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Running head: Research Paper 2

Research Paper 2
FERNANDO LUZERNO AUGUSTO CARLOS LICHUCHA

Distance Learning Doctorate of Finance


Program

This paper is submitted in partial fulfilment of the


requirements for 5523S2001 DF Investments, Taxation
& Fraud Examination R2

School of Management
Program Name: Doctor of Finance
Course Professor: Dr. Ben Collins
b.collins@smcuniversity.com)

August 25, 2016

Research Paper 2

Construct a legitimate tax plan that minimizes a


multinational technology companys taxes

Table of contents
List of Abbreviations................................................................................................... 3
List of Tables............................................................................................................... 3
Abstract...................................................................................................................... 4
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Introduction................................................................................................................ 5
A Brief History of Transnational Corporations.............................................................9
Current state of multinational corporations tax practices........................................10
Discussion of Facts and Issues..................................................................................11
Analysis of Facts and Issues..................................................................................... 16
Conclusion................................................................................................................ 18
Recommendations.................................................................................................... 19
References................................................................................................................ 20
Appendices............................................................................................................... 23

List of Abbreviations
ATO.
FDI..
.
IT.
MNC
MNEs..
MTC
OECD.
TNCs..
TNEs..
TNI.
UNCTAD
WIR

Australian Taxation Office


Foreign direct investment
Information Technology
Multinational corporation
Multinational Enterprises
Multinational technology company
Organisation for Economic Co-operation and Development
Transnational corporation
Transnational enterprises
Trans nationality Index
United Nations Conference on Trade and Development
Word Investment Report

List of Tables
Table 1 Old tax plan (In millions US dollars)................................................................................14
Table 2 Proposed tax plan (In millions US dollars).......................................................................15

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Abstract

World tax regimes are complex, fragmented and highly competitive ranging from quasi zero tax
jurisdictions such as Bahamas1 to high tax jurisdictions led by Argentina with an astonishingly
137.3% total tax rate2. The weaknesses of world tax regimes compounded by a lack of effective
world tax coordination are conveniently being exploited by MNCs to maximize their profits.
The paper attempted to devise a tax plan for a hypothetical MTC operating in the contemporary
complex corporate tax environment aiming solely to minimize its corporate taxes. The proposed
tax plan consists in shifting all the sales from affiliates in high tax regime countries to affiliates
in lower-tax jurisdictions resulting in a substantial reduction in corporate taxes and strengthened
by using the tradeoff theory of leverage to identify the optimal debt-to-equity ratio as the level at
which the two offset each other (Aca & Mozumdar, 2004) in high tax jurisdictions and by
creating a forth affiliate in a tax haven such as Luxembourg3 to raise funds at low interest rate
and offer loans to other MNC affiliates at intra-corporate high interest rate in order to take tax
advantages of affiliates in high tax jurisdictions (Needham, 2013). So, devising a tax plan for
MNCs seems to be at least very gawky given the weaknesses of the world tax regimes and world
tax coordination permeability.
1 No capital gains tax, no inheritance tax, no personal income tax, no gift tax (Peacock, n.d.).
2 The total amount of taxes is the sum of five different types of taxes and contributions payable

after accounting for deductions and exemptions: profit or corporate income tax, social
contributions and labor taxes paid by the employer, property taxes, turnover taxes, and other
small taxes (Bird, 2016).
3 Where about 33 percent of U.S. Fortune 500 companies have subsidiaries
according to a 2015 report from Citizens for Tax Justice and U.S. PIRG Education
Fund https://www.gobankingrates.com/personal-finance/10-best-tax-havens-world/
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Introduction
In the literature a multinational corporation (MNC) is defined in various ways such as given by
(Dunning, Multinational enterprises , 1993, p. 3)4, (Kogut, 2001, p. 10197)5, (Root, 1994)6 and
(Gooderham & Nordhaug, 2003)7 and has various designations including multinational
Enterprises (MNEs), global enterprise, transnational enterprises (TNEs), and transnational
corporation (TNCs) (Sagafi-nejad & Dunning, 2008). In general, a multinational corporation is a
company headquartered in one country with operations in one or more other countries.
The latest Word Investment Report8 states that top 100 MNEs in UNCTADs Trans-nationality
Index9 have on average more than 500 affiliates each, across more than 50 countries. They have
7 hierarchical levels in their ownership, about 20 holding companies owning affiliates across
4 MNC is an enterprise that engages in foreign direct investment (FDI) and owns or controls

value adding activities in more than one country (Dunning, 1993, p. 3)


5 MNEs are business organizations with economic activities located in more than two different

countries (Kogut, 2001, p. 10197).


