Question

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.

Answer 1

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.