Hidden wealth – How multinational companies avoid taxes

Today, let’s look at how multinational companies use subsidiaries and tax havens to move money around with the purpose of avoiding taxes. Tax havens is a state or an island that has its own tax policy. Often, they offer foreigners zero tax terms and legislation that prevents access from outside world.

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“The tax havens” make rich people avoid taxes - but they also suggest that multinational companies can do the same. This happens very often within the legal framework: The companies use loopholes in the system. The fundamental problem is that the tax system is not adapted to today's globalized world. This is a common problem.

The basic thing here is that corporation tax is based on a fiction: the idea that it is possible to keep profits separate in the various branches of a multinational company. Today, multinational groups, with the help of large auditing and consulting companies, can in practice move profits where they want, namely where the tax level is lowest. The big countries have almost given up taxing the profits that are exported in this way.

How do companies move their profits to tax havens? From what I understand, there are two main techniques. The first is loans between subsidiaries, so that those who operate in, for example, France or the USA, have high debt. This reduces profits in these countries, before appearing in countries such as Luxembourg or Bermuda, where profits are not taxed. The disadvantage of this technique is that it is quite easy to detect.

The second method is far more important: It is "simple" to manipulate internal prices, more specifically the prices of the products that different subsidiaries buy from each other. Subsidiaries in Bermuda sell expensive services to similar companies in the United States. Thus, the surplus in tax havens and deficits in the United States, Japan or the major economies in Europe arise. In principle, such transactions should take place at market price, as if the subsidiaries have nothing to do with each other (at "arm's length"). But such huge companies carry out billions of transactions internally every single year, and it is then almost impossible for the authorities to check that the products / services are correctly priced. However, there is overwhelming evidence that US companies are engaging in this type of manipulation [Source].

One of the reasons why it is easy to manipulate internal prices is that there is often no established "normal price". In 2003, less than a year before the listing in August 2004, Google LLC(USA) transferred its search and advertising technology to Google Holdings, a subsidiary in Ireland, which, in practice, is based in Bermuda. What was a reasonable price before listing? Google could set the price as low as possible. We do not know the price – it is a secret. It turns out temporarily that rights from IT companies transferred to Bermuda without any significant consideration, are sometimes completely free. When this wealth arrives in Bermuda, the profits become taxable there, and the tax rate for businesses is quite comfortable: 0% ...

This problem is growing, as an increasing proportion of cross-border transactions take place internally in multinational companies - and the sale of trademarks, logos and algorithms has no normal price. It is complicated to estimate how much revenue the tax authorities miss out on due to this type of manipulation, and the result always has a certain margin of error, just as with private wealth.

The funds in tax havens (e.g., Cayman Islands, Bermuda, Luxembourg, etc.) can be used to buy companies, as collateral for loans, as payroll and for investments in other countries - without leading to tax. An even more extreme outcome is possible: Companies that want to spend their savings in tax havens can merge with their subsidiaries, so that in practice they move to another country and avoid the legislation in the United States. The latter is known as «tax inversion».

When US companies avoid paying taxes, it is not just the US that has to pay the price. Much of Google's profits come from Europe. If it had not been for the tax havens, Google would have paid more taxes to for example Germany and France. On the other hand, companies also avoid paying tax on the income that comes from the United States, and it is not good to say which countries' authorities lose the most. Regardless, it is the shareholders who win. Since they form a small group, even though pension funds have some units, this turns out to be very skewed and the "rich get richer".

Thanks for reading! As always, upvotes are much appreciated!

Cheers!
-Olebulls

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