6 MNC is a parent company that (i) engages in foreign production through its affiliates located in

several countries, (ii) exercises direct control over the policies of its affiliates, and (iii)
implements business strategies in production, marketing, finance and staffing that transcend
national boundaries (Root, 1994)
7 MNC is an actively managed substantial foreign direct investment made by firms that have a

long-term commitment to operating internationally, excluding several prevalent forms of


internationalization such as licensing and contract manufacturing (Gooderham & Nordhaug,
2003).
The World Investment Report 2016 was prepared by a team led by James X. Zhan. The team
members included Richard Bolwijn, Bruno Casella, Joseph Clements, Hamed El Kady, Kumi
Endo, Michael Hanni, Joachim Karl, Hee Jae Kim, Ventzislav Kotetzov, Guoyong Liang, Hafiz
Mirza, Shin Ohinata, Diana Rosert, Astrit ulstarova, Claudia Trentini, Elisabeth Tuerk, Joerg
Weber and Kee Hwee Wee (United Nations Conference on Trade and Development, 2016, p. v).
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multiple jurisdictions, and have almost 70 entities in offshore investment hubs (United Nations
Conference on Trade and Development, 2016).
MNCs are geared by a combination of two main factors (i) the uneven geographical distribution
of factor endowments and (ii) market failure (Dunning, 1988) as cited in (Gooderham &
Nordhaug, 2003). The combination of unequally distributed factor endowments combined with
difculties in using market-based arrangements has yielded more than 320,000 MNEs with at
least one affiliate abroad totaling 1,116,000 affiliates, of which 774,000 foreign (United Nations
Conference on Trade and Development, 2016).
On a global basis, it has been estimated that the sales of foreign affiliates accounts for as much
as 46,6% of GDP worldwide (Dunning & Lundan, 2008) and MNCs generate about half of the
worlds industrial output and account for about two-thirds of world trade (Gooderham &
Grgaard, 2013).
As the significant share of MNEs total FDI income is booked in low-tax, often offshore,
jurisdictions, they constitute a real concern for tax authorities globally given fiscal losses due to
MNEs tax practices in these jurisdictions (United Nations Conference on Trade and
Development, 2016).The scale of losses through the increasingly aggressive use of tax-avoidance
schemes by MNCs is difficult to estimate, but is considered serious (Needham, 2013). The taxavoidance schemes by MNCs revolve around shifting income from higher-tax to lower- or no-tax
countries and include transfer pricing, the use of lower-tax jurisdictions, over-charging entities in
higher-tax countries to reduce taxable profit and (legally) completing a transaction in a lower-tax
The Trans nationality Index (TNI) published by UNCTAD is a composite of three ratios:
foreign assetstotal assets, foreign salestotal sales and foreign employmenttotal employment.
TNI helps to assess the degree to which the activities and interests of companies are embedded in
their home country or host countries (United Nations Conference on Trade and Development,
2007) .
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country, different to the country which the business relates to, corporate debt-equity, payments
for intangibles, shell holding companies, and hybrid entities (Needham, 2013). These schemes
have been gaining strength with business activities relying heavily on information and
communications technology10 and the rise in the value of intangible assets e.g. brands (Needham,
2013). So, the national and international corporation tax environment is complex, with many
constraints, and a solution to fiscal losses due to MNEs tax practices is also complex (Needham,
2013).
The complexity is magnified by (i) the way the individual countries look at an MNC for tax
purposes, (ii) self-preservation in all domestic tax systems,

and (iii) complex corporate

structures and investor nationality. In respect to the first complexity, the individual countries tax
parts of MNC operating on their jurisdictions following (the "separate entity approach") not the
whole MNC as per ("the unitary approach") (Needham, 2013).
The "separate entity approach" led to double taxation11 of MNCs profits which, then, required an
international tax regime adopted in 1920s based on OECD12/ United Nations treaties, and
resulted in more than 2 500 worldwide tax agreements signed between countries to eliminate
double taxation (Needham, 2013). With fierce competition, countries devise different tax rules

