Everyone knows that corporations dodge taxes. If a regulation loop hole exists, they are likely to try and exploit it, inventing a new practice, tool or mechanism for the purpose, with a new, jargon-laden name that gives it an air of legitimacy. Whereas much past evasion of taxes would happen in the corporation’s own country, with the rapid globalization of businesses over the last few decades it now spreads across nations and continents. For example, a huge relatively new field of transfer pricing has mushroomed within the financial accounting realm, with whole teams, even departments, charged with it. What does it mean? In the most basic terms, a parent company sells or trades to its own subsidiary in a different country some goods, services or labor, often at an obscenely low or high price, in order to move income or expenditure of their balance sheet around to make them fit into lower tax brackets and less regulated jurisdictions. In essence, it transfers the price somewhere else that reduces its tax liability, hence the name transfer pricing. All of this is done “for tax purposes,” with tax professionals involved engaging in what they call “tax planning,” evidenced by the fact that transfer pricing is often and increasingly an offshoot of tax departments in companies and accounting firms. Translated, it means legal tax dodging. Read this useful summary by the Tax Justice Network for a closer look.
This is of course but just one example and understanding what fully occurs behind closed doors can be clouded by the terminology. Today, Development Roast brings you an infographic published by The Online MBA that attempts to explain exactly How Corporations Get Out of Paying Taxes in more visual terms.
Of course it is not fair to just blame corporations for it, after all they are driven by a single motif – profit. This makes it perfectly common-sensical for them to reduce tax liability as it is not seen as a social duty to contribute taxes, but a cost that need to be minimised. It is also not just corporations that are to blame for the sneakiest of the tools. Professionals in large and small accounting firms dream up these mechanisms and sell them to their clients as a way to maximise their quarterly earnings. An interesting, perpetual dance of the cat and mouse chase occurs: as one loop hole closes through regulation, another may open, even if only for a short time, for which a legal tax planning initiative springs up. And finding those loopholes becomes increasingly difficult for governments. The globalization of businesses, that are larger than some countries when their income is taken into consideration, has meant that the tax returns they submit are incredibly complex. For example, General Electric Company (GE) is an American Fortune 5oo conglomerate, which is ranked the third largest company in the world by Forbes Global 2,000, that is listed as one of the most successful tax dodgers by the Online MBA infographic with an effective tax rate of just 3.6 percent. As this post by Big Think illustrates, if printed out in full, GE’s tax return would total a staggering 24,000 pages. Imagine you are a low to moderately paid Government tax investigator trying to ply through it to catch evidence of evasion, legal or otherwise.
So what can be done? Exposing the worst offenders, as the Online MBA infographic does, is one way to put pressure on corporations to stop tax evasion. However, without a more concerted international effort that aims to close legal and regulatory loop holes and enforce bad corporate behavior, the chase will continue, across borders and boundaries, to the loss of various nations’ tax bases and the gain of company owners and share-holders.
Do you think that tax evasion by corporations, even if strictly legal, is right? What would you like to see happen to stop it?
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