Sunday, October 5, 2014

Corporate tax avoidance fact of the day

The Times has a nice article on the issue of tax avoidance by corporates using strategies to shift profits (through higher royalties to the intellectual property owning entity) to jurisdictions where taxes are lowest and costs to those where they are highest (subsidiaries in high tax areas, where interest is deductible, to borrow from those in low tax areas, where interest is not taxable). It writes,
According to a report from Kimberly Clausing of Reed College, the top five countries for American affiliates, measured by jobs, are Britain, Canada, Mexico, China and Germany. Measured by reported profit they are the Netherlands, Luxembourg, Ireland, Canada and Bermuda... In 2010, according to the International Monetary Fund, Barbados, Bermuda and the British Virgin Islands received more foreign direct investment combined than Germany or Japan. The British Virgin Islands was the second-largest investor in China, after Hong Kong. These fictions are possible because most of the money flows through shell corporations that employ nobody and produce nothing. 
And this graphic nicely captures corporate tax trends,

In the same article, Larry Summers points to the problems likely to arise due to weak enforceability of corporate and income tax rules in a globalized world where businesses and rich people can easily move around their activities to minimize their tax outflow,
Consider a superstar banker, an enormously valuable pharmaceutical patent, a terrific entertainer, an assembly line worker and a teacher. Of all those things, which is the least mobile? A tax system that can’t reach the mobile is a tax system that is going to burden working people.
For an Indian government seeking a proactive international role, there may be no more appropriate issue to assume a global leadership role than co-ordinating a global effort to limit corporate tax avoidance strategies.

Update 1 (15.11.2014)

Times has a nice story about US MNCs using European tax havens to minimize their tax outflow by cutting preferential tax deals with those countries. It writes,
Luxembourg had inward foreign direct investment of $2.4 trillion in 2012, exceeding the combined intake of Germany and France, the eurozone’s two largest economies... To put that in perspective, Luxembourg has a population of just over 500,000 people. Germany and France have a combined population of 146 million people. About 91 percent of the foreign direct investment coming into Luxembourg is through special-purpose entities... Ireland has become particularly popular as a way station for managing taxes. A United States Senate report last year found that from 2009 to 2012, Apple transferred “$74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2 percent.” Another Senate report found that Microsoft transferred “rights to the intellectual property developed by American engineers” to a small Dublin office with less than 400 employees, then reported an annual profit of $4.3 billion, which was taxed at 7.2 percent.
Update 2 (20/12/2014)
From Newsweek,
Google pays as little as 2.4 percent tax on its offshore earnings, compared with the official 35 percent tax rate on American profits and the 21 percent rate in Britain, its second largest market. Google’s worldwide pretax profits grew 72 percent from 2009 to 2013, but profits booked offshore grew more than five times faster, from $7.7 billion to $38.9 billion.
In early December, the British government sought to clamp down on corporate tax avoidance by offering companies a choice between a 25 percent tax on “profits generated by multinationals from economic activity here” and a 21 percent tax on profits kept in the country. 

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