The era of financial secrecy for multinational corporation (MNC) may have also ended just like the banks after the global financial crisis in 2008.
The governments across the world, armed with public outrages to financial institutions as the main cause of the crisis, decided to “clip the wings” of the banks by introducing many tighter new regulations regarding the financial market that, arguably, may derail the global economic recovery.
Not enough with the banks, the governments of major economies led by G-20, are now trying to go after taxes of multinational companies, which they alleged using tax planning schemes to avoid paying their “fair share” of taxes that can be used to finance economic development for the public, which facing deep spending cuts especially in many major economies such as United Kingdom (UK) and United States of America (US).
In the era of digital economy, the governments’, including UK and US, pursuit for such action is getting a momentum after they learned internet firms and consumer companies such as internet giant Google Inc, Amazon Inc and Starbucks Coffee racking up billions of US$ dollars of profit due to using complex tax schemes, from tax loopholes to tax haven jurisdictions, to avoid paying higher taxes in their home country of residence as well as to pay less taxes in the host country where they get the source income. The money usually reinvested by the companies to their units to expand the businesses.
Organisation for Economic and Cooperative Development (OECD), which become at the forefront fighter for taxes issues, introduced a project called Base Erosion Profit Shifting (BEPS), a term which refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.
The main aim of OECD with the project is to avoid countries takes unilaterally action to impose taxes as well as potential double taxations, which could create a chaotic and deter economic development.
G-20 has supported the project in order to mitigate such activities and to set up a holistic approach that can actually be implemented globally once the project completed. OECD is expected to come up with solutions by 2015.
The paper is aiming to explain how the multinational companies structure their business globally to reduce their tax burden under the existing legal umbrella and how OECD, supported by G-20, via its BEPS project is seeking to deal with it.
The author will start by discussing the so-called digital economy before it explain the MNCs’ tax scheme using amazon.com Inc. as a case study. It then will discuss the BEPS project, its initiation and its action plan. The author will finally try to explain the potential risks BEPS poses to MNCs if it push too hard to tax companies that could hurt global economic development....