Abusive Tax Avoidance and Globalization

  1. Introduction

Does Globalization make it easier for transnational corporations to engage in tax avoidance? There are winners and losers when companies engage in such acts…. although mostly losers. Therefore, tax avoidance should be curbed and mechanisms to do so are starting to be implemented.

Globalization and its consequences are one of the most debated topics in social sciences today. Some critics state that Globalization has lead to economic inequality, is keeping the global south underdeveloped, is detrimental to the environment, and transfers too much power from nation states to multinational corporations (MNCs). On the other hand, proponents of Globalization point to the absolute reduction of world poverty in the last 30 years and the reduction of inequality across societies (both north and south) as some of the main positive consequences of Globalization (Oatley 2012, 347-351). Moreover, they highlight that there is no substantial proof that Globalization causes more damage to the environment than imposing overall global trade restrictions. However, there is little debate across the political and economic spectrum about the fact that Globalization has led to increasingly strong multinational corporations, which can then engage in practices that are detrimental to governments and to the welfare of its people in general (Oatley 2012, 347-351).

One of the most damaging practices undertaken by MNCs is abusive tax avoidance. A practice that is considered “legal” (unlike to tax evasion), but which is an artificial stretch of national tax laws. By analyzing what abusive tax avoidance is, how MNCs use Globalization to engage in it, how they increase their profit with such a practice, and its ultimate consequences, it will be possible to highlight the policy implications of such findings and actions that can be undertaken to reduce such practice.

 

  1. Basic analysis of your case

Tax revenue is one of the most important jobs of any government, comparable to the the blood that run through one’s body. Without it, we cannot survive. Governments need tax revenue to fulfill their basic tasks for its citizens such as creating and maintaining basic infrastructure, keeping the security apparatus, and caring for the general welfare of hospitals, schools, fire brigades, and the like. Therefore, when corporations avoid paying their fair share of taxes, all these government tasks are put in jeopardy, which can lead to social chaos and conflict (Brock and Russel 2015, 278-279).

However, before getting into the details, it is important to clarify some of the terminology used in the paper. Tax avoidance is different from tax evasion. Tax avoidance is an act by individuals and organizations to make use of legal features in the tax law to minimize the amount of tax to be paid. The problem is when such tax planning makes use of tax loopholes to pay less tax in a way that was not intended by the law. That what is called abusive tax avoidance. To be extra clear, this is different from tax evasion; tax evasion is when the subject makes use of fake information (overstated costs, understated revenue, a cover up of assets, etc.) to pay fewer taxes (Hall 2013, 2).

The problem today is that the Globalization process and the rise of the Multinational Corporations that it creates have facilitated the process of engaging in abusive tax avoidance. Once MNCs began to operate in several different countries, it makes it easier to shift costs, revenues, and profits through different taxes jurisdictions (Silla and Willmott 2010, 343). To be specific, in the case of Apple Inc., which we will analyze in this paper, Globalization has helped it keep money abroad (and avoid paying taxes) and away from its home country, the United States.

We can study this process and its consequences with different level of analysis in international relations: the domestic level (consumers and citizens), the national level (state governments), the supranational level (the European Commission), and in the international multilateral level by the Organization of Economic Cooperation and Development (OECD).

This paper will analyze how exactly corporations use abusive tax avoidance by focusing in the current case of Apple’s tax structure in Ireland and the United States (“Apple Faces Multibillion Tax Bill In EU Rulling”2016). It will also examine its consequences for consumers, citizens and national governments, the reaction by the European Union, and the implementation by the OECD of its Action Plan on Base Erosion and Profit Shifting (BEPS) to try to curb abusive tax avoidance (OECD 2013).

 

  1. A short discussion of literature

Much has already been discussed in the literature regarding abusive tax avoidance and tax evasion including its moral issues, how it is happening, and what has to be done to mitigate it. Papers such as “Abusive Tax Avoidance and Responsibilities of Tax Professionals,” “Does legality matter?,” “The case of tax avoidance and evasion,” “The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness,” “Morality, tax evasion, and equity,” and “The Ethics of Tax Avoidance and Tax Evasion,” all touch on this subject by analyzing the moral hazard of engaging in abusive tax avoidance and what are the tools that corporations use to do so.

In the paper “International Profit-Shifting out of Developing Countries and the Role of Tax Havens,” the authors Petr Jansky and Alex Prats discuss tax havens, as does “A good century for tax Globalisation, redistribution
and tax avoidance.” Although not a novelty, these very low tax nations are the forefront of the whole scheme of abusive tax avoidance and its use has been facilitated by Globalization.

Regarding abusive tax avoidance and its connection with Globalization, the literature is quite a bit more reduced. However, it is possible to find important information regarding this relationship in papers such as “International Tax Cooperation and Implications of Globalization” and “Tax Avoidance, Tax Competition and Globalisation: making tax justice a focus for global activism.” This last paper is from 2004 and since then has made a call to arms to stop extreme tax avoidance. However, unfortunately little has been done until 2016.

Specifically about the Apple case, only one academic paper has been found to have relevant information since it is a fairly new subject: “iTax—Apple’s International Tax Structure and the Double Non-Taxation Issue.” However, since it is a current issue, there is a lot of updated information in periodicals such as Forbes, Financial Times, The Economist, The Guardian, and The New York Times.

As far as the OECD Action Plan on BEPS goes, although it is relatively new, a fair amount of academic work has been done about it, mostly critical and offering advice on how to improve it. This can be seen at “A Call to Rewrite the Fundamentals of International Taxation: the OECD BEPS,” “Action Plan, International Tax Issues Corner,” and “The OECD BEPS Project— A Status Update.” In this last paper, the author examines updated information about the creation of a Multilateral Instruments suggested by the OECD that would facilitate negotiation among countries and corporations in regards to tax, double-taxation, and tax avoidance. This is an instrument that will be part of the solution proposed by this paper.

