Question

An international business, like a domestic business, would like to minimize its tax liability. Describe three ethical strategies an international business can implement to minimize its tax liability.

Answer 1

The three ethical strategies an international business can implement to minimize tax liability:

Transfer pricing:

This is a phenomenon by which an MNC saves taxes from its locations in 2 countries X and Y. Let the country X has lower tax rate than country Y. In transfer pricing to gain a tax advantage, the company unit in country X will raise the prices of products for its units in both countries X & Y. This way, the revenue for a unit in X will be higher than its normal and the same for country Y will be lower than its normal revenue. This will create higher taxes for a unit in country X but lower than normal taxes for unit country Y. Overall, the consolidated company will gain by paying lower combined taxes than normal.

Royalty Payments:

An MNC has two companies one in country X and the other in Y. Here the one in country X incurs expenditure on the making of new technology so it can sell the technology to country Y by charging royalty payments. Most of the governments across the globe allow the royalty payments as a tax exemption.

Inversion:

Shifting of the company headquarter in lower tax countries by means of merger acquisitions and strategic alliances.For example, shifting it in countries like Ireland where tax rates are extremely low as compared to the US.