Multinational Tax Avoidance Research Articles

Multilateral Tax Treaty Revision to Combat Tax Avoidance: On the Merits and Limits of BEPS’s Multilateral Instrument

Abstract Since 2015, more than 140 countries have cooperated in the OECD’s “Base Erosion and Profit Shifting” (BEPS) project to combat multinational tax avoidance. Several of the key actions, most importantly measures against tax-treaty shopping, require changes to double taxation treaties. The OECD designed a special instrument—the ‘multilateral instrument’ (MLI) - to allow for a swift implementation of BEPS-related tax treaty changes. In this paper, we show that MLI take-up is incomplete, we present (partly surprising) correlates of the take-up decision and develop a simple theoretical model to rationalize the observed take-up behavior. A key insight is that conduit countries, which are the beneficiaries of tax treaty shopping, can benefit from anti-treaty shopping laws as firms have incentives to scale-up real activity in conduit nations in order to be exempted from the new anti-treaty shopping rules. Empirical findings are consistent with these considerations: MLI adoption rates of conduit countries are high. Treaty shopping has, to date, not significantly dropped. And there is indeed indication that firms have scaled up their real economic activity in conduit nations. Overall, our findings reject that treaty shopping has been “killed” as envisaged by the OECD. JEL classification: F21, F23, F53, H25, H26, H32, H87, K34

Digital regulation and multinational tax avoidance: evidence from Common Reporting Standard

ABSTRACT We adopt the implementation of the Common Reporting Standard (CRS) as a quasi-natural experiment to study the impact of digital regulation on multinational tax avoidance. Using a sample of Chinese listed firms from 2011 to 2022, we find that multinationals affected by the CRS engage in less tax avoidance. Mechanism analysis indicates that digital regulation reduces tax avoidance by improving information transparency. Furthermore, the effect is more pronounced for firms with weaker external monitoring and higher CEO compensation.

Illicit Financial Flows, Trade Misinvoicing and Multinational Tax Avoidance: Exploratory Approach

Illicit Financial Flows, Trade Misinvoicing and Multinational Tax Avoidance: Exploratory Approach

The Big Four and corporate tax governance: From global dis‐harmony to national regulatory incrementalism

AbstractThe Big Four professional services firms – PwC, Deloitte, KPMG and EY – promote, sanction, and regularise the behaviour and practices of business and government. This is especially the case in the area of multinational tax avoidance. This large, and growing, sector of the Big Four's business model places them at the centre of both causing and addressing the problem. Their role is not limited to advising MNCs on complex tax structures. They also advise governments and international organisations on regulatory reform of the global tax system. This article examines their role in so doing through an analysis of Australian Senate Inquiry hearings and responses to the OECD reform programme on the digitalisation of the economy. We show that advice provided by the Big Four is not purely technical, but is intended to achieve a global corporate tax system that is either globally dis‐harmonised or a matter of national regulatory incrementalism. This is despite their claims of supporting global regulation based on multilateral agreements. Ultimately, we demonstrate that the Big Four use their significant structural power to discursively undermine the ideals of the OECD, the leading international organisation working to reform global taxation.

Did the Adoption of BEPS Country-by-Country Reporting Affect Multinational Tax Avoidance? Evidence from Canada

Since 2016, Canadian multinational corporations (MNCs) with consolidated revenues exceeding [euro]750 million (equivalent to Cdn$1.1 billion) in the preceding fiscal year have been subject to country-by-country reporting (CbCR) under Canada's adoption of action 13 of the base erosion and profit shifting (BEPS) project. The objective of this study is to examine empirically whether the adoption of the CbCR obligation has had an impact on the tax-avoidance practices of Canadian MNCs that are subject to this obligation—that is, whether there has been a reduction in tax avoidance by these MNCs since the adoption of CbCR. The study uses a sample that contains all publicly listed Canadian MNCs for a period of 10 years: 5 years before the adoption of CbCR (2011 to 2015) and 5 years after the adoption of CbCR (2016 to 2020). The sample is split into two groups: a treatment sample, which contains all the MNCs subject to the CbCR obligation, and a control sample, which contains all the MNCs that are not subject to this obligation. Using the difference-in-difference method, the study finds no evidence that the adoption of CbCR under BEPS action 13 has had an effect on tax avoidance by Canadian MNCs subject to this obligation. However, additional analyses by sector show that, contrary to expectations, MNCs subject to CbCR in the energy and materials sectors continued to avoid taxes even after the adoption of CbCR in 2016. In other words, the adoption of CbCR seems to have had no deterrent effect on tax avoidance by MNCs subject to this obligation in the energy and materials sectors. Since 2015, these two sectors have also been subject to another type of CbCR under the Canadian Extractive Sector Transparency Measures Act. The study results, which are robust when tested by various measures of tax avoidance and CbCR, provide important feedback to Canadian tax authorities and the Organisation for Economic Co-operation and Development on the effectiveness/ineffectiveness of BEPS action 13.

