Round Tripping Meaning
Round Tripping is an illegal way to inflate revenues by swapping assets or shell transactions, that are done usually on a no-profit basis through a mutual settlement or an agreement. For example, dealers of cloth can enter into a round tripping transaction with dealers of machinery to increase the revenue at no profit basis upon mutual consent or an agreement to reverse the transaction in the next period.
- Inflate the Revenue to show the growth of the organisation.
- To show that the organisation is doing more business than competitors.
- To manipulate and attract the Investors.
- To flow the money for personal gains by shell transactions.
- To convert the black money into legally earned money.
- To manipulate stock prices and perform insider trading to earn secret profits.
- To show the company as an operating company.
Mr A doing business of pipes comes to A Inc. who is dealing in servicing of pipes, repairs, etc. with a proposal to buy the pipes from him 100 pieces of $ 10 each amounting to $ 1000 and in return, he will purchase the old pipes which need repairs from A Inc. for $ 5 each, 200 pieces. This transaction is called round-tripping transactions. It looks like barter transactions, but it is done at cost and for mutual benefits of both the parties involved with no profit basis.
Why does Round Tripping Happen?
- To represent the organisation as busy doing business and growing.
- To attract investors by showing the growth graph.
- To make the secret profits in the form of shell transactions through a round tripping business.
- To make the accounting statement attractive and impressive to the investors.
- To show the organisation as the operating one to prevent consequences and legal formalities to be performed in intraoperative organisations.
- To save from the various taxes by investing through foreign investors as in some countries, tax for foreign investors is less.
- To inflate the stock price of the company.
In most cases, round tripping is bad and used to make secret profits by various means. But on the other hand, the round tripping business if done in good faith, proves to be beneficial for the organisation.
- The government uses round tripping in times of recession to increase the flow of money in the market.
- Such transactions can be used as a tax planning tool by large organisations. Tax planning is considered legal, it does not mean tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. .
- It is used to increase liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses. in the market when situations are adverse.
- The Government effectively uses it in policies to bring back the money which is routed outside the country.
Round Tripping is used as a tool to flow the money and use it for personal gains. It is considered unlawful in most cases. The organisation use it to evade the taxes and convert the black money into white money.
- Illusory growth due to round tripping manipulates the investors and presents the organisation as a growth making organisation.
- It is used to inflate the market capitalisation for a temporary period by the stock market players and insider tradersInsider TradersInsider trading is buying or selling the stocks of publicly traded companies based on confidential information acquired from direct or indirect sources, which will influence the security prices. It is stated as an illegal practice in many countries., which is illegal.
- It violates the accounting norm of substance over form. i.e. economic substance of the transaction is essential rather than just the legality of the transaction.
- In Global Point of View, it is used as a tool for tax evasion and money laundering.
- It is used to meet the revenue benchmark even though transactions are done at no profit and mutual settlement with the suppliers or third parties.
This article has been a guide to What is Round Tripping & it’s meaning. Here we discuss how it works along with examples, benefits and disadvantages. You can learn more about from the following articles –