Tax avoidance and tax evasion by transnational companies and the role played by tax havens have recently received much media attention, when it transpired that prominent companies such as Starbucks and Apple pay virtually no income taxes on their massive international profits. The case of the world’s largest commodity trader, Glencore, demonstrates that tax evasion by multinationals also affects developing countries. Tax issues and the detrimental role played by tax havens are now firmly on the international policy agenda, for example at the G20.
JUNE 21, 2013 | FRIEDRICH-EBERT-STIFTUNG
Tax Havens and the Taxation of Transnational Corporations
Transnational companies employ a number of techniques to benefit from the cross-country nature of their transactions, as well as from loopholes and contradictions in the tax legislation of countries involved to evade and avoid taxes. The paper discusses the role of tax havens and preferential tax schemes, the abuse of intra-firm transfer pricing, and describes how different treatment of companies in different countries can result in »double non-taxation«.
Various approaches to deal with these challenges exist, but have to be improved and strengthened. This goes for transfer pricing rules, transparency requirements (such as country-by-country reporting, centralised registers providing »beneficial ownership« information), and deductibility restrictions; anti-avoidance measures such as blacklists, the elimination of the abuse of double taxation agreements (e. g. »treaty shopping«); or the wider use of withholding taxes, especially in the case of developing countries. Given the tremendous shortcomings of the current transfer pricing system, a system change in the form of »unitary taxation« needs to be further thought through and tested.
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The taxation of transnational corporations will remain an important and difficult issue as long as we have a globalised economy. There will also probably be certain forms of tax havens or tax haven practices, or at least tax competition between states. There will be no global tax policy in the foreseeable future. Thus tax evasion and aggressive tax avoidance by transnational corporations will remain on the agenda.
Tax avoidance by corporations involves the use of low-tax countries and preferential tax regimes. It is often connected with transfer pricing of intra-firm trade, for physical goods, but increasingly also for intangibles involving fees and royalties – which can be heavily abused in order to lower the tax burden for the corporation as a whole. Methods that have gained importance in recent years involve the abuse of qualification mismatches bet-ween different jurisdictions for hybrid entities, financial instruments, and derivatives.
Despite the difficulties in tackling tax avoidance, governments must not abandon their national and international efforts in this direction. However, the current solutions to tackle aggressive tax avoidance and tax evasion only mitigate some of the problems. Obviously, they are often incomplete or insufficient. Consequently, policymakers, civil society, and the public at large need to rethink how to ensure a sufficient tax base.
