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Corporate Law, European Union, International Tax

There’s No Avoiding Corporate Tax Avoidance

By: Kadmiel Perez*

Large corporations are inescapable in modern society. They have embedded their businesses into our lives with their products, entertainment, and advertising, and out of that labor they generate billions of dollars in revenue.[1] Large multi-national corporations (MNCs) are able to make even more money as they instill their brand and way of life into large alternative markets.[2] The world’s most successful companies, such as those in the Fortune 500, know that generating profit is only half the battle. The other half, is keeping all that money from being taxed. Of course this must be accomplished in accordance with various international tax laws, or the MNC stands to lose substantial amounts of money in back-taxes and penalties.[3] Luckily for MNCs, the interplay of competing international tax jurisdictions provides loopholes and incentives for MNCs to utilize in keeping their profit’s exposure to taxation at a minimum.[4] Some MNCs have carefully planned their structure to the point where their profits go completely untouched by taxes in elaborate tax avoidance schemes.[5] The amount of money MNCs avoid paying in taxes by adopting elaborate tax avoidance schemes is $90 billion in the U.S. alone[6], which is more than the GDP of two-thirds of the world’s countries.[7] The amount of money in taxes not paid to the EU by these corporations is ten times that amount, totaling over the equivalent of $1.3 trillion.[8]

One thing that most MNCs have in common is the use of subsidiary companies that are incorporated in strategically picked tax havens.[9] MNCs are able to shift their profits to “offshore revenue” through agreements between the parent corporation and its subsidiary, whereby the parent corporation is able to pay the subsidiary for some legal right or assume some of the subsidiary’s liabilities.[10] Sometimes these costs, such as royalties paid by the parent corporation to its subsidiary for the limited right to use certain patents, are actually tax-deductible.[11] Meaning that the corporation gets a tax discount for paying itself a royalty on a patent that is owned by the corporation.[12] Then, once the money is under the books of the foreign subsidiary in a tax haven jurisdiction, it is subject to that jurisdictions law which may have drastically lower corporate tax rates – if any at all.[13]

While there may be legitimate reasons for an MNC to establish a subsidiary,[14] MNCs will also establish a large network of downstream subsidiaries to allow parent corporations to take advantage of the worlds varying tax rates and incentives amongst international jurisdictions.[15] This network allows an MNC to maximize its different revenue streams by funneling them to the jurisdiction that will minimize its tax hit for that respective revenue stream.[16] Businesses that deal heavily in intellectual (IP) are able to easily accomplish profit shifting by selling their ownership rights in IP; such as patents, trademarks, and copyrights, to their subsidiary holding companies.[17] Then, through systems of royalty payments to the subsidiary, the parent corporation is able to easily minimize tax exposure to their IP profits.[18] Mega-tech companies such as Apple and Google are some of the richest, most successful companies in the world, because their technology and IP are invaluable to society. Since almost all of their profits are derived from the selling and licensing of their IP, they are able to shift a substantial portion of their profits to their IP holding companies.[19] This revenue may go completely untaxed, denying tax revenue to multiple jurisdictions.[20] Recent history has seen offshore profit-shifting boom,[21] despite increased public awareness and worldwide legislative attention on the issue.[22] As our world becomes increasingly technologically dependent, the global economy’s dependence on IP will only grow. This means that more profits will be derived from IP and more money will go untaxed in jurisdictions that are in desperate need of funds for their governments.[23]

Even though many of the MNCs that top the list of the most aggressive tax avoiders are Fortune 500 companies with origins or strong ties to the U.S., this problem is not one limited to the U.S.[24] All over the world, people and local companies are outraged that they are subject to taxes, while the rich become richer by capitalizing on complex tax avoidance schemes.[25] Within this last year, tax jurisdictions such as the U.S., the U.K., the E.U., and Korea have all attempted to recoup billions of dollars in back-taxes and penalties for money a MNC claimed was derived from outside the jurisdiction, or the jurisdictions have attempted to make illegal certain corporate tax practices.[26] One example of this is the current debate going on in the E.U. now about whether special tax rulings administered by tax-havens, such as Ireland and Luxembourg, to MNCs were illegal because they offered the tax-haven an unfair advantage in attracting MNCs to their jurisdiction over others in the E.U.[27] The tax-havens would promise extremely low tax rates, sometimes lower than the jurisdiction’s already low corporate tax rate, in return for MNCs’ guarantee that they will form companies and maintain certain minimum business operations within the jurisdiction.[28]

