
What is the core subject of this research?
The research investigates the tax avoidance practices of leading insurance companies in the United Kingdom by analyzing their annual financial reports from 2011 to 2015.
Which specific themes are covered in the work?
The study covers the mechanisms of tax planning, the usage of offshore tax havens, the relationship between profitability and tax, and the ethical considerations surrounding corporate tax payments.
What is the primary research goal?
The goal is to determine if top-tier UK insurance companies exhibit patterns of tax avoidance by comparing their actual tax payments against their profitability ratios.
Which methodology is employed in the analysis?
The author utilizes quantitative methods, including the calculation of specific financial ratios (TOR, ROS, ROAE) and a linear regression analysis conducted via SPSS software.
What topics are addressed in the main body?
The main body covers a literature review on tax practices, an examination of subsidiary locations in tax havens, and a discussion of the statistical results regarding tax-to-profit ratios.
Which keywords define this study?
Key terms include tax avoidance, insurance industry, tax havens, profitability ratios, financial reporting, and linear regression.
Why are insurance companies specifically mentioned as having complex tax issues?
The report notes that insurance companies have unique streams of income and expenses that make tracking tax liabilities significantly more complicated than in other sectors.
What significance do the subsidiaries in tax havens hold for this analysis?
The presence of subsidiaries in tax havens is considered a potential indicator of tax avoidance, as these locations often offer low or zero tax rates and increased financial secrecy.
What did the linear regression analysis reveal about the relationship between profits and taxes?
The analysis showed no significant statistical link between profitability metrics (ROS/ROAE) and the Tax on Return (TOR) ratio, suggesting that profitability alone does not predict tax payment behavior in the sample.
What limitation does the author mention regarding the data?
A major limitation is that the analysis is restricted to public annual reports, which do not disclose actual taxable income, making precise tax liability calculation impossible.
- Citar trabajo
- Tung Nguyen (Autor), 2017, Are Insurance Companies in the UK Avoiding Taxes? Historical Tax Payments over the Last Five Years, Múnich, GRIN Verlag, https://www.grin.com/document/536417
