International Taxation Flashcards
How do Multinationals Avoid International Taxation?
Tax paid where revenue/profit is located.
Multinationals (Starbucks) can structure location of revenue & profits to avoid tax.
What Tax are Multinationals Subject to, and Why is it a Problem that they Avoid it?
Subject to CT (wealth tax). Used to distribute wealth, targeting Private Equity.
* A loss of tax revenue for local governments
* Distorted competition
* Inequality
What are Solutions to Issues Faced by International Taxation?
- Global Effective Minimum Rate = 15% (Pillar II)
- Formulary Apportionment (Pillar I)
- Digital Service Taxes
Transparency
What is Pillar I? How does it Divide Global Profits Between Countries?
Applies to large multinationals, reallocates taxable income to market jurisdictions.
Changes effective tax rate and cash tax obligations and impacts current transfer pricing arrangements.
Routine Profit, Non-Routine Profit, and X% of Non-Routine Profit allocated to market jurisdiction.
What is Pillar II?
Acts as a minimum tax rate (15%).
GloBE gives country right to “tax back” profit currently taxed below minimum rate. A “top up” tax.
If not introduced by country, another country can collect revenue. E.g. Switzerland only taxes 5% and UK collects 15%, UK can collect extra 10%.
What are the Advantages of Transparency?
Better Political Decision Making -
Where MNEs operate, can change laws and close tax loopholes.
Healthier Economy & Security for Investors -
Clear which MNEs risk tax scandal, incentivises corporations to reduce risk. Increased predictability & stability, more informed decisions by investors.
More Stable & Fair Environment for MNEs -
Tax scandals cause public outcry, impacts brand, sudden increase in tax for that MNE.
Financial & Reputational Risk -
Non-transparency to avoid financial/reputational risk is foolhardy. Gambling in “tax-detection-risk lottery,” not good corporate governance.
What are the Disadvantages of Transparency?
Too Complicated -
Tax authorities/investors have all the info needed to determine tax liabilities, but hard to explain to wide audiences.
Inability to Optimise Organisations Tax Structure -
More info available reduces MNEs ability to optimise tax structure which can be a competitive advantage.
Additional Admin Costs -
Making additional info available in a standardised manner increases admin costs.
Increased disputes -
New info = new misinterpretations and uncertainty in determining final tax position.
What are Counter Arguments to the Disadvantages of Transparency?
Tax being too complicated to explain may be irrelevant. MNEs could try harder to explain or make structures easier to understand.
Tax optimisation prevented and seen as competitive disadvantage, but how does that relate to companies governance and corporate social responsibility? And is the advantage actually sustainable?
Exposure of company secrets is argued on the thought that current data is safe within the company. Most data is already publicly available, info disclosed will not consist of secret formulae.
