Corporate International Tax Management

"In this world nothing is certain but death and taxes" - Benjamin Franklin

The quote above is a very famous saying by former US president Benjamin Franklin and
illustrates the truth that taxes are an unavoidable part of life. But is this necessarily true? In reality, tax evasion describes the action of avoiding tax by illegal means and is potentially a very serious crime both on an individual but also corporate level. However, tax avoidance is an often controversial procedure whereby an individual or corporation uses the tax system to their own advantage and as a result benefits from paying lesser amounts of tax. The current UK main rate of corporation tax is 25%, so it easy to see why companies would pursue legal methods of paying a lesser rate. The controversy arises from the assumption that the ordinary citizens of the UK will suffer from large companies avoiding paying the level of tax that is required. With less tax being received from these companies, governments will need to obtain the funds from elsewhere or potentially reduce spending on public services due to less taxation revenues being obtained.

One policy that was introduced initially to protect tax payers has been used as a means for some tax payers to actually avoid paying the required rate. Double taxation treaties have been agreed between several countries, aiming to avoid people and businesses paying tax twice on the same income. An example would be if a company based in one country produced a good in another country but shipped it back to the original country. A double taxation treaty between the two countries would mean that the company would not pay tax on a particular income more than once. However, many companies abuse this policy by relocating operations or even just relocating the head office of their company to a country with a low tax rate. By doing this they can choose to pay tax at the lower rate and avoid paying the higher rate tax required in their original country. A relatively recent example of this occurred with Hendersons the asset management group.

In 2008, they decided to register their headquarters in the Republic of Ireland. Moving from the UK to the Republic of Ireland allowed them to take advantage a lower rate of tax (12.5% in Ireland compared to 25% in the UK). Despite the high initial cost of the move (thought to be around £4.5m), the group have been reported saying that the long-term tax benefits will prove much more significant than than the cost of the move. Hendersons are not the only company to have decided on such a move, many other UK companies have been attracted to relocating part of their business to Ireland due to fact it shares a common time zone and language with the UK as well as the obvious tax benefits. It is clear from this example that companies are more than willing to adjust their operations in an effort to avoid paying higher level of tax.

Another method companies use to avoid tax is known as transfer pricing. Transfer pricing allows multinational companies to transfer profits and costs to different subsidiaries in an effort to avoid paying higher levels of tax. An example of transfer pricing occurs with the three main companies in the banana industry. Del Monte, Dole and Chiquita (all US companies) pay a very small amount of tax in the US and also in the Latin countries where the majority of their bananas are produced. By shifting certain costs to the subsidiaries in the US and the Latin countries where the tax rate is relatively high they are able to report lower levels of profit and therefore are eligible to pay lower rates of tax. On the other side, profits are transferred to subsidiaries in countries where there is a very low or even zero level of tax. This allows them to pool most of their profits together in a country where the tax level is low and therefore have a significantly reduced tax bill. This can be achieved by subsidiaries in countries with a higher level of tax over invoicing subsidiaries in countries with a lower level of tax.

Transfer pricing is often used by companies today, and again is a controversial process. Is it fair that rich, multinational companies bend the rules in their favour so that they end up paying less tax? They are clearly benefiting from avoiding tax but who suffers? In the case of Del Monte, Dole and Chiquita, avoidance of higher levels of tax through transfer pricing could have a serious effect on poor countries in Latin America. Multinational companies like these are avoiding paying tax in certain countries in an effort to increase overall profits, but as a result ordinary people could suffer from less tax being obtained in their home countries resulting in less spending on public services. This is a very contentious topic and questions the ethics of large corporations. Personally I can see why companies would want to reduce their tax bill, and within reason that is ok. But the extent of which some companies exploit current tax systems in a very questionable, but never the less legal way is immoral.