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Multi-National Tax Avoidance & Its Implications

Sep 09, 2014 at 05:39 pm by mikewood

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Multi National Tax Avoidance

Implications For Nations Around The World

September 2014 / International Affairs / News & Analysis / Queens Buzz. By Michael Wood. Tax avoidance by the large multi-national corporations has been growing worldwide. Government officials say it threatens to deprive governments and communities of much needed resources to provide their citizenry with adequate community infrastructure like transportation, housing, healthcare and education.

Multi-national tax avoidance has long been a problem for developing nations, such as in South Africa. President Thabo Mbeki says his country loses significant sums of tax revenue through corruption, criminal activities and multi-national tax avoidance schemes. Mbeki estimated that the continent of Africa loses $50 billion per year. Thus he joined a UN sponsored group entitled High Level Panel On Illicit Financial Flows which hopes to identify solutions / approaches to the growing worldwide problem.

Multi-national tax avoidance has also become a growing problem in the United States. U.S. President Barack Obama identified multi-national tax avoidance as a possible campaign issue for the 2014 interim elections. Several years ago, it was publicized that multi-national General Electric's effective U.S. tax rate was under 2% throughout most of the first decade of the 21st century, while the company earning in the neighborhood of a couple hundred billion dollars in profits. In the United Kingdom, Starbucks was identified as one of the skillful corporate tax dodgers since they first began operating in the U.K. in 1999.

Click here to read our report about Multi-national Tax Avoidance & its implications.

Multi National Tax Avoidance

Implications For Nations Around The World

September 2014 / International Affairs / Queens Buzz. Continued.

Multi-national Governing Bodies Aware Of Problem, But Little Has Been Done To Date

A number of multi-national groups have sought to close loopholes and / or identify solutions to the growing problem. The Group of Eight / Group of Twenty [G8 originated 1974 and G20 originated 1999] meet annually to discuss economic, financial and taxation issues such as this. The G8 / G20 members include the following [ G8 members in bold]: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. To date no solution has been found.

The G8 represents about 40% of global GDP and about 12% of the world's population. The G20 represents between 75% - 80% of global GDP and about two thirds of the world's population. The G8 was created in response to the global oil crisis of 1973.

The Organization of Economic Cooperation & Development [OECD] is a larger group comprised of 34 nations. This group, which originated to administer the Marshall Plan in the mid 1940's [following WWII] was revised in the early 1960's to encompass nations outside of Europe. The purpose of this group is to foster wider and deeper economic relations between / among nations. The OECD appears to be one of the organizations which has taken much of the lead on trying to reign in tax avoidance by multi-nationals.

G8 New Leadership & Multi-National Tax Avoidance As Growing U.S. Concern

According to a February 2014 report by Reuters it's estimated that about $21 trillion is sitting in tax havens around the world. They noted that the Cayman Islands is one of them where the where taxation rate is zero and they get privacy. They also reported that half of worldwide shipping business is run out of tax havens.

In a report on Bloomberg it was estimated that the U.S. will lose about $17 billion in tax revenue over the next decade by tax inversions alone. A tax inversions is where an American company aquires a foreign entity and then moves its 'offical or taxable' headquarters into the lower taxing nation of the newly acquired entity.

In Africa they aren't even able to estimate how much revenue they are losing as the governments don't have measurements of how much of the natural resources the multi-nationals are extracting from their continent.

Multi-national Tax Avoidance - Monitoring Groups & Critics

The UN, Action Aid and Citizens For Tax Fairness are all trying to create awareness of the issue. The UN is seeking more cooperation among nations to gain tax fairness. Action Aid has been monitoring the situation in Africa. And Citizens For Tax Fairness filed a report characterizing multi-national tax avoidance in the U.S. of 288 of the Fortune 500 companies. Companies like Verizon, Apple, Boeing and General Electric were cited as some of the poster children for multi-national tax avoidance.

According to Reuters, a GE spokesperson said that the methodology used to produce the report filed by Citizens For Tax Fairness was biased. They also said that the company [GE] paid taxes at various levels of American governance. A Verizon spokesperson said that they play by the rules and paid $2.9 billion from 2008 - 2012. And Boeing said it's effective tax rate in 2013 was 26%. [Editor's Note: The 26% tax rate on Boeing was on $6.6 billion in profit on $86 billion in revenue. Verizon's $2.9 billion in taxes according to The Citizens For Tax Fairness was paid on about $19 billion in profit during this time for an effective tax rate of 15%.].

Multi-national Tax Avoidance - The Issues

Multi-nationals are doing what's in their own best interest and that of their shareholders. This is one of the major tenets of Darwinian capitalism which governments are constantly seeking to modify in an effort to serve the entire population, not just the few.

To be sure the issues are complex. Tax invesions are on such way to reduce tax bills - by essentially moving the taxable headquarters into a foreign subsidiary with a lower tax rate. Another is to move the patents or copyrights of the company into a foreign subsidiary so that the royalites, rent, licensing and other revenue streams are taxed at a lower rate. And a third is the use of cloud computing. Cloud computing is essentially an internet service, which may be hosted anywhere, the software or employees could be working anywhere and hence the taxable revenue tied to such a ubiquitous operation could also be anywhere. Not exactly - there are rules - but you see the point.

Next Steps - The White House Proposal / OECD / The UN

It remains uncertain when any concrete action will take place. The issue has hit the public radar screen. About two thirds of the U.S. public appears to believe that corporations are undertaxed, while 8% believe they are taxed too much. Government leaders around the globe remain concerned. The American president was considering taking some legislative action, but the Republican House indicated it wouldn't pass any new tax legislation.

Both the UN and the OECD continue to explore potential solutions and are attempting to build cooperative ties and some sort of consensus.

Hence at this juncture, real action on the issue appears to remain elusive.

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