10 ICT refers to technologies that provide access to information through telecommunications

and includes the Internet, wireless networks, cell phones, and other communication mediums
http://techterms.com/definition/ict .
11 When a companys tax profits are subject to tax from the country in which it is
situated and tax from its source country; due to an overlap of jurisdiction (Rixen,
2009) as cited in (Simpson, 2016) .
12 The Organisation for Economic Co-operation and Development (OECD) whose task is to

promote policies that will improve the economic and social well-being of people around the
world. http://www.oecd.org/about/
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and rates and offer different tax advantages in order to attract investment to their jurisdictions
and some of them may not tax some income at all, or at significantly lower rates than others
(Needham, 2013).
Second, countries tend to seek self-preservation in all domestic tax systems as well as in the
bilateral and multilateral agreements made between countries (Rixen, 2009) as cited in (Simpson,
2016). This is because, while governments prefer to avoid double taxation situations, they also
do not wish to lose taxable revenue (Rixen, 2009) as cited in (Simpson, 2016).
Third, complex corporate structures are the ways firms, and especially affiliates of multinational
enterprises (MNEs), are often controlled through hierarchical webs of ownership involving a
multitude of entities. More than 40 per cent of foreign affiliates are owned through complex
vertical chains with multiple cross-border links involving on average three jurisdictions.
Corporate nationality, and with it the nationality of investors in and owners of foreign affiliates,
is becoming increasingly blurred (United Nations Conference on Trade and Development, 2016,
p. 124). So, complex corporate structures and investor nationality have become increasingly
notorious in recent years because investment schemes involving offshore financial centres,
special purpose entities and transit FDI have proved to be an important tool in MNE tax
minimization efforts (United Nations Conference on Trade and Development, 2015).
So, devising a fiscal plan for MNCs seems to be very gawky either for the viewpoint of fiscal
authorities or for the MNCs themselves.
Therefore, this paper attempts to devise a legitimate tax plan that minimizes a hypothetical
multinational technology companys taxes taking in to account that countries devise different tax
rules and rates and offer different tax advantages in order to attract investment to their
jurisdictions (Needham, 2013).

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A Brief History of Transnational Corporations


The earliest historical origins of transnational corporations date from 16th century when major
major colonising and imperialist ventures from Western Europe, notably England and Holland,
formed firms such as the British East India Trading Company to promote the trading activities or
territorial acquisitions of their home countries in the Far East, Africa, and the Americas. The
contemporary form of transnational corporation did not appear until the 19th century, with the
development of the factory system, capital intensive manufacturing processes; better storage
techniques; and faster means of transportation (Greer & Singh, 2000).
During the 19th and early 20th centuries, the search for resources including minerals, petroleum,
and foodstuffs as well as pressure to protect or increase markets drove transnational expansion
from the United States and Western European nations (Greer & Singh, 2000). During these
years, mergers and acquisitions contributed to the growth of transnational corporations in major
sectors such as petrochemicals and food (Greer & Singh, 2000).
Today, there are more than 320,000 MNEs with at least one affiliate abroad totaling 1,116,000
affiliates, of which 774,000 foreign (United Nations Conference on Trade and Development,
2016). About 300 largest TNCs own or control at least one-quarter of the entire world's
productive assets, worth about US$5 trillion (Greer & Singh, 2000).
However, some MNCs are reported in the press as paying little or no taxes. A report from the
U.S.A. Government Accountability Office states that nearly 20% of large U.S. corporations that
reported a profit on their financial statements in 2012 ended up paying exactly nothing in U.S.
corporate income taxes (Sahadi, 2016). Almost 600 of the largest companies operating in
Australia did not pay income tax in the 2013 to 2014 financial year as reported by (Australian
Taxation Office (ATO), 2015).
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Current state of multinational corporations tax practices


Multinational corporations strive to avoid paying taxes by locating their holding companies and
subsidiaries in tax havens or low tax regime countries and choosing where to allocate their
profits and expenses (The Fair Tax Campaign, 2013). The holding companies owning affiliates
across multiple jurisdictions can perform a number of tax-reducing functions such as minimizing
tax paid on dividends by lending them to the parent company and hiding the nature of certain
transactions from the authorities (The Fair Tax Campaign, 2013).
The top tax havens in the world are Bahamas 13, Nevada, U.S.A.14, Wyoming, U.S.A.15,
Bermuda16, Switzerland17, Caymen Islands18, Hong Kong19 (Peacock, n.d.).
Trading between subsidiaries can be used to manipulate arms length transfer pricing rules by
artificially reducing the cost of products and services sold from higher tax regime countries to
another company in a lower tax regime country and then inflating the costs of the same products
13 No capital gains tax, no inheritance tax, no personal income tax, no gift tax.
14 No capital gains tax, no inheritance tax, no personal income tax, no gift tax.
15 No corporate taxes, no inheritance taxes, no franchise taxes, no inventory taxes, no personal

income taxes, no unitary taxes, no estate or gift taxes


16 No corporate taxes, no personal income taxes.
17 Full or partial tax exemptions, depending on which private bank you use.
18 The full package no personal income taxes, no capital gains, no corporate taxes, no payroll

taxes and the country doesnt withhold taxes on foreign entities.


