Multinational Corporations and Tax Avoidance - Assignment Example

1. Multinationals use several tax avoidance strategies such as transferring of prices, which involves the determination of the prices for sales between different entities within them. International trade has become an intra-firm trade occurring between subsidiaries of the same multinational. Transferring of pricing can be said to be the process in which the multinational subsidiaries work to determine the income of each of the entities. The activities include setting, analyzing, documenting, and adjusting the charges that are made between related parties for services, foods, and property use. Tax evasion is achieved by multinationals that determination of prices of commodities by the firms that are not related (Azam, 2016). This makes it appear as a single company, yet there may be many of them. This process may deny host countries revenue that is crucial in developing the economy. Whenever two companies operate businesses under common ownership, they evade the required tax. Another way is through thin capitalization in which a company is financed through two means such as equity and debt. For some multinational interested in evading tax, use the tactics of borrowing from one another. It can be said to be a tax evasion technique in which some subsidiaries of multinationals acquire finances from the parent company instead of using equity capital as Da Rin, Di Giacomo & Sembenelli (2011) reports. This is done intentionally by some companies from high-tax jurisdiction borrowing from those in the low jurisdiction. Another method multinational corporations use to evade tax is double Irish and Dutch Sandwich (Lanis & Richardson, 2012). Doubles Irish entails three companies within an entity although their personalities are separate. For instance, on the enterprise is located in a low tax jurisdiction and shares an agreement to exploit intellectual property rights with the other two commonly in tax havens by using transfer pricing.

2. Tax havens play a significant role in facilitating and enhancing the transfer pricing process by multinationals corporations. Firms operating internationally tend to shift their profits from high tax to low tax jurisdictions by the use of various techniques. Shifting debt to multinationals located in the high tax countries may help in evading tax as the revenues from foreign subsidiaries is not taxed until the income is repatriated to the parent country (Christensen, 2011). Subsidiaries of companies are treated differently in different countries depending on the tax law. Hybrid entities receive different treatments depending on the tax jurisdiction, and the US companies operating in other countries pay little tax. People can also evade paying tax through passive income such ad capital aims, dividends, and interests by failing to report any income they earn abroad. The interest that is usually paid to foreign recipients is never taxed meaning that people can evade tax in the US by having shell corporations and trust in foreign have countries (Fisher, 2014). Addressing of profit shifting by the companies is quite difficult, as it will force the lawmakers to alter the tax law and other legislation such as formula apportionment. An increase in the information reporting may help in improving enforcement of tax laws to enable administration of penalty to tax evaders. Tax havens may include low taxes or none at all, lack of transparency, ineffectiveness, and lack of requirement for substantial activity. The multinational corporations in the US do not pay tax on the income they earn from their foreign subsidiaries until repatriation of the revenue to the US parent in the form of dividends.

3. Estimates of losses due to tax avoidance rely mostly on data that is reported on the income and assets by corporations. For individual tax evasion, it is quite difficult to estimate the number of the assets that is abroad if the income is never reported to the tax department. However, Joseph Guttentag and Avi-Yonah's estimate is at $50 billion as far as individual avoidance is concerned (Rossing & Rohde, 2014). The estimates used in the calculation are based on $1.5 trillion held by the persons with a high net worth outside the US. The rate of calculation is 10 percent and a tax rate of a third, which gives a figure of about $50 billion. If the tax is calculated using a tax rate of 15 percent for dividends and capital gains the total loss of tax will be $23 billion according to Gravelle (2015). The losses due to equity investment are about $15 billion using a rate of 10 percent as the return. From 2002 and 2011, the tax rate was 20 percent giving a loss of about $20 billion, which is quite high. Losses due to interests amount to about $40 billion if the rate of tax is taken as 7.7 percent after tax returns at 35 percent (Zucman, 2014). According to the Tax Justice Network, the loss of revenue in the world is about $255 billion for all countries from evasion by individuals. This is using the 7.5 percent return and a 30 percent rate of tax for calculations. In the US, the loss will be $33 billion when calculated based on the $1.5 trillion (Gravelle, 2015). However, the cost in the US may be above $100 billion a very high figure. Zucman's estimates stand $1.2 trillion from abroad led to a loss of $36 billion in 2013. This shows that the US is incurring massive losses from tax evasion by both individuals and corporations. Tax avoidance by various multinationals robs countries revenues every year especially the developing ones as Richardson, Taylor & Lanis, 2013). Developing countries lose about $100 billion annually in corporate income according to the UN Conference on Trade and Development. Another report by IMF has the estimates of losses as $213 billion annually due to tax avoidance. The DRC Government lost about $ 7.8 billion in tax revenue to a multinational known as Danzer group, which engaged in logging activities (Gravelle, 2015). Whenever two countries trade with each other three is always, a market price transaction that comes up called the arms' length trading and its price is considered to qualify for taxation. It provides a core tax justice as it benefits both the developing and developed countries in equal measure. However, developing countries suffer most due to transfer pricing losing billions every year.

