Question

Describe the ways in which multinational corporations are able to reduce their global exposure to tax liabilities. Be sure to identify the primary tools used and the potential financial benefits from successful tax management programs.

Answer 1

The ways in which MNCs are able to reduce their global exposure to tax:

1. Inversion: MNC's sometimes, to save their tax shift their headquarters to a lower tax jurisdiction such as Cyprus.

2. Exemption of income earned in foreign countries: Some countries levy taxes on not only the income earned in their home country but also on the income earned through foreign operations. In U.S a home MNC (belonging to/ with headquarters in US) will only be charged on the income earned in US and not on the income earned in any other country.

Some other points are: pricing policy, tax evasion through and payment of royalty.

The potential financial benefits from successful tax management programs are:

Lower tax rate

Efficient use of finances saved through tax management

Avoidance of unnecessary tax payment

More growth possibilities