In: Accounting
List and critically assess the methods and models that
Multinational Enterprises (MNEs) have
used to minimize their tax obligations. Also, identify the primary
techniques that MNEs have
adopted to maximize their profit potential. Illustrate your answer
with specific reasoning,
argument and drawing on examples.
Multinational taxation is an area of research that encompasses
academics in accounting, finance and economics. Over the years,
these researchers have endeavored to understand the role of
taxation on multinational corporation (“MNC”) behavior. In
particular, researchers are interested in determining whether
taxation alters where MNCs’ operate their businesses. A review of
the literature on foreign direct investment provides clear support
for taxes influencing MNCs’ location decisions. In addition, MNCs
appear to organize themselves in a manner to increase the amount of
their profits invested in relatively lightly taxed jurisdictions.
By altering the location and the character of income across
jurisdictions, MNCs are able to reduce their tax burdens. The
natural extension of these lines of research, then, is determining
the welfare consequences of MNCs’ sensitivity to taxation. Ceteris
paribus, investors are better off if an MNC can lower its worldwide
tax burden. Yet, the revenue consequences to the jurisdictions
involved are far less clear. The central problem of multinational
taxation is that there are atleast two jurisdictions that can claim
the right to tax the firm’s income.
Firms that only operate within the confines of one jurisdiction
face oneset of statutory tax rates. Firms that operate in several
jurisdictions are not only subject to several sets of tax rates but
also several sets of tax regulations. The interplay between rules
and rates leads to a multitude of potential tax obligations facing
these firms. As the income of multinational corporations faces
overlapping tax claims, MNCs have developed various avenues for tax
avoidance which complicates tax collection by the tax authorities.
Such tax-avoiding behavior may reduce tax revenue and could distort
international financial flows and the internationalallocation of
investment by MNCs. An important policy question is to what extent
these incentives for tax avoidance actually affect thebehavior of
MNCs and reduces tax revenue.