19 No sales taxes, no capital gains, a wealth of personal tax deductions and no payroll taxes.
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sold on from the new country, which pockets the difference as reduced-tax profit (The Fair Tax
Campaign, 2013). The amount of multinational corporations profits shifted to tax havens is
staggering and it has been coined nowhere income 20 or white income21 because is not taxed
anywhere (Sheppard, 2010).
Although, the manipulation of arms length transfer pricing rules is illegal in some countries it
has been difficulty for developing countries to deal with it because the tax authorities do not have
the capacity to challenge the sophisticated trading techniques used by multinationals and their
teams of lawyers and accountants (The Fair Tax Campaign, 2013).
In quest for lowering taxes, MNCs can create internal financing companies in low tax regime
countries or tax havens that borrow money from them to lend to other subsidiaries at high
interest rate to reduce their tax bill. The practice is called thin capitalisation and intends to
overload subsidiaries in high tax regime countries with huge amounts of debt charged whatever
rate of interest to maximise the profit that can be extracted from subsidiary company in a high
tax area to then transfer it to a low tax location (The Fair Tax Campaign, 2013).

Discussion of Facts and Issues


The intra-group transactions and the locations where the profits are actually generated are the
fundamental pillars for the proposed legitimate tax plan that minimizes a hypothetical
multinational technology companys taxes herein discussed.
The hypothetical multinational technology company (MTC) is a business that is incorporated and
operated in one country (the home country) with operations in one or more other countries. There
20 In U.S.A
21 In Europa
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are two basic approaches to how the home country taxes the income of a multinational
corporation: the territorial approach and the worldwide approach (Hungerford, 2014) equivalent
to (the "separate entity approach") and ("the unitary approach") (Needham, 2013).
Under the worldwide approach, the home country would tax the MTCs income generated both
domestically and foreign-sourced. Under this approach, the home country generally would allow
a credit or deduction for foreign taxes paid on foreign-source income to avoid double taxation
(Hungerford, 2014). In these circumstances, the home-country MTC can allocate its capital
around the world based on economic considerations and not tax considerations since the income
from capital owned by home-country citizens faces the same tax burden regardless of where the
capital is invested (Hungerford, 2014).
Under the territorial approach, the home country only would tax the MNCs income earned
within its jurisdiction except foreign generated income that may be subject to taxation by foreign
countries. In this approach, the location of investment can be affected if different countries have
different tax rates on capital income, that is, investment decisions will be based, at least in part,
on tax considerations (Hungerford, 2014).
The present proposal assumes the territorial approach with different countries having different
tax rates on capital income. The hypothetical MTC under consideration is one of the giants of
technology and is the largest Information Technology (IT) company in the world that offers IT
services including business consulting, application development and innovation, business
analytics and strategy analytics. The MTC is currently headquartered in Argentina (Appendix 2)

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with an astonishingly 137.3% total tax rate 22 and the country's turnover tax alone eats up nearly
90% before taxes on salaries (Bird, 2016). It possess eleven affiliates in equal number of
countries namely Bolivia23, Tajikistan24, Colombia25, Algeria26, Mauritania27, Brazil28, Guinea29,
France30, Nicaragua31, Venezuela32, and Italy33.
As the MTCs managers face different tax rules and rates in countries with astonishingly high
rates ranging from Argentina (home country) with the plateau total tax rate of 137.3% to Italy
with the plain total tax rate of 65.4% and the targets to operate in the most effective and
22 The total amount of taxes is the sum of five different types of taxes and
contributions payable after accounting for deductions and exemptions: profit or
corporate income tax, social contributions and labor taxes paid by the employer,
property taxes, turnover taxes, and other small taxes (Bird, 2016).
23 with 83.7% total tax rate
24 with 80.9%
25 with 75.4%
26 with 72.7%
27 with 71.3%
28 with 69%
29 with 68.3%
30 with 66.6%
31 with 65.8%
32 with 65.5%
33 with 65.4%
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profitable way, may decide to adjust their structures and locations to be as tax efficient as
possible. The management decision to shift their profits to low-tax locations is prompted by the
variance in tax rates across different countries where the MNC operates (GUPTA, 2009).
The components of the provision for the income taxes before the current proposal were as
follows (Table 1).

