As governments are seeing tax revenue from their citizens decrease, they are reconsidering how multinational firms move income to jurisdictions where the corporate taxes are the lowest. Preventing “taxation arbitrage” is the goal, but it is difficult to determine whether there is a sufficient amount of coordination and cooperation between countries to realize the goal.
What’s Inside?
Governments are becoming increasingly frustrated with multinational firms maneuvering to recognize income in countries that have lower tax rates. The main vehicles for performing this form of tax arbitrage are intangible assets, such as intellectual property. In one example, a company has one division pay another division royalties for its own intellectual property. The division receiving the royalties is located in a country with a lower tax rate.
With tax revenues from citizens declining, the issue of tax arbitrage by multinational corporations is becoming more of a hot topic, particularly in Europe and the BRICs (Brazil, Russia, India, and China). But the amount of coordination between taxing authorities necessary to create a “unitary tax code” does not seem possible. Also, if it is implemented poorly, a unitary tax code may simply encourage countries to create more tax havens to attract more corporate income. Already, there are examples of countries using their tax codes as a means to compete for business.
The author presents discussion of the topic by executives, academics, and the Organisation for Economic Co-Operation and Development.
How Is This Article Useful to Practitioners?
The issue of shifting income from one country to another for tax reasons is not new, but the use of intellectual property as the vehicle is something that has evolved over time. Given that countries are becoming more aware of this type of income shifting to avoid tax, new tax rules will more than likely emerge in the future. A unitary tax code does not seem likely, but companies can expect higher taxation in some form. This taxation will be tempered by a given country’s desire to attract corporate income using its tax code as a means to compete.
Abstractor’s Viewpoint
I find the discussion interesting, but in some ways I am surprised the activity of tax arbitrage by multinational firms appears to have not been foreseeable. I would expect any company to avoid as much tax as possible (multinational or not). Consequently, the countries mentioned in the article either are rather gullible or simply are not pressing the issue because the given country uses the tax code to its advantage in some other manner (perhaps to attract business). I suspect it is the latter reason and not the former.
Furthermore, what is not discussed are the tax revenues generated by employees. A country may choose to give a multinational corporation the ability to have a lower tax bill in exchange for the tax revenues generated by the employees the company hires. On a smaller scale, municipalities make this trade-off of lower taxation in exchange for job creation quite frequently.