Legal Risks and Regulating Suggestions on Cross-border Tax Avoidance: Using Thin Capitalization As a Starting Point

Abstract

With the integration of the global economy and the rising volume of international transactions, tax avoidance by MNCs poses a huge challenge to the global economy. Thin capitalization by MNCs creates serious tax base erosion and profit shifting for host countries and is a tax avoidance tool that cannot be ignored. This paper focuses on the present legal risks of thin capitalization and thus proposes recommendations for improving the legal regulation of tax avoidance by MNCs. Firstly, this paper introduces the concept of thin capitalization and analyses the impact of capital weakening by MNCs as a tax avoidance tool on the host country, revealing that thin capitalization by MNCs can have significant adverse effects on the host country.Secondly, the paper then looks at international law and the tax laws of China, the UK and Germany. The analysis concludes that international tax treaties are effective in regulating thin capitalization by MNCs. This paper analyses the advantages of international tax treaties and shows their importance.Finally, this paper makes suggestions for improving international tax cooperation based on the importance of international tax treaties as analyzed in the previous section. This paper proposes that the improvement of the BEPS MLI may start with setting a time limit on treaty reservations, strengthening the tax administration systems of economically underdeveloped countries and regions, and encouraging developing countries to actively participate in international tax cooperation.