Tax avoidance and tax evasion by transnational companies and the role played by tax havens have recently received much media attention, when it transpired that prominent companies such as Starbucks and Apple pay virtually no income taxes on their massive international profits. The case of the world’s largest commodity trader, Glencore, demonstrates that tax evasion by multinationals also affects developing countries. Tax issues and the detrimental role played by tax havens are now firmly on the international policy agenda, for example at the G20.
Transnational companies employ a number of techniques to benefit from the crosscountry nature of their transactions, as well as from loopholes and contradictions in the tax legislation of countries involved to evade and avoid taxes. The paper discusses the role of tax havens and preferential tax schemes, the abuse of intra-firm transfer pricing, and describes how different treatment of companies in different countries can result in "double non-taxation".
Various approaches to deal with these challenges exist, but have to be improved and strengthened. This goes for transfer pricing rules, transparency requirements (such as country-by-country reporting, centralised registers providing "beneficial ownership" information), and deductibility restrictions; anti-avoidance measures such as blacklists, the elimination of the abuse of double taxation agreements (e.g. "treaty shopping"); or the wider use of withholding taxes, especially in the case of developing countries. Given the tremendous shortcomings of the current transfer pricing system, a system change in the form of "unitary taxation" needs to be further thought through and tested.
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