In the world of multinational corporations (MNCs) whose headquarters are based in the United States, the transfer of intellectual property and profits to tax haven countries has become a common and lucrative business practice. Through the use of foreign holding companies, or so-called “Controlled Foreign Corporation (CFC)”, MNCs have been able to generate higher profits while avoiding high U.S. corporate income tax rates on worldwide earnings. Overall, 83 of the 100 largest publicly traded U.S. corporations have subsidiaries in locations listed as tax havens or financial privacy jurisdictions, according to the Government Accountability Office (Hirsch 1). The underlining purpose behind the use of tax haven countries is so that foreign holding …show more content…
In generic terms, a tax haven refers to a geographical area outside the jurisdiction of one 's home country, which imposes few restrictions on legitimate business activities within its jurisdiction, and pays little or no income tax (What is a tax haven?). Apple Inc. (APPL), a world leader in the multinational technology industry, is currently facing legal challenges related to its subsidiaries in Ireland, a tax haven country. Even though Apple is a U.S.-based MNC with headquarters in Cupertino, California, it has been able to circumvent paying taxes from its foreign subsidiaries by shifting profits to the two holding companies located in …show more content…
corporate income tax rate. Statistics estimate that American companies keep sixty percent of their cash overseas and untaxed, some $1.7 trillion, according to a U.S. Senate HSGAC Permanent Subcommittee on Investigation (Hickey 1). Tax haven countries are recognized for having lower corporate income tax rates, making them extremely desirable locations for MNCs to have their foreign holding companies. What’s more, these holding companies are known for holding intellectual property rights in the tax haven countries that do not abide by U.S. tax
A prime example of this is the relationship between Mexico and the United States. Mexico has a comparative advantage over a large majority of countries in the world in its abundance of cheap labor. Mexico also has fairly underdeveloped environmental protection and labor laws, which allows corporations more leeway in their operations. Additionally, Mexico provides incentives to foreign corporations including reduced tariffs, unrestricted leases and certain tax exemptions. As a result, corporations have less overhead costs and a greater potential for profits.
Off-shoring is the establishment of business operations outside national boundaries. The process of moving business outside these boundaries is to garner an advantage either through tax breaks, lower wages, lower transportation cost and/or relaxed regulations ("Offshore definition," 2014). Many firms either branch out as a horizontal multinational or vertical multinational. Horizontal multinational’s produce the same good or services as abroad. This foreign direct investment (FDI) is done to strategically place production closer to the target market. Doing this provides advantages surrounding transportation cost while enhancing learning associated with local needs. A vertical multinational is one that fragments a portion of its good to take advantage of lower cost (i.e. cheap labor). Markusen and Maskus found horizontal multinational replaces trade whereas, a vertical multinational positively correlates with trade (Markusen & Maskus, 2001).
Apple and many other multinational companies have been keeping profits made outside of the United States for years in an effort to reduce tax exposure. Apple has taken the scenario a step further by creating a company that has does not have a country of origin, and thereby doesn’t owe any country taxes. Other multinational corporations have taken notice, and have begun to emulate Apple. The corporate tax rate in the United States has involuntarily been the driving force behind corporations developing offshore tax avoidance schemes.
Gain in case of tax inversion: A company situated in US is taxed by USA’s internal revenue code on the income earned by its foreign subsidiaries. This gives ample incentive to the corporations situated in US to shift their base to foreign nations. By this
The first definition to explore will be tax havens. As defined by the Organization for Economic Co-operation and Development (OECD) a tax haven is a state or territory in which taxes are either not levied or at a rate below the majority of other states. Furthermore, they identify three characteristics that define whether or not a state is a tax haven. The first of these is the ability to offer non-residents and/or foreign companies a financial system in which to hold their money with little to no taxes on income. Second, states may have laws or administrative practices in place that ensure the anonymity of personal financial information. Lastly, a lack of transparency in the operation of laws and a lack of consistency in how they are enforced. This may include secret dealings, negotiated tax rates, or off the book deals given to one ind...
