Taxing Tax Avoidance.

Taxing Tax Avoidance.

The more corporation tax is cut, the more wealthy individuals shift their income tax liability into lower corporation tax. This is tax avoidance, and is legal. Tax evasion is not legal.

In Europe the rules governing Trans National Corporations (TNS) treat them not as a unified body, but as a loose collection of separate entities. These entities can trade with one another. Internal prices are supposed to be set as if this was a normal market, with entirely separate entities trading with one another. So the TNC can set the prices for these internal transfers to suit the tax laws in various countries.

It is estimated that nearly half of world trade takes this form of internal transfer. The transfer takes place across political boundaries, but within the TNC. So profits can move around the world from high tax countries to low tax countries.

The companies in the low tax countries are called “subsidiaries”. These subsidiaries carry out the necessary financial transfers, and are physical located in the low tax countries. These are small companies employing few people, as little as two!

There are possible solutions to this legal avoidance. One is called Unitary Taxation. Take the total global profits of the TNC and allocate it to the countries where it has sales, production,   design, marketing, factory, office; or any other physical presence. Then internal pricing can be ignored for for tax purposes.

The precise site for each profit allocation can be problematic. Indeed countries can compete with one another to increase their size of the profits of the TNC. This can then increase the tax take for whichever country wins this competition.

An alternative solution is country by country reporting. Currently TNCs report their profits sales etc. globally, or by region. These figures could be broken down by country. Then each country, and their citizens, could see how much profits are generated in their country, and tax accordingly. This increases transparency, including low and high tax rates around the world.

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