Curbing tax avoidance by multinational companies

How can govts keep MNCs from avoiding taxes
1/6 How can governments keep multinational companies from avoiding taxes by shifting their profits to low-tax countries? For nearly a decade, nations have grappled with that question, seeking to deter companies from legally avoiding tax by resorting to so-called tax havens – typically small countries that entice companies with low or zero taxes, even though the firms do little actual business there. Here are some key questions:
2/6 What is a global minimum corporate tax?
With a global minimum, countries would change their tax laws so that if one of their companies enjoys profits that go untaxed or lightly taxed offshore, that company would face additional tax at home to bring its rate up to the minimum. That is, the headquarters country would raise the tax rate for offshore income until it reached the minimum.

Doing so would put a floor under corporate taxation worldwide. It would remove the incentive for companies to shift profits to low-tax countries, so the thinking goes, because if those companies escaped tax abroad, they would have to pay it at home anyway. An agreed global minimum would also weaken the motivation for countries to enact low tax rates to attract companies in the first place.
3/6 How big is the problem?
For decades, corporate earnings have been migrating to tax havens, often through complex avoidance schemes. From 1985 to 2018, the global average corporate statutory tax rate fell from 49% to 24%, thereby shifting the tax burden from companies and their shareholders to workers’ wages.

In 2000-2018, US companies booked half of all foreign profits in just seven low-tax jurisdictions: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland. Though small countries levy a low rate, they may capture what is for them significant revenue. The practice costs the US Treasury around $100 billion in lost revenue annually.
4/6 How does this affect ordinary people?
Several ways. Taxes on the earnings of multinational companies are ultimately paid by the shareholders in those companies _ a group that is, in general, wealthier than average. As the tax load on corporate revenue has declined, the overall tax burden has tended to shift to wages and labor – in other words, from generally affluent shareholders to ordinary workers.

Another reason to care: According to the OECD, large companies that operate across borders enjoy an unfair competitive advantage by capitalizing on international tax avoidance strategies that aren’t available to local-only companies.
5/6 How do cos move profits to find the lowest tax rate?
Though some tax avoidance schemes are illicit, most are perfectly legal. Part of the issue is the nature of the modern economy: It is increasingly based on intangible assets, like trademarks, software and other intellectual property. Those are easier to move around than are tangible assets, such as factories.

One way of shifting tax liability is through a profit-sharing agreement. This involves assigning a share of costs and profits to a subsidiary in a low-tax jurisdiction. Another way is to move earnings from copyrighted software or other intellectual property to subsidiaries in countries where such earnings face little or no tax.
6/6 The dispute over ‘digital’ taxes
One part of the OECD talks has focused on taxing companies that do business in countries where, often because the companies’ businesses are Internet-based, they have no physical presence and thus pay little or no tax on those sales. The Biden administration proposes to resolve the issue by producing a list of 100 of the world’s biggest and most profitable companies – no matter what their line of business – and letting countries tax them based on their local sales. The idea would be for other countries to repeal their unilateral digital taxes and end the trade tensions they incite.

Source:The Economics Times