With and Without Rest Rewarding Taxes

With and without Rest Rewarding taxes ©® 2018 Constantinos Challoumis Abstract: The purpose of this paper is to compare the money cycle with and without the impact factor of rewarding taxes. This analysis is based on the money cycle and the impact of restrewarding taxes. This means that we have a study on the structural characteristics of the economy that support the market and its robustness. As a result, the impact factor of rest rewarding taxes is significant because it enforces the economic dynamic of any economy. Then we draw conclusions about the significance of this influence factor. I. Comparison between the cycle of money with and without the impact factor of the rest rewarding taxes This paper examines the case of the money cycle with and without all of the impact factors of rewarding taxes. Then, in this examination, the impact factor of the rest-rewarding taxes is used in one case and avoided in the other. Then, using the QE method, conclusions were drawn about the importance of this impact factor in the economy. Furthermore, this impact factor is about the transfer of public-sector administration to the private sector and tax returns to the market. It should also be noted that any other rewarding taxes are excluded from this study in order to estimate the utility of this factor. The economic activity of the members of a society and the transactions between them take place within a certain institutional framework, i.e. according to certain rules of conduct/operation. These rules of conduct are enforced and maintained by the state. • An important rule is the recognition of individuals' ownership of products and factors of production. This means that every person is entitled to have their own home, their own car, their own business, etc., and use them as he sees fit. • Another important rule is to define the currency, for example, the euro, as the general medium of exchange and measurement of values. Other institutional rules are the labor framework, the market operating framework, the banking sector's operating framework, etc. The set of rules of conduct constitutes the institutional framework of the economy, and its observance is of great importance for its proper functioning. Therefore, violation of these rules entails sanctions imposed by the state. • Of course, the institutional framework is not always the same. The rules of conduct governing the economic relations of individuals change when existing conditions require changes. 1 Electronic copy available at: https://ssrn.com/abstract=4438664 The economy goes through alternating phases of economic growth (boom) and economic recession. • The period of economic growth is characterized by an increase in production and a decrease in unemployment. On the contrary, the period of recession is characterized by a fall in output and an increase in unemployment. At the same time, the economy can suffer from periods of inflation, that is, from constant increases in the prices of goods. • In cases of economic recession, in periods of inflation as well as in other cases where the economy presents serious problems, the State intervenes by taking measures in order to stabilize the economy and improve the economic situation. • In addition to its regulatory role for economic stability, the state has a significant participation in the execution of public works, which are necessary for the development of the economy. Such projects are highways, ports, land reclamation, flood protection works, etc. These projects are investments that increase the capital of the economy and improve its productivity. In other words, the state can contribute to economic development by creating an infrastructure on which many economic activities are based. For example, a land reclamation project increases agricultural production and farmers' incomes. II. Cost sharing and the applied methodology, The contracts and the agreements between the participants of control transactions are those which determine the allocation of profits and losses. To the agreements should be mentioned the changes in the contracts. This is the reason why tax authorities should make periodic inspections. The periodic specification of contracts is important for the comparability analysis. These periodic inspections of the companies which participate in controlled transactions are crucial for the arm’s length principle. Then, the determination of the cost sharing depends on the periodic check of companies which are tested parties.1 The scope of the controlled transaction company is to deal with problems related to the taxation of its activities. As a result, the requirements of tax authorities and control trading companies should be within the scope of the arm length principle. The appropriate agreement for controlled business companies is therefore to allow them to maximize profits in a low tax environment and to maximize costs in a high tax environment. Furthermore, the companies of controlled transactions should be notified that tax authorities are inspecting them under the condition of proportional adjustments. The interpretation of the 1 As tested parties considered the companies which participate in control transactions. 