Corporations have been moving to foreign countries for decades. Bermuda claims to be the first tax haven due to legislation passed in 1935 permitting offshore companies, however this claim to fame is debatable due to the similar legislation passed by Lichtenstein in 1926 to attract offshore capital. Switzerland also became a prominent tax haven after World War One. While other European countries had to raise their taxes to help pay off war debt, Switzerland, having been neutral in the war, had an influx of business. Originally tax havens were used to avoid personal taxation, but starting in the 1950’s companies have been moving to them because of new jurisdiction.
Corporate inversion is a tax avoiding strategy in which a multinational company in the United States renounces its citizenship and re-incorporate itself in a tax haven country to avoid paying taxes on its foreign income.A multinational company has operations in more than one countries; however, it declares one of them as its home where the parent company resides. An inversion deal changes the parent company with no changes in operational behavior. Corporate inversion has never been the talking point of mainstream common people because of the complex nature of corporate financial accounting and taxation rules. But the recent wave of inversions made
World multiplarization and economic globalization make the emerging market developing very fast which stimulate the booming of EMMNs (Emerging Market Multinationals). Here is some data already illustrates these new changes. Developing markets accounted for 60% of incremental world GDP from 2000 to 2010. Over the next decade, most of the world’s expected population growth of approximately 750 million people will be in these economies[2] . Emerging market hedge fund capital reached a record new level in the first quarter of 2011 of $121 billion，which only have 0.4 percent of word outward foreign direct investment(FDI) and 15.8 percent by 2008[3] .And the numbers of the multinationals from emerging economies are estimated 21,500 multinationals[4].
According to the U.S Treasury, Congress enacted FATCA for the purpose of combating international tax evasion. The act targets wealthy American residents and citizens who evade taxes through offshore account. And this act is expected to increase federal revenue and maintain the fairness of the tax system (U.S. Treasury 2014).
What this means is that the US Treasury Department will not allow US firms to invert a foreign company that has been purchased in the last three years by the firm. The next action would be addressing “earnings stripping”. Earnings stripping is a tactic that large foreign-based companies use to avoid paying U.S. taxes by artificially shifting their profits out of the United States (Zients). To prevent this stripping, the Treasury wants to prevent debt that is not invested in the US from receiving any tax breaks. These tactics were brought up by President Obama on April 4 to close loopholes in order to make the tax system more
Why all this secrecy? Well, the shocking amount of hidden money in in type of accounts is thought to be no less than $21 trillion. Much of this money is acquire through assets that raise their value and to even farther benefit avoid taxes in what is called tax havens. According to Leona Helmsley, a female that ran a chain of luxurious hotels and famous for once saying and quote “only the little people pay tax”. What do the predominantly wealthy people do to avoid taxes? Owners of offshore accounts found a different path that allowed them to keep their money, the idea of tax havens which is known to be promoted by those experts whose expertise are off the charts but nonetheless are still experts at using the flexibility of the system to their advantages. Offshore banking is a two-sided game in which white collar criminal camou...
Oesterie, M. J., Richta, H. N., & Fisch, J. H. (2012). The influence of ownership structure on internationalization. International Business Review, 22(1), 187-201.
From the above discussion, several differences can be depicted between criminals engaged in money laundering and tax evasion. In this context, criminals involved in money laundering are influenced to conduct the crime in order to hide the destination or the source of their income. On the other hand, a criminal involved in tax evasion mainly tends to hide real financial status in the form of paying less tax to the concerned authorities. One more dissimilarity between the two can be apparently observed as the legal actions that are imposed over these criminals. Criminals of money laundering are expected to get stern penalty as compared to that of tax evasion. Additionally, moral values, according to Value-Belief-Norm theory also differ in nature between the criminals engaged in money laundering and tax evasion.
When MNEs operate in international business they encounter diverse political systems, economic situations, regulations, as well as cultures that exist from nation to nation. Ethical issues and dilemmas become entangled in various legal options that the MNEs have to fulfill. Equally, local customs plus the established norms add another layer of complexity to the already souring question of how to act both legally, as well as ethically in an unfamiliar...
Double taxation arises when an individual or business acquiring income in a foreign country is required to pay taxes on that income in both the foreign country as well as the country of origin. For example, an American company operating in a developing country, in the absence of a tax treaty between the two countries may have to pay a withholding tax to the government of the developing country, as well as corporation tax to the United States government (Howard, 2001, p. 259).