Question

What are the different techniques multinationals use to avoid taxes? What are the implications of these techniques on the firm and the country they do business in? Provide specific examples for various countries and relate the tax issues to dividend payments, cash flow, equity transfers (stock buybacks) and the competitiveness of the multinational enterprise.

I chose to do a research on "Exemption/Deferral of Foreign Affiliate Income". Can you please write me a research paper on this topic.

Answer 1

1. Techniques used by multinationals to avoid taxes:

a. Establishment of head office:

The tax rates between different countries are varied. A company might choose to establish its head office in a country with a low tax rate.

b. Establishment of affiliates :

A multinational is structured in such a way that it requires affiliates across different territories. It may choose to have these affiliates in countries with low tax rates or tax haven countries like Switzerland.

Impliactions of techniques:

Multinational corporations are notorious for exploting the gaps in tax policies and laws of various countries to hugely reduce their tax liabilities.In many cases , the multinational corporations get away with the avoidance of tax through deceiving" transfer pricing" as well. However, the government of the country they do business in suffers hugely in terms of tax revenue due to the methods deployes by these corporations to evade taxes or to push their tax laibility across the border.

Specific examples can be included as follows:

Dividend payments:

In the united states, a taxpayer's income from all across the world is taxed offset by foreign credits. If a company not located in the united states distributes dividend to a taxpayer in the united states, a detailed calculation of the foreign tax credit will need to be done to ensure that the US taxpayer gets the benefit of the witholding tax.

Cash flow:

The cash flows of a multinational arise from various locations. There are 2 ways to tax these cash flows- destiantion based taxing and source based taxing. Destination based taxing allows the affilaite country to tax any cash flow arising from opertains in that country itself. The source country i.e head quarter country loses out on a major chunk of revenue due to this.

All multinational enterprises are focused on maximizing profits by any means. The tax of a company forms a major chunk in the cost items of the balance sheet. The more competitive the enterprises get, the more they adopt deceitful means to evade taxes.