2 Electronic copy available at: https://ssrn.com/abstract=4438664 proportional adjustments condition is that companies that participate in controlled transactions frequently lack the appropriate data and uncontrolled transactions of similar circumstances to compare, so they adjust their data in a proportional manner. [1][2] This means that if the tested parties conclude that the profits and losses of companies from uncontrolled transactions are significantly higher or significantly lower, they use a proportional analogy to compare them with their data. The production of goods or services creates profits and costs to the companies.2 Based on the prior scrutiny we have that3: 𝑢 = 𝑠(𝑧𝑓 + 𝑧̃ 𝑑 ) (1) 𝑧 = |𝑧̃ − 1| (2) The symbol 𝑢 is about the impact factor of the comparability analysis which has any method to the 𝑠.4 The symbol z is a coefficient which takes values between 0 and 1. What value could receive is determined by the influence of the method (using the best method rule) to the 𝑠. The symbol of 𝑓 is about the cost which comes up from the production of goods, and the symbol of 𝑑 is about the cost which comes from the distribution of the goods. According to equations (1) to (6) is plausible to determine the following equations: 𝑢𝑐 = 𝑧𝑓 + 𝑧̃ 𝑑 (3) b= (p-𝑢𝑐 )*𝑗1 (4) and The symbol of 𝑏 in the preceding equation is about the amount of taxes that companies must pay for controlled transactions in the application of the arm’s length principle. The 𝑢𝑐 is the amount of tax obligations that can be avoided through the allocations of profits and losses. Moreover, 𝑗1 is a 2 See paper: Challoumis, Constantinos, Arm's Length Principle and Fix Length Principle Mathematical Approach (March 23, 2018). Available at SSRN: https://ssrn.com/abstract= 3 See paper: Challoumis, Constantinos, Analysis of Tangibles and Intangibles Transactions Subject to the Fixed Length Principle (March 17, 2018). Available at SSRN: https://ssrn.com/abstract=3142960 4 See paper: Challoumis, Constantinos, Analysis of Tangibles and Intangibles Transactions Subject to the Fixed Length Principle (March 17, 2018). Available at SSRN: https://ssrn.com/abstract=3142960 3 Electronic copy available at: https://ssrn.com/abstract=4438664 coefficient for the rate of taxes. Then, the equation (8) shows the case of the arm’s length principle. In addition the case of fixed length principle we have the following equation: 𝑣 = p*𝑗2 (9) The symbol of 𝑣 in the previous equation shows the taxes that should be paid to the enterprises of controlled transactions in the application of the fixed length principle. Then, 𝑗2 is a coefficient for the rate of taxes in the case of fixed length principle. Thereupon, we conclude according the prio theory that: 𝑣≥𝑏 (10) The tax for the companies which participate in controlled transactions of transfer pricing in the case of fixed length principle is higher or at least equal with than of the case of the arm’s length principle. Consequently, with the principle of a fixed period, controlled transaction companies can deal with the problems resulting from the allocation of profits and losses. Therefore, tax authorities are able to address the effects of the transfer price on global tax revenues. [3][4][5][6] The fixed-length principle allows for the recovery of global tax losses from controlled transfers of transfer price transactions. The following system illustrates the control company's transaction allocation procedures, data proportional adjustment, and the fixed length principle. [7][8][9][10][11] Thence, we have that: Best method rule Comparability analysis Fixed length principle Theoretical background Generator Results, graphs and conclusions Figure 1: Cost sharing and application of fixed length principle Figure 1 determines the procedures of the fixed-length principle and its quantity analysis to determine the behavior of the model. The following section presents the theory of the money cycle. In addition, the methodology following is based on the Q.E. method. 4 Electronic copy available at: https://ssrn.com/abstract=4438664 II. The cycle of money and the ideal case of cycle of money Tax receipts shall correspond to the savings that could be achieved by companies if taxes were avoided. There are different ways to manage these savings from one case to another. The benefit of companies could be managed in a completely different way, so that it can be preserved or taxed. According to the cycle of money theory, when saving is strong and taxes are strong, the economy is in good shape. It is crucial for this determination to be a separation of savings into the nonreturned savings (or escaped savings) and into the returned savings (or enforcement savings). The equations are presented in order to illustrate the extent of that analysis below: 1 𝛼 = 𝛼𝑠 + 𝛼𝑡 , ή, + 𝛼𝑡 (1) m = μ + 𝛼𝑝 (3) 𝛼𝑝 = ∑𝑚 𝑗=0 𝛼𝑝𝑗 (5) 𝑥𝑚 = 𝑚 − 𝑎 𝑣 μ = ∑𝑛𝜄=0 𝜇𝜄 𝑐𝑚 = 𝑐𝛼 = (2) (4) 𝑑𝑥𝑚 (6) 𝑑𝑥𝑚 (7) 𝑑𝑎 𝑑𝑚 𝑐𝑦 = 𝑐𝑚 − 𝑐𝛼 (8) The variable of α is symbolized the case of the escaped