1. Introduction and Literature Review
The credibility of a tax system has to do with the stability of that tax system by generally influencing the behavior of businesses (Bhuiyan & Farazmand, 2020;
Challoumis, 2019a; Cornelsen & Smith, 2018; Dollery & Worthington, 1996;
Domingues & Pecorelli- Pere, 2013; Islam et al., 2020; Kroth et al., 2020; Mackean et al., 2020; McIsaac & Riley, 2020; Menguy, 2020; OECD, 2020; Silva et al., 2020).
Companies involved in controlled transactions are encouraged for this activity, that is, an unreliable tax system favors companies carrying out controlled transactions to avoid being taxed. Unlike companies that are consistent and operate without carrying out controlled transactions to avoid being fully taxed (Challoumis, 2021d, 2021a, 2022c, 2022b, 2022a).
A business with a controlled transaction activity succeeds in avoiding its adequate taxation, unlike a business that is consistent and fully taxed by the tax authorities of its country. The consistent business usually also acts in favor of the domestic banking system, expanding the money cycle of the economy in question. Therefore, a stable tax system works not only in favor of consistent businesses but also in favor of the economy as a whole.
The quantification analysis of the sensitivity of the tax system to the liable tax system is done by the application of the Q.E. method. The background of this method stands on the behavior analysis of mathematical equations. Thus, there we determine two axes to the analysis of the Q.E. method which is:
• The analysis of the behavior of the model 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 the impact that one independent variable has with one or more other independent variables.
Therefrom, using the prior two axes of methodology, is plausible to extract conclusions about the behavior of mathematical equations, and how some
Constantinos Challoumis 32
factors react to changes. Consequently, is plausible the transformation of quality data to quantity data. This method is applied for this study for controlled transactions and more precisely in the variables of the impact factor of the tax revenue (Bernasconi & Espinosa- Cristia, 2020; Biernaski & Silva, 2018; Blundell
& Preston, 2019; Bowling et al., 2019; Castaño et al., 2016; Delgado Rodríguez
& de Lucas Santos, 2018; dos Santos Benso Maciel et al., 2020; Russo Rafael et al., 2020; Tydir, 2019; Van de Vijver et al., 2020; Wright et al., 2017; Wu et al., 2019). 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, it is plausible to quantify qualitative data. In our analysis, this method is used for clarification of the behavior of the impact factor of the global tax revenue.
2. 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”
is determined as that:
s k l
r c t i
= +
+ + + (1)
Therefore are countries that receive the products that are taxed in different countries. This allocation of profits between profits and losses permits the enterprises which participate in controlled transactions of the transfer pricing activities to maximize their utility. But, contemporaneously the tax revenue from a 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 havens. 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, and c. 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 symbol of i is about the intangibles. The parameter of r is about the risk, the t is about how much trustworthy is the tax system (Abdelkafi, 2018; Al- Ubaydli et al., 2021; Cascajo et al., 2018; Evans et al., 1999; Farah, 2011;
Fernandez & Raine, 2019; Franko et al., 2013; Gilens & Page, 2014; Jomo & Wee, 2003; Lal et al., 2018; Limberg, 2020; Moreno- Jiménez et al., 2014; Stern, 2015;
33 Impact Factor of Liability of Tax System
Syukur, 2020). This means that t examines the case of liability of the tax system from the view of the bureaucracy. 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 uncontrolled transactions. Thus, the numerator is proportional to the income of taxes, as the investments and the stable tax environments, with tax liability, enhance the tax income. On the other hand, the denominator is inverted and proportional to the tax income, as the risk, the cost, and the unbalance of taxation cause less tax income (Challoumis, 2018a, 2019b, 2019c, 2020a, 2021a, 2021c, 2021e, 2021d, 2021b, 2022a, 2022c). Moreover, for s we have that:
s k i
r c t i
= +
+ + + (2)
Since equation, equation (3) is determined the aggregate impact factor of tax revenues, which is symbolized by s∧, and is defined by the next equation:
˘s s s= + (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 of tax heavens, and in the case of the non- tax heavens. Then, s is a factor that allows the comparison between the controlled the uncontrolled transactions. Thence is plausible to have a standalone behavior analysis of controlled transactions and a combined behavior analysis between the controlled transactions with the uncontrolled transactions. The next section is analyzed the impact factor of tax revenues with the rest impact factors.
