Taxes and Rules for MultinationalTaxes and Rules for Multinational CorporationsCorporations

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Table of Contents

Multinational Corporations Tax Rules and Regulations.........................................................................3

Introduction.......................................................................................................................................3

Policies followed by MNCs for paying less tax...................................................................................3

Profit shifting.................................................................................................................................4

Hybrid entities...............................................................................................................................4

FDI Policies.....................................................................................................................................5

Difficulties for introducing Global Tax Regimes.................................................................................5

Conclusion.........................................................................................................................................6

References.........................................................................................................................................7

Multinational Corporations Tax Rules and Regulations

Introduction

The essential section of any business planning for MNCs includes the strategy and principles

for tax planning. It includes the concepts of business models, tax management, tax risks,

value chain layouts, company’s legal structure, responsibilities of tax functions, governances

in taxes and basic business concepts (Braunstein, 1999). During the past years policy makers

and developmental agencies are being pulled towards international taxation strategies.

International tax avoidance by MNCs, increased net worth of the individuals and the

function of tax havens for increasing the incentives are said to be interconnected for

avoidance strategies. These strategies are adopted by the MNCs to shift income from the

high tax to low tax countries. They include presence of informal sectors, high poverty level

and inconsistency of low class citizens for paying huge taxes. Furthermore they also include

misrepresentation of corporate debt equity structure and intra-firm transfer prices in

addition to operating costs for attracting Foreign Direct Investments (Dharmapala, 2008).

The report focuses upon the policies adopted by the MNCs to pay diminutive amount of

taxes and the hurdles that arise for introducing such global tax regimes.

Policies followed by MNCs for paying less tax

Major part of country’s GDP and intra-firm trade is due to the presence of MNCs. With

operations at central and regional levels MNCs have global operating bodies with combined

supply chain products (Luo, 2001). The procedures and products are inclusive of the digital

economy which differs with respect to the location of the customers. In order to accomplish

public spending countries charge taxes. These taxes are in the form of corporate income

taxes and are based on company’s profits (Detomasi, 2007). OECD or Organisation for

Economic Cooperation and Development is considered to be an international organisation

with 34 countries as members. They are responsible in dealing with tax information

exchange and tax planning through tax agreements. On the other hand these agreements

have permitted zero taxation or under taxation policies. MNCs have the capability for

separating their functions including sales, development and research. Digital economy lends

a hand to MNC for operating internet business procedures and intangible assets for gaining

profits. However the methods adapted by MNCs for tax avoidance in the developed

countries orbits the shifting income from higher-tax rate to either no or lower tax countries

(Dharmapala, 2008). Some of the strategies are as follows:

Profit shifting

MNCs limit the operational activities in the higher tax countries through progressing

towards subsidiary-located low-tax countries. The international funds by MNCs are not their

chief contributions but make up 25% of the total investment for the Least Developed

Countries (LDCs). Through the issuance of bonds from local banks of LDCs, MNCs are able to

make use of funds for saving adequately (Haufler, 2013).

In addition MNCs also transfer the pricing policies between the companies that are under

the same MNC. It mainly includes the physical goods as well as intangible products. More

than quarter of the international transactions is included in inter-company transactions and

are not purchased from a third party. Hence they are not seen as arms-length. Abusive

transfer pricing occurs when the price in increased. Hence this is a method to shift profits

where a subsidiary in a high tax authority purchases the products from the other company

that has low-tax jurisdiction. In case of the UK there are more than 60 experts for

determining the transfer pricing. Additionally the group company existing in lower tax

environment having IPR ownership rights accuses other group in a higher tax state for the

usage of technology, brands, licenses or patents. MNC have the company that owns the IPR

in the country where there are no taxes to be paid for licence fees and then charge its

associate that are around the globe (Braunstein, 1999).

Hybrid entities

Fusion of two entities encircles the deduction of the same cost including the loan interest

from two separate countries based upon the company’s associate structures. This also

occurs when cross-countries permits dual-resident companies (Luo, 2001). For instance, in

the UK Ireland have companies that are based only in Ireland or tax haven countries

including Bermuda. This gives rise to a tax reducing structure for wholly owned subsidiaries

that have transactions in Ireland, Bermuda and Holland. The Irish affiliates have twofold

residence and circulates profits through Dutch affiliates giving rise to no corporate income

tax (Dharmapala, 2008).