 

  1. Theories and models

Although market liberalism in the form of Globalization might have exacerbated abusive tax avoidance, this paper will show that the same economic theory can also be used to curb its occurrence. By using international organizations (or even creating new ones such something like a “World Tax Organization”) nation states can cooperate to rein in corporations and achieve a better outcome for all. The alternative would be a realist view of competition and mistrust that would not solve the problem of abusive tax avoidance in the international market system leading to a “race to the bottom”(Oatley 2012, 199-200). Moreover, this would prove that states are still relevant in international economy and trade, that they can improve trade competition, and that they can be a force for good if the revenues acquired by combating abusive tax avoidance are used for the welfare of the general public and reducing income inequality.

To read the final paper: http://globalpoliticalstudies.com/abusive-tax-avoidance-and-globalization-final-paper-ipe/

 

  1. Reference list

“Apple Faces Multibillion Tax Bill In EU Ruling”. 2016. Financial Times. https://www.ft.com/content/7fd897de-6e03-11e6-a0c9-1365ce54b926.

Armstrong, Chris S., Jennifer L. Blouin, Alan D. Jagolinzer, and David F. Larcker. “Corporate Governance, Incentives, And Tax Avoidance”. SSRN Electronic Journal. doi:10.2139/ssrn.2252682.

Bethencourt, Carlos and Lars Kunze. 2015. “The Political Economics Of Redistribution, Inequality And Tax Avoidance”. Public Choice 163 (3-4): 267-287. doi:10.1007/s11127-015-0248-9.

Blaufus, Kay, Matthias Braune, Jochen Hundsdoerfer, and Martin Jacob. “Does Legality Matter? The Case Of Tax Avoidance And Evasion”. SSRN Electronic Journal. doi:10.2139/ssrn.2643636.

Bowers, Simon. 2016. “Ireland Gets An Apple Windfall, But Tackling Tax Avoidance Just Got Harder | Simon Bowers”. The Guardian. https://www.theguardian.com/business/blog/2016/aug/30/ireland-gets-an-apple-windfall-but-tackling-tax-avoidance-just-got-harder.

Braithwaite, John. 2005. “Globalisation, Redistribution And Tax Avoidance”. Public Policy Research12 (2): 85-92. doi:10.1111/j.1070-3535.2005.00387.x.

Brock, Gillian and Hamish Russell. “Abusive Tax Avoidance And Institutional Corruption: The Responsibilities Of Tax Professionals”. SSRN Electronic Journal. doi:10.2139/ssrn.2566281.

Christensen, John, Pete Coleman, and Sony Kapoor. 2004. “Tax Avoidance, Tax Competition And Globalisation: Making Tax Justice A Focus For Global Activism”. Global Tax Workshop.

Forst, David. 2015. “A Look At The Recommended Changes To The OECD Model Tax Convention To Address Transparent Entities As Set Forth In The OECD’S BEPS Action Plan”. Journal Of Passthrough Entities.

Gallemore, John and Eva Labro. “The Importance Of The Internal Information Environment For Tax Avoidance”. SSRN Electronic Journal. doi:10.2139/ssrn.2199632.

Hall, Kenneth S. 2013. “The Ethics Of Tax Avoidance And Tax Evasion”.

Herrington, Matthew. 2015. “The OECD BEPS Project— A Status Update”. International Tax Journal.

Janský, Petr and Alex Prats. 2015. “International Profit-Shifting Out Of Developing Countries And The Role Of Tax Havens”. Development Policy Review 33 (3): 271-292. doi:10.1111/dpr.12113.

Lee, Kangoh. 2016. “Morality, Tax Evasion, And Equity”. Mathematical Social Sciences 82: 97-104. doi:10.1016/j.mathsocsci.2016.05.003.

Ndikumana, Léonce. 2014. “International Tax Cooperation And Implications Of Globalization”.Department Of Economic & Social Affairs.

Oatley, Thomas H. 2008. International Political Economy. New York: Pearson/Longman.

OECD,. 2013. “Action Plan On Base Erosion And Pro T Shifting”.

Ross, James and Matthew Herrington. 2013. “A Call To Rewrite The Fundamentals Of International Taxation: The OECD BEPS Action Plan”. International Tax Journal.

Sikka, Prem and Hugh Willmott. 2010. “The Dark Side Of Transfer Pricing: Its Role In Tax Avoidance And Wealth Retentiveness”. Critical Perspectives On Accounting 21 (4): 342-356. doi:10.1016/j.cpa.2010.02.004.

Stiglitz, Joseph. 2016. “Tax Avoidance Fuels Global Inequality (Opinion)”. CNN. http://www.cnn.com/2015/10/09/opinions/stiglitz-tax-avoidance-globalization/.

Sullivan, Paul. 2014. “Crossing The Line Between Tax Avoidance And Evasion”. Nytimes.Com. http://www.nytimes.com/2013/02/12/business/crossing-the-line-between-tax-avoidance-and-evasion.html?_r=0.

“The Mystery Of The Vanishing Taxpayer”. 2000. The Economist. http://www.economist.com/node/276945.

Thorndike, Joseph. 2016. “Tax Avoidance Or Tax Evasion? There Is A Difference”. Forbes.Com. http://www.forbes.com/sites/taxanalysts/2015/03/12/tax-avoidance-or-tax-evasion-there-is-a-difference/#204fa8ce2a0d.

Ting, Antony. 2014. “Itax—Apple’S International Tax Structure And The Double Non-Taxation Issue”.

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