The problem for jurisdictions here is two-fold. There is an interest on behalf of the jurisdiction to tax the corporation on its profits so that it can maximize tax revenue.[29] A concurrent conflicting interest exists because there is also a race to the bottom going on between tax jurisdictions.[30] Some jurisdictions purposely set their corporate tax rates at miniscule levels to incentivize MNCs to come to their jurisdiction.[31] This in turn forces higher tax rate jurisdictions to lower their corporate tax rates or risk losing the benefit of having the physical presence of an MNC within its jurisdiction.[32] The benefits outside of tax revenue generated for some of these MNCs cannot be understated. They can provide thousands of jobs to a community as well as spur the economy in other ways.[33]

With so many jurisdictions agreeing that MNC tax avoidance is a huge issue that is crippling economies around the world, one would think that an international tax resolution might be possible. However, the competition over who gets to tax these MNCs and reap the benefits will probably prevent such a resolution from ever happening.[34] In light of this, jurisdictions will try to create as many penalties for shifting profits as possible, while simultaneously creating incentives for keeping profits local. Still, these penalties and incentives will not matter.[35] As long as there are jurisdictions willing to live at the bottom, corporations will flock there, and taxes will be deferred and avoided. Indeed, there is serious doubt about whether legislatures will ever be able to reach this untaxed fortune.[36] If there is no legal or political recourse against these MNCs, then society will continue to pay the price of having to supplement the tax revenue not gained.[37] The amount of revenue not taxed will continue to rise into the trillions of dollars[38] either until economies start to fail or until the consumers around the world build collectively say, “Enough is enough.”

[1] See Felix Richter, U.S. Tech Companies Hoard Billions in Offshore Tax Havens, Statista (Oct. 14, 2015), http://www.statista.com/chart/3877/offshore-holdings-of-tech-companies/.

[2] Xuan-Thao N. Nguyen, Holding Intellectual Property, 39 Ga. L. Rev. 1155, 1163 (2005) (“As intellectual property becomes a more important corporate asset, many companies with large intellectual property portfolios search for ways to maximize revenues. A common way to expand market exposure is through the licensing of intellectual property assets for new fields of products and services in existing or new territories.”).

[3] See, e.g., Anh Vu, Vietnam Inspects Coca-Cola, Metro Cash & Carry for Alleged Tax Evasion, Thanh Nien News (Oct. 5, 2015), http://www.thanhniennews.com/business/vietnam-inspects-cocacola-metro-cash-carry-for-alleged-tax-evasion-52089.html (“The businesses, which reported the total losses of VND3.58 trillion ($156.74 million) from their transactions with associated partners, were ordered to pay VND418.9 billion ($18.34 million) in back taxes and fines.”)

[4] See IP Tax Planning in the Age of Anti-Tax Avoidance Intellectual Property (IP), Startup Overseas, http://www.startupoverseas.co.uk/news/ip-tax-planning–in-the-age-of-anti-tax-avoidance-intellectual-property-ip.html [hereinafter IP Tax Planning] (last visited Oct. 21, 2015).

[5] Neil Irwin, How to Make $30 Billion and Pay No Corporate Income Tax, The Apple Way, Wash. Post (May 20, 2013), http://www.washingtonpost.com/news/wonkblog/wp/2013/05/20/how-to-make-30-billion-and-pay-no-corporate-income-tax-the-apple-way/ (“[Apple] managed to bring in $30 billion in overseas profits over a four-year period without paying a dime of corporate income tax to the Irish, American or any other national government.”).

[6] Offshore Shell Games 2015: The Use of Offshore Tax Havens by Fortune 500 Companies, Citizens for Tax Justice (Oct. 5, 2015), http://ctj.org/ctjreports/2015/10/offshore_shell_games_2015.php [hereinafter Offshore Shell Games] (“Multinational corporations’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.”).