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Table 1 Old tax plan (In millions US dollars)
Country

Total

tax

Income

Current taxes34 Deferred taxes

Provision

for income

rate
taxes
Argentina
137.30%
25,790.00
9,026.50
-1,789.00
7,237.50
Bolivia
83.70%
17,300.00
4,325.00
750.00
5,075.00
Tajikistan
80.90%
7,500.00
0.00
0.00
0.00
Colombia
75.40%
8,900.00
2,225.00
350.00
2,575.00
Algeria
72.70%
15,009.00
3,452.07
-201.00
3,251.07
Mauritani
71.30%
4,500.00
1,125.00
0.00
1,125.00
a
Brazil
69%
23,750.00
8,075.00
0.00
8,075.00
Guinea
68.30%
2,300.00
805.00
0.00
805.00
France
66.60%
35,750.00
11,904.75
0.00
11,904.75
Nicaragua
65.80%
3,450.00
1,035.00
-7.00
1,028.00
Venezuela
65.50%
6,930.00
2,356.20
12.00
2,368.20
Italy
65.4%.
26,590.00
8,349.26
300.00
8,649.26
Total
177,769.00
52,678.78
-585.00
52,093.78
Source: Total tax rate from (Bird, 2016) and the author computed the components of provision
for income taxes.
The company had a provision for income taxes of 52,093.78 million USD and a net profit after
tax of 125,675.22 million USD. The new tax plan will cut the tax bill in the following way. The
MNC will create three new regional affiliates located in countries with low corporate tax rates,
namely Canada with 11% to 15%35 tax rate, Lesotho with 10.84%36 tax rate, and Macedonia with
7.4%37 tax rate. So, the production from Argentina, Bolivia, Colombia, Brazil, Nicaragua and
Venezuela will be sold to an affiliate in Canada at production cost without paying the corporate
tax in the local jurisdiction. The production from Algeria, Mauritania and Guinea will be sold to
34 Calculated using corporate tax rare from Appendix 4 Taxes breakdown
35 http://www.doingbusiness.org/data/exploreeconomies/canada/paying-taxes/
36 http://www.doingbusiness.org/data/exploreeconomies/lesotho/paying-taxes/
37 Appendix 3 The 18 countries with the lowest tax rates in the world
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an affiliate in Lesotho also at production cost. Finally, the production from France

and Italy

will be sold to an affiliate in Macedonia at production cost. The production from Tajikistan will
be sold from that country because there are no corporate taxes.
The three new regional affiliates will sell the production at the true market price from respective
jurisdictions resulting in corporate tax savings amounting to 30,054.03 million USD dollars
(Table 2) from 52,093.78 of old tax plan.
Table 2 Proposed tax plan (In millions US dollars)
Country prior
corporate tax
Argentina

35%

Bolivia
Colombia

25%
25%

Brazil
Nicaragua

34%
30%

Venezuela

34%

New affiliate
corporate tax

Tax savings
-20.0%
-10.0%
-10.0%

Canada

15%

-19.0%
-15.0%
-19.0%

Subtotal
Algeria
Mauritania
Guinea

23%
25%
35%

Subtotal
Tajikistan

-12.2%
Lesotho 10.84%

0.0%

0%

France

33.3%

Italy

31.4%

Macedonia 7.4%

-22.5%
-20.6%

Subtotal
Grand total
Source: Author

-14.2%
-24.2%

5,158.0
0
1,730.0
0
890.00
4,512.5
0
517.50
1,316.7
0
14,124
.70
1,825.0
9
637.20
555.68
3,017.
97
0
8,029.4
5
5,466.9
0
13496.
35
30,639
.03

Deferred
taxes

Net tax
savings

1,789.0
0

3,369.00

750.00
350.00

2,480.00
1,240.00

0.00
-7.00

4,512.50
510.50

12.00

1,328.70

-684.00

13,440.70

-201.00
0.00
0.00

1,624.09
637.20
555.68

-201.00
0.00

2,816.97
0.00

0.00

8,029.45

300.00

5,766.90

300

13796.354

-585.00

30,054.03

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The proposed tax plan would be strengthened using the tradeoff theory of leverage to identify the
optimal debt-to-equity ratio as the level at which the two offset each other (Aca & Mozumdar,
2004) in high tax jurisdictions and by creating a forth affiliate in a tax haven such as
Luxembourg38 to raise funds at low interest rate and offer loans to other MNC affiliates at intracorporate high interest rate in order to take tax advantages of affiliates in high tax jurisdictions
(Needham, 2013).