4. There are various steps to ensure that countries do not lose billions to corporations, which do not want to pay tax. Some of them include information reporting such as in the case of the European Union, which has given directive for information reporting. Nations should cooperate with the OECD and the G-20 in addition to other organizations to help in improving information. Tax havens should be persuaded to join the exchanges based on the OECD model to help in ensuring complete tax compliance. There is a suggestion by Tax Justice Network for the UN to develop a global tax standard, which will form a panel to determine the compliant countries and recognize the non-compliance ones. Another suggestion is for the World Bank and IMF to assess and address compliance to taxes (Jenkins & Newell, 2013). These measures will help in ensuring that multinational corporations pay tax even when operating in foreign countries. Another measure is the expansion of bilateral information exchange by forming treaties, which will offer

4. The purpose of the Organization and Economic Cooperation and Development (OECD) is to give international guidelines based on the arm's length principle, which states that the transfer price should be equal to two companies involved, were two separate and independent entities and not part of the same corporate structure. The principle can be located in Article 9 of the OECD Model Tax Convention and helps in guiding the bilateral treaties (Keightley, 2013). It also applies to non-OECD countries to help in reducing the loss of income through tax evasion. The OECD has a function of providing the developing countries with technical assistance in implementing and administering transfer price rules in a better way. However, application of the transfer principle through the arm's Length principle is challenging and may take a lot of time. The law makes it possible to have an equitable agreement that can pass any legal scrutiny even when the corporations have shared interests (Keuschnigg & Devereux, 2013). It is used to allocate profit taxation rights in countries that experience double tax conventions by transfer pricing. This means that the US banks have to increase the information they collect on corporation performances and tax compliance. Adopting the OECD model of bilateral tax and regular information exchanges with the help of the Treasury is also recommended. There is also the unilateral approach in addition to the application of sanctions for tax havens (Gravelle, 2010). Nations should stop the abuse of the Tax Haven Abuse Act to ensure full enforcement of the sanctions suggested by the Patriot Act that is utilized for imposing penalties money laundering and financing of terrorist groups according to Mehta & Siu, 2016). Revision and strengthening of the qualified intermediary program can also help in resolving the matter and ensure compliance. Besides, if the burden of proof is persuaded to the taxpayer, it may also help as suggested by Blum. Adequate information is also required to ensure that corporations do not hide their activities ad evade tax, especially in developing countries. If enough information about foreign accounts is provided especially if it exceeds $50,000 it would require reporting (Gravelle, 2011). Another important method is creating shell corporations as US firms to stop tax evasion and provisions of tax compliance to access penalties. In addition, statute limitations should be extended to deal with the international cases, and cases should also be made public. Other measures include addressing of tax shelters, regulating the rules used by various states for permitting incorporation, and strengthening penalties (Picciotto, 2012). If all the action is taken, it is possible to save billions lost by countries due to unpaid taxes.