[7] See GDP (Current US$), World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.CD (last visited Oct. 24, 2015, 5:19 PM).

[8] Google Tax Avoidance – $10 Billion in Taxes Through a Dutch Construction, Lionsground (Oct. 1, 2015), http://lionsgroundnews.com/google-tax-avoidance-10-billion-in-taxes-through-a-dutch-construction/2/ [hereinafter Google Tax Avoidance] (“Tax evasion and avoidance, which cost the EU 1 trillion euros ($1.3 trillion) a year.”).

[9] Offshore Shell Games, supra note 6.

[10] See, e.g., IP Tax Planning, supra note 4 (“Typically, the company arranges for the rights to exploit intellectual property outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement between the US parent and the offshore company, written strictly in terms of US transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the US, but without paying US tax on the profits unless and until they are remitted to the US.”).

[11] Nguyen, supra note 2, at 1164 (“The IP holding company then licenses the intellectual property assets back to the parent company 33 and in some instances to sister companies that need to use the intellectual property assets. 34 These sister companies, which are also operating companies, conduct business in numerous or all states and are generally allowed to deduct, as business expenses, royalties paid to the IP holding company.”).

[12] Nguyen, supra note 2, at 1164.

[13] See IP Tax Planning, supra note 4.

[14] Nguyen, supra note 2, at 1190-91.

[15] See, e.g., Offshore Shell Games, supra note 6 (“PepsiCo maintains 132 subsidiaries in offshore tax havens. The soft drink maker reports holding $37.8 billion offshore for tax purposes.”) (emphasis removed); see also IP Tax Planning, supra note 4 (illustrating the difference, in tax exposure to corporations, between various international tax-havens.).

[16] Offshore Shell Games, supra note 6 (explaining how MNCs manipulate their revenue streams to minimize tax exposure and in turn maximize profit).

[17] Nguyen, supra note 2, at 1163-65.

[18] Nguyen, supra note 2, at 1163-65.

[19] See Tim Fernholz, Apple is Still No. 1 at Avoiding US Taxes, Quartz (Oct. 7, 2015), http://qz.com/518327/apple-is-still-no-1-at-avoiding-us-taxes/; Google Tax Avoidance, supra note 8; Richter, supra note 1.

[20] See Irwin, supra note 5 (“[Apple] managed to bring in $30 billion in overseas profits over a four-year period without paying a dime of corporate income tax to the Irish, American or any other national government.”).

[21] See, e.g., Fernholz, supra note 19 (“US multinationals in the Fortune 500 doubled the assets they hold in foreign subsidiaries between 2008 and 2014, taking advantage of loopholes in US and foreign laws to keep $2.1 trillion out of sight of tax authorities, a new analysis shows.”); Google Tax Avoidance, supra note 8 (“Google Inc. (GOOG) avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.”).

[22]See, e.g., Fernholz, supra note 19 (“While the Obama administration has proposed closing loopholes that allow companies to shift profits and hide assets from the IRS, corporate lobbyists have thus far been able to keep them from becoming law.”); Doubts Grow Over Fight Against Big Business Tax Evasion, Sputnik News, (Sep. 23, 2015), http://sputniknews.com/europe/20150923/1027410404/luxleaks-tax-evasion-europe.html [hereinafter Big Business Tax Evasion]; Tony Wickenden, Net Is Closing in on Offshore Tax Avoidance, Offshore News Flash, (Oct. 20, 2015), http://www.offshorenewsflash.com/2015/10/20/tony-wickenden-net-is-closing-in-on-offshore-tax-avoidance/; Update: Two Weeks in the Fight Against the Tax Dodgers, European Federation of Public Service, (Sep. 3, 2015), http://www.notaxfraud.eu/node/48; John Craig & Kitty Richards [hereinafter Tax Dodgers], Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue, Center For American Progress, (Jan. 9, 2015), https://www.americanprogress.org/issues/tax-reform/report/2014/01/09/81681/offshore-corporate-profits-the-only-thing-trapped-is-tax-revenue/.

