Multi-National’s Profit Shifting Tax Strategies for Tax Evasion

Posted on June 18, 2022

Multi-National’s Profit Shifting Tax Strategies for Tax Evasion

After the Apple controversy, the U.S. Congress is currently examining the tax strategies multi-national enterprises (MNEs) use to evade taxes in the U.S. This kind of tax evasion is difficult to enforce because uses loopholes in the tax code to evade taxes legally.

The U.S. Congress is examining whether complicated tax strategies aimed at tax evasion by MNEs is leading to base erosion and profit-shifting (BEPS). TaxNews explains: “Pascal Saint-Amans, Director of Centre for Tax Policy and Administration at the Organization for Economic Co-operation and Development, noted that “BEPS arises because, under the existing rules, MNEs are often able to artificially separate their taxable income from the jurisdictions in which their income-producing activities occur.”

“This can result,” he added, “in income going untaxed anywhere, and significantly reduces the corporate income tax paid by MNEs in the jurisdictions where they operate. … While there clearly is a tax compliance aspect, as shown by a number of high profile cases, there is a more fundamental policy issue as the common international tax standards may not have kept pace with the changing business environment.”

He concluded that BEPS largely focuses on moving profits to where they are taxed at lower rates and expenses to where they are relieved at higher rates. For example, the tax treatment of related party debt-financing, captive insurance and other intra-group financial transactions; through transfer pricing, in relation to the shifting of risks and intangibles, such as intellectual property; and by the artificial splitting of ownership of assets between legal entities within a group; and through the availability of preferential tax regimes.”

The House of Representatives Ways and Means Committee held a hearing where Chairman, Dave Camp said that BEPS is the result of bad laws, and advocated for tax reform. TaxNews shares the details:

“Camp recalled that the discussion draft included options to mitigate US base erosion, of which the one receiving most support seems to be a stick-and-carrot approach where all foreign income attributable to intangibles – whether or not owned by the US parent or a foreign subsidiary – would be taxed by the US at the substantially lower rate of 15 percent (minus any credits for foreign taxes paid on the same income).

That approach would provide a deduction for income related to intangibles kept in the US (the carrot) and an immediate inclusion for income related to intangibles held abroad (the stick). “In other words,” he concluded, “companies would feel less pressure to shift income to low-tax jurisdictions because that income would be taxed at the same rate – whether it is earned in the US or Bermuda.”

In addition, Edward Kleinbard, Professor of Law at the University of Southern California’s Gould School of Law, urged the introduction of a requirement for every US MNE to publish a worldwide disclosure matrix of its actual tax burdens by jurisdiction, so as to “enable tax authorities to identify possible patterns of inappropriate income shifting, thereby making better use of limited audit resources.”

However, Paul Oosterhuis, a partner in Skadden, Arps, Slate, Meagher & Flom LLP, confirmed that any discussion of BEPS “must begin by first considering where profit should be located; only then can we begin to determine whether it has been improperly shifted.”

The discussion over tax reform is already a hot topic with Congress, proposing a shift to a consumption tax. Whether a reform of the tax code will involve a complete overhaul of the tax code or just blocking of loopholes is a question that might find its answer in the future.