savings. This means that we have savings which are not return back to the economy, or come back after long term period. The variable of 𝛼𝑠 symbolizes the case that we have escaped savings which come from transfer pricing activities. The variable of 𝛼𝑡 is symbolizes the case that we have escaped savings not from transfer pricing activities but from any other commercial activity. For instance 𝛼𝑡 could refer to the commercial activities which come from the uncontrolled transactions. The variable of 𝑚 symbolizes the financial liquidity in an economy. The variable of 𝜇 symbolizes the consumption in an economy. The variable of 𝛼𝑝 symbolizes the enforcement savings, which come from the citizens and from small and medium sized enterprises. The variable of 𝑥𝑚 symbolizes the condition of financial 5 Electronic copy available at: https://ssrn.com/abstract=4438664 liquidity in an economy. The variable of 𝑐𝑚 symbolizes the velocity of financial liquidity increases or decreases. The variable of 𝑐𝛼 symbolizes the velocity of escaped savings. Therefore, the variable of 𝑐𝑦 symbolizes the term of the cycle of money. Thereupon, the cycle of money shows the level of dynamic of an economy, and its robustness. Moreover, there are three basic impact factors of the rewarding taxes. The rewarding taxes are the only taxes which have immediate and important role in the market of any economy. These factors are affiliated with the education, with the health system of each society, and with the rest relevant structural economic factors of the prior two impact factors. This issue is illustrated in the next scheme: Return to market Fixed length principle Cycle of money v≥b Enforcement savings Rewarding taxes Lost from market Escaping savings Rest rewarding taxes education health Figure 2: The cycle of money with rewarding taxes In the previous figure we have the case that in the tax system are included all the tax factors and with all the rewarding tax factors. In this study used only one impact factor as seems to the figure below: Return to market Fixed length principle Cycle of money v≥b Enforcement savings Rewarding taxes Lost from market Escaping savings Rest rewarding taxes Figure 3: The cycle of money only with the impact factor of rest rewarding taxes 6 Electronic copy available at: https://ssrn.com/abstract=4438664 We obtain from the previous scheme that we have the case of only one impact factor, which is about the rest rewarding taxes. Therefore, it is able to proceed to mathematical and quantity analysis of the cycle of money in the case of rewarding taxes. III. Definition and mathematical approach of the cycle of money with and without the impact factor of the rest rewarding taxes For the purposes of the mathematical approach of the cycle of money we use the prior equations subject to the next conditions which are about the rewarding taxes: 𝛼𝑝 = 𝛼𝑟 + 𝛼𝑛 *ℎ𝑛 +𝛼𝑚 *ℎ𝑚 (9) 𝛼𝑟 ≥ 𝛼𝑛 *ℎ𝑛 ≥ 𝛼𝑚 *ℎ𝑚 (10) and In the prior two equations used some impact factors, which are the 𝑎𝑝 which also demonstrated in the equation (5), moreover the variables 𝛼𝑟 , 𝛼𝑛 , ℎ𝑛 ,𝛼𝑚 and the ℎ𝑚 . The variable 𝛼𝑟 symbolizes the impact factor of the rest rewarding taxes. The symbol of 𝛼𝑛 is the impact factor of the education and any technical knowledge. The symbol of 𝛼𝑚 is about the impact factor of health anything relevant and supporting of this issue. The symbol of ℎ𝑛 , and of the ℎ𝑚 , are the coefficients of the education and the health impact factor accordingly. Therefore, we use the equation from (1) to (10) and the next table for the coefficients of the values of the cycle of money with and without of some impact factors of the rewarding taxes. [2] IX. Conclusions A structurally troubled economy has a lower economic dynamics than an economy without a problem. This means that taxes on the economy will not return to the market. This would reduce consumption and investment in the economy. In this case, an economy without taxes has a lower dynamic than an economy without compensatory taxes. This means that, while most taxes are harmful to the economy, the rest of the tax on benefits is positive, since they are returned to the economy to finance consumption and investments. This is a general distinction between the three tax and tax of reward (restructuring, education and health). This analysis shows that other taxes (structural) benefit the economy. 7 Electronic copy available at: https://ssrn.com/abstract=4438664 References 1. Feinschreiber R.,2004, Transfer Pricing Methods An Application Guide (John Wiley & Sons, New Jersey). 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 3. Challoumis, Constantinos, Arm's Length Principle and Fix Length Principle Mathematical Approach (March 23, 2018). Available at SSRN: https://ssrn.com/abstract= 4. Challoumis, Constantinos, Analysis of Tangibles and Intangibles Transactions Subject to the Fixed Length Principle (March 17, 2018). Available at SSRN: https://ssrn.com/abstract=3142960Challoumis, Constantinos, Methods of Controlled Transactions and Identification of Tax Avoidance (February 4, 2018). 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