FDI Policies

Some countries have allowed MNCs monopolies for protecting domestic markets from the

imports via tariffs. They have established markets and factories on local basis and have

charged high prices leading to premium profits for monopolies from local citizens

(Blomström, 2003). Tax holidays are also observed by the MNCs for pulling foreign

investments as taxes that are paid to foreign entities are tax-deductible in an MNC home

country. As a result when a tax holiday is implemented MNC do not pay taxes to the LDC

host country. Hence the investment holds no more importance due to reverse foreign aid.

Difficulties for introducing Global Tax Regimes

Avoidance strategies and tax evasion by the MNCs are well understood that how MNC make

use of shifting their income from high tax countries to low tax countries (Payne, 1997). The

financial recession era made the fiscal policies related to tax evasion was a major issue for

the developed countries. The OECD countries have 35% of tax revenues of their GDP while

the developing countries only acquire 13%. The increment of tax by the developing

countries leads to a situation where the government agencies cannot obtain the required

financial resources for educational, healthcare and sanitation services. The low tax revenues

urge the governments to increase the levels of aid and debts and can distort the positive

attitude towards creditors (Sethi, 2003).

By determining the social and economic effect of tax evasion it is estimated that almost

£189 Bn can be lost by the developing countries which 5% of the total GDP. The OECD states

that developing countries can lose more than three times of the amount they obtain in aid

due to tax evasion and avoiding tax havens. It also suggests that the strategy for tax havens

however play an important role in: firstly offering low tax rates for producing

encouragement for corporations to shift from high tax jurisdictions and secondly it offers

secrecy provisions for enabling tax evasion. Both of the factors are a magnet for foreign

capital in globalisation. Studies by the Tax Justice Network suggest that £21.2Tn can be held

offshore and the developing countries can lose over £126bn in terms of tax revenues

(Blomström, 2003).

Studies also suggest the loss that arises due to profit shifting and price data strategies by

MNCs (Held, 1999). The aim for these studies is to observe the abnormal price transactions

of imports and exports by the help of price filter matrix. The result depicts tax loss for the

mispricing of European countries to be £230Bn. A research by Riedel and Fuest portrays that

MNCs associated to havens have less profit margins and MNCs that pay less tax to the

national companies also face loss. For FDI tax variables including market size, infrastructures

and labour force are significant but tax competition has lead to tax driven investments

which decreases the tax bill.

The inadequacy of methods for obtaining information related to taxpayers and tax evasions

also add-in to problems for MNCs. During the past years it has been observed that several

developing countries have adopted the strategies for preventing profit outflows including

thin-capitalisation, anti-avoidance rules and specific transfer pricing legislation. Nonetheless

they do not exist in several developing countries creating problems for MNCs. As of

February 2013, BEPS or Base Erosion and Profit Shifting reported that profit shifting is the

basic cause of base erosion (Haufler, 2013). It also described the MNCs mobile activities for

avoiding payment of taxes which can change the already existing policies that can be

harmful. Restricted to the cost management pressures the corporate tax department fails to

play their character as tax management. As a result the corporate tax professionals are

forced to administer the tax management with limited amount of resources, thus

deteriorating the overall image (McDaniel, 2003).

Conclusion

It can be concluded from the studies that MNCs that are strongly connected to the tax

havens show more profit shifting. The international tax rules should be revised. They should

focus upon the excessive distribution of global tax base and each country should be given

deserving amount of tax for the profits earned by MNCs. The treatment towards MNCs

should be fair and for what they really are, including the centralised management and

economic scales. They should be monitored for their tax payments and economic activities

instead of their jurisdictions for tax avoidance strategies.

References

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Braunstein, E., & Epstein, G. (1999). Creating international credit rules and the Multilateral

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Dharmapala, D. (2008). What problems and opportunities are created by tax havens?. Oxford Review

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Detomasi, D. A. (2007). The multinational corporation and global governance: Modelling global

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Haufler, V. (2013). A public role for the private sector: Industry self-regulation in a global economy.

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Held, D. (Ed.). (1999). Global transformations: Politics, economics and culture. Stanford University

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Manzon, G. B., Sharp, D. J., & Travlos, N. G. (1994). An empirical study of the consequences of US tax

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McDaniel, P. R. (2003). US Tax Treatment of Foreign Source Income Earned in Developing Countries:

A Policy Analysis, The. Geo. Wash. Int'l L. Rev., 35, 265.

Payne, D., Raiborn, C., & Askvik, J. (1997). A global code of business ethics. Journal of Business Ethics,

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Sethi, S. P. (2003). Setting global standards: Guidelines for creating codes of conduct in multinational

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