- Multinational corporations
are able to move their profits around the world
by placing their operations in countries
where tax rates are low.
Lowering their effective tax rates.
Historically because the US federal tax rate of 35%
was relatively high compared to the tax rates
compared to the taxrates in other countries,
in other countries,
US based corporations entered
into many innovative arrangements
to reduce their income tax burden.
Now with the US corporate tax rate
dropping to 21% in 2018,
these innovative arrangements may slowly fade away.
But they're still an interesting illustration
of how corporations strategically structure their operations
in order to pay the lowest possible
legal amount of income tax.
Let's look at some examples.
Technology companies are able to
easily move their intellectual property
their intellectual property
to places where tax rates are low.
For example, Apple has used
a so called double Irish income tax structure
double Irish income tax structure
where it placed some intellectual property rights
in an Irish subsidiary based in the Cayman Islands
where the tax rates are zero.
Any profits generated by those very valuable
intellectual property rights
were taxed at the Cayman Islands rate of zero.
Another tax strategy involves international transfer pricing
international transfer pricing,
where a corporation sells products
from one division of the corporation
to another division of the same corporation
that's located in a different country.
This issue of international transfer pricing
doesn't sound very interesting.
But I am told that in the area of international taxation
this is by far the most important issue
that there is.
Again let's take the example of Apple.
Let's say that I'm an Apple subsidiary
located in the Cayman Islands
with my valuable intellectual property rights.
I then sell rights to use those intellectual property rights
to another Apple subsidiary located,
let's say in Ireland.
When selling those rights
to another subsidiary in the same Apple network
in the same Apple network,
I charge a very high price.
That very high transfer price
generates lots of revenue and lots of profits
in the Cayman Islands where the tax rate's zero.
where the tax rate's zero.
This property right transfer pricing arrangement
also creates large purchase costs in Ireland
and that's good because there are income taxes in Ireland.
because there are income taxes in Ireland.
So I want costs high in Ireland
I want costs high in Ireland,
where I'll have to pay tax on the profits
and I want profits high in the Cayman Islands
where there is no income tax.
I can manage where the profits are reported
through international transfer pricing.
Another interesting corporate issue
is something called tax inversions.
The operating headquarters of a company
can be in one country with high tax rates
but for tax purposes
the legal headquarters could be located in another country
with low tax rates.
The reason this is possible
for a multinational corporation
is because the corporate structure
is very flexible, very nimble
and things can be moved around.
If you try to do this with a partnership structure,
with different partnership laws around the world,
frankly it would be impossible.
Now the question that some ask themselves is,
do large companies abuse the flexible, nimble
the flexible, nimblecorporate business structure
corporate business structure
to evade legitimate income taxes?
That's not a question I'm prepared to answer,
that's something for governments to decide.
And there's always a bit of cat and mouse contest
There's always a bit ofcat and mouse contest
between large corporations and national governments.
For example, starting in 2018,
the United States government has created
a new procedure for taxing the income
from the intellectual property of US based corporations.
In a nutshell, this new procedure requires
this new procedure requiresall US-based corporations
all US based corporations to compute
to compute how much oftheir international income
how much of their international income
arises from intellectual property.
Now the details on how
this computation is done are interesting
are interesting,
but we'll skip over them here.
Then the US based corporation must pay US income tax
must pay US income tax
on that intellectual property related income
no matter where in the world the income is generated.
It'll be interesting to see how
US based corporations respond to this new tax procedure.
response to this new tax procedure.
Because of the flexibility of the corporate structure
large multinational corporations could be very careful
in structuring their business operations
to pay the lowest tax legally allowable.