Companies employ several strategies to minimize or avoid paying taxes on their profits. Here are some of the most common methods:
One of the primary strategies used by multinational corporations is shifting profits to low-tax jurisdictions or tax havens. This is often done through:
Transfer Pricing: Companies manipulate the prices of goods and services traded between their subsidiaries to shift profits to low-tax countries. For example, a subsidiary in a high-tax country might pay inflated prices for goods or services from a subsidiary in a low-tax country, reducing taxable profits in the high-tax jurisdiction[1][2].
Intellectual Property Location: Companies strategically locate management of intellectual property (IP) in low-tax countries. They then charge high royalties to subsidiaries in high-tax countries for using this IP, effectively shifting profits[3].
Companies engage in international debt shifting by having subsidiaries in high-tax countries borrow excessively from subsidiaries in low-tax countries. The interest payments on these loans reduce taxable profits in high-tax jurisdictions[3].
Corporations often establish subsidiaries in tax havens - countries with very low or no corporate taxes. They then report disproportionately large profits in these jurisdictions, far exceeding the actual economic activity there[2][4].
Companies take advantage of various tax credits and deductions offered by governments. For instance:
- Accelerated depreciation allows companies to write off the cost of assets faster than they actually wear out, reducing taxable income[1].
- Research and development tax credits can significantly lower tax bills for companies investing in innovation[1].
Some companies engage in corporate inversions, where they relocate their legal domicile to a lower-tax country, often through mergers with foreign entities, while maintaining significant operations in their original country[1].
Multinational corporations exploit networks of double tax treaties to route income through countries with favorable tax treaties, reducing overall tax liability[3].
In worldwide taxation systems (like the U.S. had before recent reforms), companies could defer paying taxes on foreign profits until they were repatriated, allowing for long-term tax avoidance[3].
Companies often take advantage of specific loopholes in tax laws or generous subsidies offered by governments. For example, some jurisdictions offer refundable tax credits that effectively act as subsidies[4].
While many of these strategies are legal forms of tax avoidance (as opposed to illegal tax evasion), they have come under increased scrutiny. International efforts, such as the OECD's global minimum tax agreement, aim to curb these practices and ensure that multinational corporations pay their fair share of taxes[5].
Citations: [1] https://www.investopedia.com/financial-edge/0512/how-large-corporations-get-around-paying-less-in-taxes.aspx [2] https://itep.org/offshore-tax-havens-corporate-tax-avoidance-demonstrates-need-for-global-minimum-tax/ [3] https://www.imf.org/-/media/Files/Publications/WP/2018/wp18168.ashx [4] https://time.com/6326583/tax-shelters-multinational-corporations/ [5] https://ifs.org.uk/articles/how-world-tackling-tax-avoidance-multinational-companies [6] https://www.theigc.org/blogs/taxing-effectively/how-does-profit-shifting-enable-tax-avoidance-developing-countries [7] https://www.emerald.com/insight/content/doi/10.1108/lbsjmr-12-2022-0082/full/html [8] https://usafacts.org/articles/how-can-corporations-avoid-paying-taxes/
ref: https://edition.cnn.com/2022/02/10/investing/elon-musk-tesla-zero-tax-bill/index.html