Course on international taxation. Lesson 12: Taxation of Multinational Corporations
Lesson 12: Taxation of Multinational Corporations
12.1 Definition of Multinational Corporations
MULTINATIONAL CORPORATIONS (MNCs) are companies that operate in multiple countries. MNCs can be large, multinational companies with a global presence or smaller companies that operate in a few countries.
12.2 Taxation of Multinational Corporations
The taxation of MNCs can be complex, as it involves the tax laws and regulations of multiple countries. Some of the key issues in the taxation of MNCs include:
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RESIDENCE AND SOURCE: MNCs may be taxed based on the residence and source of their income and gains. Residence refers to the country in which a company is considered to be tax resident, while source refers to the country where the income or gain is considered to have arisen.
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TAX RATES: MNCs may be subject to different tax rates in different countries, depending on the tax laws and rates of each country.
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DOUBLE TAXATION: MNCs may be subject to double taxation, where the same income or gain is taxed in more than one country. Double taxation can be mitigated through the use of double taxation agreements or other measures.
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PERMANENT ESTABLISHMENT: MNCs may have a permanent establishment (PE) in another country, which can subject the company to tax in that country.
12.3 Strategies for Minimizing the Taxation of Multinational Corporations
There are several strategies that MNCs may use to minimize their tax liability, including:
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ESTABLISHING A RESIDENCE OR BUSINESS IN A LOW-TAX JURISDICTION: MNCs may establish a residence or business in a low-tax jurisdiction, such as a tax haven, to take advantage of low or no taxes or favorable tax rates.
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EARNING INCOME FROM SOURCES IN LOW-TAX JURISDICTIONS: MNCs may earn income from sources in low-tax jurisdictions, such as through the sale of goods or services or through investments in low-tax jurisdiction-based companies.
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MOVING ASSETS TO LOW-TAX JURISDICTIONS: MNCs may move assets, such as bank accounts, investments, or intellectual property, to low-tax jurisdictions to take advantage of low or no taxes or favorable tax rates.
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UTILIZING DOUBLE TAXATION AGREEMENTS: MNCs may take advantage of double taxation agreements to minimize their tax liability, by claiming exemptions or reductions in tax in one of the countries party to the agreement.
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STRUCTURING TRANSACTIONS TO MINIMIZE TAX: MNCs may structure transactions, such as the sale of goods or services or the transfer of assets, in a way that minimizes tax.
12.4 Challenges of Taxing Multinational Corporations
There can be challenges involved in taxing MNCs, including:
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COMPLEXITY: The taxation of MNCs can be complex, as it involves navigating the tax laws and regulations of multiple countries.
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CHANGING TAX LAWS: The taxation of MNCs may be affected by changes in tax laws and regulations in different countries, which can make it difficult to predict the tax consequences of certain actions.
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BASE EROSION AND PROFIT SHIFTING: MNCs may engage in base erosion and profit shifting (BEPS), which is the use of legal means to minimize tax by shifting profits to low-tax jurisdictions. BEPS can lead to a loss of tax revenue for governments and may contribute to inequality.
12.5 Summary
In this lesson, we have introduced the concept of multinational corporations (MNCs) and the key issues in their taxation, including residence and source, tax rates, double taxation, and permanent establishment. We have discussed the strategies that MNCs may use to minimize their tax liability, including establishing a residence or business in a low-tax jurisdiction, earning income from sources in low-tax jurisdictions, moving assets to low-tax jurisdictions, utilizing double taxation agreements, and structuring transactions to minimize tax. We have also covered the challenges of taxing MNCs, including complexity, changing tax laws, and base erosion and profit shifting.
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