3. Determination of Liability of Tax System
The determination of the stability of the tax system is established by the impact factor liability of the tax system (how stable is a tax system, with not many changes through some periods). To determine the way that liability affects 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 obtain the behavior of the global tax revenue using the completed form of the equation (1) (Challoumis, 2018b, 2020b, 2022b).
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• In the second application of the Q.E. methodology are applied all the factors are except the factor which is under review. Thereupon, in that case, is avoided the factor of liability of the tax system, l.
This methodology is illustrated below:
Figure 1. Steps of Q.E. application
The previous scheme is shown the methodology followed by the Q.E. method to determine the behavior of the global tax revenue in the case that there exists a liable tax system (ideal case) and the version in which we have an absence of this factor ( figure 1).
4. Impact Factor of Tax Revenues on the Liability of the Tax System
The liability of the tax system is in a condition of interaction with the impact factor of tax revenues. In this behavioral analysis is determined the model which clarifies the behavior of the impact factor of tax revenues with the existence and with the avoidance of the impact factor of tax liability. All the necessary equations have been referred to in the previous sections, except for one condition. Then, for the application of the Q.E. method we use the following condition, which is:
t l i k c> > > > (4) Consequently, it is plausible to proceed to a quantitative analysis using equations (1), (2), and (4). Thence, applying the Q.E. method and choosing the appropriate magnitudes for the coefficients, we have that:
35 Impact Factor of Liability of Tax System
Table 1. Compiling coefficients
Factors Values of s Values of s′
k 0.4 0.4
i 0.6 0.6
l 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
Based on the previous coefficients the generator formed the behavior of the model which is underdetermination. Thence should be noticed that the factors have an upper limit of 1, and a lower limit of 0. But, s and s are plausible to receive values greater than one as their mathematical structure allows 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 previous figure, we used the s, which here is common for the tangibles and the intangibles. Then s (blue line) is symbolized the case that we have the impact factor of l which symbolizes the liability of the tax system (existence of a constant tax system). With s′ (red line) it symbolized the case that we have the absence of the impact factor of liability of the tax system, l. In the case of s we have a constant and reliable system, and with s′ we have an unstable tax system, with a low liability. In consequence, the global tax revenue is higher in the case that exists the impact factor of the liability (blue line) than in the case the impact factor of liability is not used (red line). We conclude as we expected
Constantinos Challoumis 36
that the existence of a tax system that has not to have many disturbances serves better the tax revenue from the global view. Additionally, from the diagram (b) of Figure 2, we obtain that the frequency of the fs (black line) is lower than the frequency of fs’ (blue line). Thereupon, the companies which participate in controlled transactions of transfer pricing increased in the case where the liability of the tax system is low (blue line). Then, the number of uncontrolled transactions is declined when in an unreliable system, meaning the existence of tax systems with a lot of disturbances and changes to their tax policy ( figure 3).
Accordingly, when there exists a tax system that the companies can trust, then the number of controlled transactions is decreased and the number of uncontrolled transactions is increased (Figure 4). Thus, we obtain that reliable tax systems increase uncontrolled transactions and global tax revenue.
5. Conclusions
This paper examined the liability of the tax system. When there is an economic environment with an unreliable tax system the companies prefer to participate in controlled transactions activities. In contradiction when there exists a reliable tax system enterprises prefer to participate in uncontrolled transaction activities.
Therefore, the companies design their business plans subject to the reliability of their economic environment. In general, we conclude that stable tax systems offer high global tax revenue and a lower number of controlled transactions of transfer pricing.
6. Appendix
Program of simulations © ® 2017 Constantinos Challoumis
%Q.E. method of Constantinos Challoumis for Transfer Pricing
q= 0;
while q<10 q= q+ 1;
count= 0;
counts= 1;
counts1= 1;
while count<10 if rand()<9
i= 0.6*rand();
37 Impact Factor of Liability of Tax System
endif rand()<9
l= 0.7*rand();
endif rand()<9
r= 0.5*rand();
endif rand()<9
c= 0.3*rand();
endif rand()<9
t= 0.8*rand();
ends= (k+ l)/ (r+ c+ t);
s_ tilda= 0.3;
count= count+ 1 if s<0.3
counts= counts+ 1;
else
counts1= counts1+ 1;
endend
s1= (k)/ (r+ c+ t);
s_ tilda= 0.3;
count= count+ 1 if s<0.3
counts= counts+ 1;
else
counts1= counts1+ 1;
endend
vec= [c,count,counts,counts1,i,l,q,r,s,s1,s_
tilda,t;vec];
end
Constantinos Challoumis 38