Analysis of Facts and Issues


In one hand, when a MNC wants to go global a number of issues has to be clarified before a
decision is taken such as the foreign country tax regime, incentives for overseas businesses,
double tax treaties and how foreign source income will be taxed (PKF INTERNATIONAL
LIMITED, 2014). In the other hand, governments worldwide continue to reform their tax codes
at a historically rapid rate and consequently MNCs need to be aware of changes in the tax
landscape (EYs Tax Services, 2015). For the development countries corporate taxing is the
precious part of their tax systems, particularly where alternative revenue sources are thin (Tax
Justice Network, n.d.). Since the MNCs should pay to governments a number of taxes such as (i)
value added tax39, (ii) income tax40, (iii) social security, and (iv) corporate tax 41, they might be
38 Where about 33 percent of U.S. Fortune 500 companies have subsidiaries
according to a 2015 report from Citizens for Tax Justice and U.S. PIRG Education
Fund https://www.gobankingrates.com/personal-finance/10-best-tax-havens-world/
39 a direct consumption tax on goods and services purchased
40 citizens contribution based on their salary
41 based

on the profit of the enterprise.


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tempted to use a myriad of tax reduction methods to minimize tax burdens including transfer
pricing, lower-tax jurisdictions, over-charging entities in higher-tax countries to reduce taxable
profit and (legally) completing a transaction in a lower-tax country, different to the country
which the business relates to (Needham, 2013), accounting technologies, contract manufacturing,
Double-Irish and Dutch Sandwich amongst others (Eyitayo, 2015). The world does not seem to
have an entity that oversees the global tax system. Over the last century a loosely co-ordinated
international tax system has emerged to deal with double taxation championed by OECD 42 and
the United Nations Tax Committee (Tax Justice Network, n.d.). Consequently, tax avoidance
strategies are a choice that multinational corporations make in pursuit of higher profits,
remuneration, status, media praises and are made possible by professionals, and offshore
financial centers that consider them legitimate for reduction in taxes even though the dividing
line between tax evasion and tax avoidance remains unclear (Eyitayo, 2015).
Thus, it is against this apparently innocuous background that a territorial lower-tax plan was
devised for an MTC struggling with astonishingly high rates ranging from Argentina (home
country) with the plateau total tax rate of 137.3% to Italy with the plain total tax rate of 65.4%.
Using these gimmicks, the MTCs territorial lower-tax plan managed to cut the tax bill from
52,093.78 (Table 1) to 30,054.03 million USD dollars (Table 2) by selling all production at
production cost to affiliates strategically located in lower-tax jurisdictions.

42 a club of rich countries, that among other things, oversees the global tax system, and devises

the broad framework of rules and tax treaties that countries sign up to (Tax Justice Network,
n.d.)
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Conclusion

The MNC are being taxed in a very complex corporate tax environment around the world
characterized by (i) (the "separate entity approach") and ("the unitary approach") approaches,
(ii) self-preservation in all domestic tax systems, and (iii) complex corporate structures and
investor nationality (Needham, 2013). The complex corporate tax environment is aggravated
with a lack of a strong global tax system which is conveniently being exploited by MNCs to
maximize their profits. The paper attempted to devise a tax plan for an MTC operating against
the contemporary complex corporate tax environment aiming at minimizing its taxes. The tax
plan shifted all the sales from affiliates in higher tax regime countries to affiliates in lower-tax
jurisdictions resulting in a substantial reduction in corporate taxes and was strengthened by using
the tradeoff theory of leverage to identify the optimal debt-to-equity ratio as the level at which
the two offset each other (Aca & Mozumdar, 2004) in high tax jurisdictions and by creating a
forth affiliate in a tax haven such as Luxembourg43 to raise funds at low interest rate and offer
loans to other MNC affiliates at intra-corporate high interest rate in order to take tax advantages
of affiliates in high tax jurisdictions (Needham, 2013). So, devising a tax plan for MNCs seemed
to be at least very gawky given the weaknesses of the world tax regimes and world tax
coordination permeability.

