Round Tripping Meaning Examples How It Works

Round Tripping Meaning

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Round Tripping (wallstreetmojo.com)

Purpose

Inflate the RevenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more to show the growth of the organisation.To show that the organisation is doing more business than competitors.To manipulate and attract 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.

Example

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 a round-tripping transaction. It looks like barter transactions, but it is done at cost and for the mutual benefits of the parties involved with no profit.

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 statementAccounting StatementAn accounting statement or account statement refers to a document that summarizes the financial details of an account during a given period. An example of an accounting statement is a bank account statement. A bank account statement reflects the source and amount of every transaction within a selected period. Different accounting statements serve other purposes, but they all act as written proof that helps resolve disputes.read more 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 tax for foreign investors is less in some countries.To inflate the stock price of the company.

Benefits

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 organization.

The government uses round-tripping in times of recession to increase money flow in the market.Such transactions can be used as a tax planningTax PlanningTax planning is the process of minimizing the tax liability by making the best use of all available deductions, allowances, rebates, thresholds, and so on as permitted by income tax laws and rules imposed by a country’s government. It contributes to better cash flow and liquidity management for taxpayers, as well as better retirement plans and investment opportunities.read more tool by large organizations. Tax planning is considered legal, and 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. read more.It is used to increase liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more in the market when situations are adverse.The Government effectively uses it in policies to bring back the money routed outside the country.

Disadvantages

Round Tripping is used to flow the money and use it for personal gains. It is considered unlawful in most cases. The organization uses it to evade taxes and convert black money into white money.

Illusory growth due to round tripping manipulates the investors and presents the organization as a growth-making organization.It is used to inflate the market capitalization for a temporary period by the stock market players and insider tradersInsider TradersInsider trading is defined as the act of taking key trading decisions related to a company’s listed stock using critical non-public information. The US Securities and Exchange Commission (SEC) penalizes offenders of illegal insider trading as it causes material loss to the investors. It also shakes their faith in the stock market.
read more, which is illegal.It violates the accounting norm of substance over form, i.e., the economic significance of the transaction is essential rather than just the legality of the transaction.From a global point of view, it is used for tax evasion and money launderingMoney LaunderingMoney laundering is a criminal act of legitimizing the money acquired through illegal or unethical means by disguising the origin of the crime.read more.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.