Taxation Influences Multinational Companies Structure And Investment Decisions

992 words - 4 pages

The structure of MNC’s are greatly influenced by taxation, there are many strategies which MNC’s use to reduce tax which need intelligent structuring of a company is certain jurisdictions around the world in order to be successful. The main strategies I will be discussing are the:
1. Choice of where MNC’s set up their permanent establishment (PE)/headquarters,
2. Where their subsidiaries will be located,
3. Will they use tax havens?
4. Transfer pricing
5. Royalty payments.

In my example later I will also discuss specific strategies used by Google such as the double Irish, Dutch sandwich.

1.) The decision of where a company locates its head office is quite an important one if trying to avoid tax. The importance of the decision is determined by the fact that a company usually has to pay tax in the country in which it is incorporated. So, the choice to locate a company in a high tax territory such as the US which has one of the highest corporate tax rates in the world (up to 35%) can be expensive.

Companies usually need to be incorporated in a major financial centre such as London, New York or Frankfurt resulting in that tax cannot be minimised, so intermediate holding companies are set up, which are owned by the parent company and in turn own the operating subsidiary companies.

Nothing really happens in these intermediate locations, they exist normally just to collect dividend income from the subsidiary companies they own and then usually loan, but not pay as dividends, the resulting cash that they hold to the parent company in London, New York, or other areas. These intermediate companies are placed in locations which are chosen due to their low tax rates on dividend income received, numerous double tax treaties with other countries to ensure that it is not treated as a tax haven (even though it is) and a favourable regime for taxing interest income, of which it may have a great deal. Locations which are quite popular are locations such as Ireland, the Netherlands, Luxembourg and Switzerland, all of which offer these arrangements. [1]

2.) MNC’s will usually have subsidiary companies in each territory in which it operates due to a combination of tax law and other regulations. Any additional locations are normally a purely tax driven decision.
Non-tax haven countries tend to have higher tax rates than the tax havens yet there are a few smaller developed countries, such as Ireland and the Netherlands which also offer low tax rates on profits. They do this to increase their own tax revenues by attracting profits to their country which are not necessarily earned there but have been relocated using a variety of methods which I will discuss later. The decision by MNC’s to relocate profits from where they are earned to another location to be declared is an easy one as they will pay lower taxes in consequence. Many MNCs claim they have a...

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