Multinational tax avoidance: An application of controlled foreign companies and royalty payments in South African legislation

This paper seeks to determine whether South African tax legislation would limit the effectiveness of tax avoidance schemes used by multinational enterprises to avoid their tax liabilities. The paper reviews two commonly used multinational tax avoidance schemes, namely, disregarding controlled foreign companies (‘check box’ regulations) and royalty payments. Using a doctrinal research methodology, the paper considers the application of these schemes within the context of South African legislation. The findings indicate that the effectiveness of the schemes is somewhat curtailed. However, the South African tax base remains at risk, and efforts to combat base erosion are still necessary.

The Digital Services Tax as a Tax on Location-Specific Rent

In 2018, the European Council and the UK and Spanish governments each proposed to introduce a Digital Services Tax (DST), to be levied on the revenue of large digital platform companies earned from advertising, online intermediation, and/or the transmission of data. We offer a rationalization of the DST as a tax on location-specific rent (LSR). That is, just as many countries already levy royalties on rent earned from extracting natural resources, one can think of the DST as a tax levied on economic rents earned by digital platform companies from particular locations. We provide stylized examples showing how rent earned by digital platforms can be traced to specific locations, even when users from multiple jurisdictions participate. We then elaborate the analogy between the DST and resource royalties, and analyze the DST’s economic incidence as well as its effect on consumer welfare using a simple model. Finally we explain why the DST’s significance goes beyond current concerns about multinational tax avoidance, in that it indicates directions for redesigning international taxation in the age of labor-replacing AI technology.

Are Less Developed Countries More Exposed to Multinational Tax Avoidance? Method and Evidence from Micro-Data

AbstractThis paper uses a global dataset with information about 210,000 corporations in 142 countries to investigate whether tax avoidance by multinational firms is more prevalent in less-developed countries. The paper proposes a novel approach to studying cross-border profit shifting, which has relatively low data requirements and is therefore particularly well-suited for the context of developing countries. The results consistently show that the sensitivity of reported profits to profit-shifting incentives is negatively related to the level of economic and institutional development. This may explain why many developing countries opt for low corporate tax rates in spite of urgent revenue needs and severe constraints on the use of other tax bases.

Venturing Beyond the OECD: An Analysis of New Zealand's Response to Multinational Corporate Tax Avoidance

Multinational tax avoidance is a major economic issue that has generated significant political traction in recent years. Multinational corporations have been eroding the tax bases of states by shifting profits around the globe. The OECD has recently finalised a co-ordinated response to this so called “base erosion profit shifting”. The OECD has created “action plans” that states can adopt by renegotiating existing tax treaties. New Zealand has chosen to venture beyond the OECD’s action plans and create domestic legislation to target multinational tax avoidance. This paper examines whether New Zealand’s proposed legislation will be consistent with its tax treaties. It is argued there will be some inconsistencies, which may engage New Zealand’s state responsibility in international law and cause double taxation. I also analyse the legal and policy implications of New Zealand’s proposals, and draw on comparative perspectives. I ultimately conclude that New Zealand’s proposals may reduce commercial certainty and foreign investment. However, I suggest both New Zealand’s proposals and the OECD’s initiatives are a novel step towards harmonising the international tax regime. The effects of which will likely be felt for years to come.

Multinational Tax Avoidance: Is It All About Profit Shifting?