43 Where about 33 percent of U.S. Fortune 500 companies have subsidiaries


according to a 2015 report from Citizens for Tax Justice and U.S. PIRG Education
Fund https://www.gobankingrates.com/personal-finance/10-best-tax-havens-world/
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Recommendations

The world needs to act as one in dealing with MNCs in order to optimize corporate taxes
collection. The proliferation of tax regimes and world tax coordination permeability are
conducive for multinational corporations to avoid tax and reduce revenue of governments all
across the world. The countries need to move together in their efforts to raise fiscal funds
through corporate tax and entice MNC through coordinated incentives and agreed low tax
policies.

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11009701600902311110406609400407
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Research Paper 2

Appendices
Appendix 1 A stylized example of an MNE ownership structure

Source: (United Nations Conference on Trade and Development, 2016, p. 130)

26

Research Paper 2
Appendix 2 27 countries with the highest levels of tax
2
7.
2
6.
25.
24.
23.
22.
21.
20.
19.
18.
17.
16.
15.
14.
13.
12.
11.
10.
9.
8.
7.
6.
5.
4.
3.
2.

Japan: 51.3% Japan has one of the largest economies despite having a total tax rate of more than 50%. It has the
fifth-highest taxes in Asia
Mexico: 51.8% Mexico is one of several Latin American countries with a total tax rate above 50%. The basic
rate of tax for corporations sits at 30%.
Ivory Coast: 51.9% One of eight African countries in our ranking, Ivory Coast charges a basic 25% corporate
profits tax but bumps that to 30% for those in the telecommunication, IT, and communication sectors.
Austria: 52% One of just six countries in Europe with a tax rate of more than 50%, Austria has some interesting
quirks with its tax system. For example, couples are taxed separately even when they're married.
Ukraine: 52.9% Businesses in Ukraine have to contend not only with serious geopolitical concerns, but also
with some of the highest taxes in Europe. Only four countries on the continent have a higher total rate.
Sri Lanka: 55.6% Sri Lanka's basic rate of tax for corporations stands at 28%, but it jumps to 40% for any
company "dealing in liquor or tobacco." The total rate of tax ends up far higher thanks to several more add-ons.
Belgium: 57.8% The home of the European Union has the fourth-highest rate of tax in the eurozone and the
highest outside the "big five" Euro countries.
Costa Rica: 58% The small nation is one of a few countries in Central America to have a tax rate well in excess
of 50%.
Spain: 58.2% Two of the other "big five" European countries sneak in ahead of Spain, with higher rates for
businesses.
India: 61.7% Finance Minister Arun Jaitley aims to cut India's corporate tax level by more than 5 percentage
points, down to 25% over four years.
Tunisia: 62.4% Though some other countries farther south have steeper rates, Tunisia's total tax rate is the
second highest in North Africa.
Benin: 63.3% The World Bank says the country's corporate income tax runs to only 15.9%, but a bundle of other
taxes raise the total rate imposed on businesses significantly.
Gambia: 63.3% Without major natural resources, Gambia is among the poorest nations in the world. Taxes on
turnover rather than profit raise rates for businesses significantly.
Chad: 63.5% Like Gambia, Chad relies on agriculture and is extremely poor. It taxes 1.5% of turnover or 40%
or profits, depending on which is higher.
China: 64.6% Like many other countries on the list, China levies some taxes on the turnover of businesses rather
than on their profit.
Italy: 65.4% Though known for its higher tax rates, Italy gets beaten to the top spot in Europe by another
country.
Venezuela: 65.5% The government of Venezuela pursued a higher-tax model, with dramatic increases in taxes
for foreign oil companies under President Hugo Chavez.
Nicaragua: 65.8% In 2012, the International Monetary Fund suggested that the country reduce the complexity of
its corporate tax system.
France: 66.6% The country tops the ranks for Europe
Guinea: 68.3% Most of Guinea's corporate taxes are paid through a flat-rate tax on turnover from the previous year.
Brazil: 69% Last year, Latin America's biggest economy eliminated a 20% tax on business payrolls as part of an
effort to reform its system.
Mauritania: 71.3% In 2013, this agriculture-dependent country brought in a withholding tax of 15% to stop
people from moving payments to nonresidents.
Algeria: 72.7% Algeria has the highest total tax rate in Africa.
Colombia: 75.4% The country brought in a new wealth tax though it's fourth in the world, it comes in third in
Latin America for its total tax rate.
Tajikistan: 80.9% The country in Central Asia has a 2% statutory tax rate on all turnover, which takes out a
significant chunk of a company's average profits.
Bolivia: 83.7% Bolivia's 3% tax on transactions wipes out 60% of company profits, even before other taxes are
taken into account. But it still loses out to one other Latin American country.