[23] Robert Wood, U.S. Tax 35%, Ireland 12.5%, New Irish Tech Rate 6.25%, Any Questions?, Forbes, (Oct. 15, 2015), http://www.forbes.com/sites/robertwood/2015/10/15/u-s-tax-35-ireland-12-5-new-irish-tech-rate-6-25-any-questions/.

[24] See, e.g., Big Business Tax Evasion, supra note 22; Google Tax Avoidance, supra note 8; Ammad Ahmed, Starbucks, Fiat Face Repaying Millions of Euros in Tax, Customs Today, (Oct. 20, 2015), http://www.customstoday.com.pk/starbucks-fiat-face-repaying-millions-of-euros-in-tax/; Tax Dodgers, supra note 35; Vu, supra note 3.

[25] See, e.g., Big Business Tax Evasion, supra note 22; Offshore Shell Games, supra note 6; Ahmed, supra note 24; Tax Dodgers, supra note 22; Vu,supra note 3.

[26] See, e.g., Kelly Erb, Coca-Cola Says IRS Wants $3.3 Billion in Additional Tax Following Audit, Forbes, (Sep. 18, 2015), http://www.forbes.com/sites/kellyphillipserb/2015/09/18/coca-cola-says-irs-wants-3-3-billion-in-additional-tax-following-audit/; Wickenden, supra note 22; Craig & Richards, supra note 22; Tax Dodgers, supra note 22; Vu, supra note 3.

[27] Tax Dodgers, supra note 22.

[28] Ahmed, supra note 24; Tax Dodgers, supra note 22.

[29] See, Andrew Blair-Stanek, Intellectual Property Law Solutions to Tax Avoidance, 62 UCLA L. Rev. 2, 15-16 (2015).

[30]Paul Caron, Ireland To Lower Corporate Tax Rate From 12.5% To 6.25% For IP, TaxProf Blog, (Oct. 14, 2015), http://taxprof.typepad.com/taxprof_blog/2015/10/ireland-lowers-corporate-tax-rate-from-125-to-625-for-ip.html; Caroline Simson, Ireland Will Slash Corporate Tax Rates For IP Profits, Law360, (Oct. 13, 2015), http://www.law360.com/articles/713503/ireland-will-slash-corporate-tax-rates-for-ip-profits; Wood, supra note 23.

[31] See, e.g., Caron, supra note 30; Simson, supra note 30; Leonid Bershidsky, Let’s Just Give Up on Taxing Big Corporations, Bloomberg View, (Oct. 8, 2015), http://www.bloombergview.com/articles/2015-10-08/multinationals-don-t-pay-taxes-but-citizens-don-t-object; Wood, supra note 23.

[32] See Simson, supra note 30; Wood, supra note 23.

[33] See Craig & Richards, supra note 22 (“It also creates an incentive at the margin to move real economic activity—jobs and assets—to low-tax jurisdictions”); IP Tax Planning, supra note 4 (Many countries offer various tax incentives in the hopes of attracting IP and the associated profits, jobs and capital.”).

[34] Big Business Tax Evasion, supra note 22 (“However, despite having set up a special committee to look into the issues, lawmakers have said it may never be possible to apply the same rate of corporation tax throughout Europe, because some member states will be reluctant to comply.”)

[35] See, e.g., Wickenden, supra note 22; Simson, supra note 30.

[36] See Big Business Tax Evasion, supra note 22.

[37] Offshore Shell Games, supra note 6 (“Congress, by failing to take action to end to this tax avoidance, forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.”)

[38] Offshore Shell Games, supra note 6 (“Only 57 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore. In total, these 57 companies would owe $184.4 billion in additional federal taxes. Based on these 57 corporations’ public disclosures, the average tax rate that they have collectively paid to foreign countries on these profits is a mere 6.0 percent, indicating that a large portion of this offshore money has been booked in tax havens. If we apply that average tax rate of 6.0 percent to the entirety of Fortune 500 companies, they would collectively owe $620 billion in additional federal taxes.”)

*Edited by Christine Sanders



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