The international dimension of multinational corporations (MNCs) creates opportunities for pursuing both global as well as local (i.e., subsidiary-level) tax planning strategies. Until now, we have surprisingly little insights into the dynamics of these local versus global tax planning strategies. Using a group-level tax avoidance calculation technique and the staggered adoption of Transfer Pricing (TP) Documentation Requirements across European countries, we study the causal effect of increased shifting costs on changes in MNC tax strategies. We find that the relative importance of local tax planning increases by 50 percent in countries that introduced TP Documentation Requirements and remains stable in other countries. Importantly, we show that especially firms with higher internal agency conflicts, firms with greater target ETR pressure as well as firms with resource constraints are responsible for the results. Finally, we document that this substitution effect is strongest in subsidiaries where the MNC has the highest local knowledge.

Multinational tax avoidance vs. European Comission

This paper deals with recent actions of the Commission with respect to EU State Aid rules. The Commission is looking at the compliance with EU State Aid rules of certain tax practices in some Member States in the context of aggressive tax planning by multinationals, with a view to ensure a level playing field. A number of multinational companies are using tax planning strategies to reduce their global tax burden, by taking advantage of the technicalities of tax systems, and substantially reducing their tax liabilities. This aggressive tax planning practice erodes the tax bases of Member States, which are already financially constrained.

Multinational Tax Avoidance: Virtue Ethics and the Role of Accountants

The techniques that some large multinational corporations use to reduce their tax liability have come under increasing public scrutiny in recent years, alongside governmental investigations and international commitments aimed at curbing opportunities for tax avoidance. Although discussion of tax avoidance activities, and their regulatory responses, is often conducted with reference to moral concepts (such as ‘fairness’), philosophical analysis of the ethics of multinational tax avoidance remains limited. In particular, the virtue ethics tradition that emphasises the agent (and his/her character) and the performance of specific roles has not been considered in detail. This paper examines how the contemporary virtue ethics of Alasdair MacIntyre can be applied to the issue of multinational tax avoidance, and considers the role that accountants play in these activities. It argues, firstly, that MacIntyre’s approach provides a more useful philosophical analysis of the issue (when compared to utilitarian and deontological approaches for example) and, secondly, that the main parties involved (MNC accountants and regulators) are likely to agree with the main tenets of this approach. The paper also contributes by reconceptualising, using MacIntyre’s scheme, the issue of tax avoidance in relation to Donald Cressey’s ‘fraud triangle’.

Country-by-Country Reporting: Law in the Making

Legislative progress in the BEPS area has been fairly quick in Australia, culminating with the enactment of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act No. 170 of 2015 (date of assent: 11 December 2015). The author reviews the potential impact of the Act as regards transfer pricing documentation and penalties.

Multinational Anti-Avoidance Law: Australia’s Response to BEPS Action 7

On 3 December 2015, the Australian Parliament passed the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (the “Multinational Anti-Avoidance Law”). This timely article looks not only at the operation of the Multinational Anti-Avoidance Law, and a number of technical issues identified, but for additional context, first discusses BEPS Action 7 and the basic jurisdictional rules under Australian domestic law for the taxation of business income of non-residents.

Multinational Tax Base Erosion Problem of the Digital Economy

Recently, Amazon and Google and other large multinational companies are reported that they use changing corporate structure to avoid tax. This behavior caused widespread international concern. Many multinational companies use digital economy transactions, and take advantage of international tax loophole to erode basic tax. This emerging trading pattern is a huge challenge to national tax authorities. Thus, researching the tax mechanism of Transnational Corporations in the digital economy, a better understanding of the behavior of multinational tax avoidance is important to our country. This paper analyses the digital economy trade transaction characteristics, and points out the cause of the tax erosion in the area of digital economy; then combines with characteristics of the tax system China, discusses on measures taken by China to deal with the tax avoidance in the digital economy.

Taxable Corporate Profits

AbstractRevenues from corporate income taxes have remained relatively stable as a share of national income over the last three decades despite reductions in corporate tax rates and increased opportunities for multinational tax avoidance. This is largely explained by an increase in the share of corporate profits in national income. In this paper, we discuss the sources of corporate profits, and specifically corporate taxable profits; these include a normal return to capital investment, returns to labour or entrepreneurial effort that are realised as dividends or capital gains, and returns to market power. We relate these components of profits to the ways that corporate taxes can change incentives to invest or exert effort, and we discuss some implications for policy.