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Research Paper 2
1.

Argentina: 137.3% Astonishingly, Argentina's total tax rate is judged to be over 100% of corporate profits. The
country's turnover tax alone eats up nearly 90% before taxes on salaries

Source: (Bird, 2016)


Appendix 3 The 18 countries with the lowest tax rates in the world

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

Former Yugoslav Republic Macedonia: 7.4%. As the only country with a tax rate of less
than 10% on its businesses, but the IMF noted this year that public debt has doubled in
Macedonia since 2008, partly as a result of this choice.
Qatar: 11.3%. Qatar edges out the region's other oil-rich state to come in second place,
but still loses out to one other nation.
Kuwait:12.8%. The emirate recently rejected an IMF suggestion that it should introduce
a business profit tax to address its fiscal shortfall.
Bahrain: 13.5%. The country is less oil-rich than some of its neighbours. According to
EY, it "levies no taxes on income, capital gains, sales, estates, interest, dividends,
royalties or fees."
Lesotho: 13.6%. Unlike many of the other countries on the list, Lesotho is one of the
poorest in the world, and has the lowest Total Tax Rate of any African country.
Saudi Arabia: 14.5%. The oil giant is able to keep its business taxes extremely low
because of its massive petrochemical revenues, though it may suffer if it continues to do
so while oil prices are still extremely low.
Zambia: 14.8%. The mining hub recently raised royalties on open mines to 20%, before
cutting it back to 9% following protests from major commodity companies.
United Arab Emirates: 14.8%. Despite its low rate and high ranking, the UAE comes
only 4th in the Middle East region, showing how low taxes in that part of the world are.
Georgia: 16.4%. Since the end of the Soviet Union, Georgia is one of the states that had
embraced a low tax model, repeatedly slashing the number of taxes and their rates.
Singapore: 18.4%. With such low tax rates, many companies from around the world
choose Singapore as a base for their Asian operations.
Croatia: 18.8%. The country both joined the European Union and cut its income taxes
during 2013.
Luxembourg: 20.2%. Luxembourg came under fire late in 2014 when investigative
journalists revealed the extent of the country's private tax arrangements with major
global companies.
Armenia: 20.4%. Though Armenia has a fairly simple system, it has been plagued with
revenue collection challenges.
Namibia: 20.7%. Namibia is one of only two African countries that make it onto the list.
Cambodia: 21%. The country has attracted a huge amount of foreign investment in the
last two decades, and has a much lower Total Tax Rate than most of its developing
neighbours.
Canada: 21%. This is one of the few large, advanced economies that makes it into the
upper ranks. The Canadian province Manitoba has a 0% corporation tax rate for small
businesses.
Montenegro: 22.3%. This tiny Balkan state has a corporate income tax rate of just 9%
one of Europe's lowest.
Hong Kong: 22.8%. The city has been one of the most attractive places in the world for
businesses, with a low-tax environment that goes back to the 1960s.
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Research Paper 2
Source: (Bird, 2016)

Appendix 4 Taxes breakdown


Taxes breakdown
Country

a)44

b)45

c
)46

d)47

Argentina
35
35
21
44
Bolivia
25
13 38.92
16.71
Tajikistan
n.d.
20
13
26
Colombia
25
33
16
48.2
Algeria
23
35
17
35
Mauritani
25
33
18
16
a
Brazil
34
27.5
19
39.8
Guinea
35%
40% 18%
23%
France
33.30% 50.30% 20% 54.83%
Nicaragua
30 %
30 %
15%
Venezuela
34%
34% 12%
25%
Italy
31.40% 48.90% 22% 42.57%
Source: http://www.tradingeconomics.com

e)48

f)49

27
22.21
25
40.2
26

17
13
1
8
9

15

28.8
11
18%
5%
40.63% 14.20%
19%
6%
32.08% 10.49%

44 Corporate Tax Rate


45 Personal Income Tax Rate
46 Sales Tax Rate
47 Social Security Rate
48 Social Security Rate For Companies
49 Social Security Rate For Employees
29