International Taxation and Multi National Companies - Research Paper Example

International Taxation and Multi National Companies (MNCs) Introduction The ever-changing operating and regulatory environments, new business models, new information technologies and competition have such a big impact on the overseas branches and operations of MNCs and related decision making process. Thus MNCs are seeking cost effective ways especially its attention on. Multi National Companies (MNCs) have been making use of global tax strategies and constantly changing tax regulations as to manage its multiple and complex objectives on a global scale. The effective tax rate (ETR) creates the opportunity for financial efficiencies, improving liquidity and long term tax savings in MNCs. However the poor alignment between the corporate strategies and global tax planning would create unnecessary tax burden on the business activities. Especially the MNCs focus its attention on global expansion, cost reduction, new products and services and creation of new value chains as its business initiatives and therefore tax planners and the senior executives in MNCs need to identify both the tax risk and tax opportunities in their global tax environment. Effective tax planning in MNCs requires ability to react in the changing business environment and also plan for the future opportunities. Developing a global tax structure for MNCs involves multiple steps including studying the global profit and tax rate, setting goals, identifying the tax planning techniques and strategies, selecting the alternatives, implementing the tax plan and consistently review the performance. Thus there can be identified three main tax planning strategies under three areas such as profit alignment, attribute management and treasury management. These three fundamental components can be identified as more critical to MNCs due to the fact that they are operating in global markets. However MNCs need to invest in deliberate process in order to produce long term results in corporate strategies together with global tax strategies. Analysis Many Multinational Companies (MNCs) who are involved in global business are concerning towards international tax planning just because it is a burden to their operations and they wants to reduce it and pay less taxes to the foreign governments where their branches are located in. Tax planning is an important aspect of overall financial operations. International tax planning has been based on the revenue policies and regulations of the host country and thus it is flexible to the domestic companies, so international firms may find difficult in adapt to the situation. In order to reduce the taxation overheads many companies changing their location from a highly taxed governments to the lower tax nations. This is one reason why companies are going globally (Hong, & Smart, 2010). For instance when the companies doing the business globally it is possible that the income arises in United States but actually it belongs to a company which is located in another country and which has a tax treaty with United States. In this case the company can have the transaction free of tax because the transfer of income is free from taxes which are originally generated in one country and remitting to another country. Therefore business entities would be able to reduce the taxation overheads and thus increases their profitability as well. There are many countries with lower tax rates for specific types of revenues. Many loopholes can be observed in the taxation policies such as finding a low tax rate applied to a certain type of income of one country with a tax treaty with the home country and there after organize the revenue in the host country. Once it has moved with the tax treaty country the revenue can be transferred to any country in the world. Before the globalization it was possible to transfer revenue generating assets to another company which is located in some other country in tax free condition. But today due to the complexity of business transactions across the countries have tighten up the policies and rules regarding remit of income to another country. The taxpayers who are aiming overseas operations for reduce the taxation overheads can be identified in two different approaches. One group wants to reduce their tax burden somehow by violating the tax laws, presenting a wrong figures and facts, hiding some of the income transactions in their annual financial reports and audit reports. Thus the other group of taxpayers would like to obey the rules and remain in the laws. They frequently raising their arguments regarding the corporate tax rate of the government in order to reduce the tax burden on them but would not go beyond the limits (Wunder, 2009). It is very important to have a separate finance department to manage taxation overheads of the company. These professional staff should update their knowledge in corporate taxation and the government taxation policy changes, because it is very difficult to determine whether a particular transaction will carry taxation liability or tax exemption. Due to the frequent change in government policies and rules the accounting treatments for taxation has become a complex process. Effective tax planning carries the advantages of minimizing the corporate tax overheads at the same time not violating the government tax rules and regulations (Campbell, 1990). For instance insurance and investment companies adopt the strategy of rendering its services for another branch of the same business which is physically located in a third country. So the transactions carried among these entities would not carry any tax liability. Another method adopting by multinational companies to avoid unnecessary tax burden is that the artificially high transfer pricing to remit the income to a tax haven. Due to the complexity of international transactions it would be difficult to gather the relevant information regarding the transaction to the tax authorities to impose the taxes (Wunder, 1999). Therefore it is noted that tax rate has gone up over the years due to various reasons. The rate is purely depends on the state’s ruling political party and its policies. When the tax rate is comparatively lower business executives can afford to ignore the tax burden and regard it as a minor issue. But the increased number of taxes has force the senior executives to change their attitude towards the issue. So tax liability has become an important factor while taking some of the business decisions. Most of the business executives and tax accountants are aware of the savings of taxes and tax planning and provisions made for taxes are adequate. It is very important to keep in mind that the taxes cannot be neglected, because it is one of the obligations of the persons towards the government. Thus all the citizens of the country are liable to pay taxes because the government is basically depends on taxes as government’s revenue. It is necessary to have accounting treatments to face the taxation liabilities such as provisions for taxation in every year out of the net profit which the company earns from its operations. It might delay and reduce the dividends to the share holders but the Multi National Companies (MNCs) are in a position to face the tax burden. There should be a reliable and safe juridical framework for the effective international tax planning in the host countries. MNCs can adopt the international tax planning methods such as conversion of income and stock option planning (Olibe, & Rezaee, 2008). Another efficient technique is that many MNCs are indulge in charity in host countries with an objective of obtain some kind of tax flexibility from the host country’s government. This kind of methods enables MNCs to minimize the taxation liability in order to increase the profitability of the company. International tax planning involves different types of strategies in minimizing the amount of tax need to pay by a person or business for given period of time under the tax laws of individual countries (Lymer, & Hasseldine, 2002). Thus the system of taxation depends on the various countries and taxes would levy on different circumstances. International tax planning is based on the revenue laws of a particular country and governments limit their income taxation under three forms such as territorial, residency and exclusionary. Some of the countries tax system is based on the territorial system and it depends on the in-country income. For example according to the Hong Kong Inland revenue Ordinance, government imposes tax on income which is earned within their borders. Next under the residency tax system some of the governments tax imposes on the all income earned by the citizens of particular country. For example US and the UK taxation systems are basically based on this residency based tax system. Under the exclusionary system it is based on the inclusion or exclusion from taxable income. Thus some of the governments have been adopted combination of those three systems. Most of the MNCs involved in the competitive business environment and its business operations directly impacted by the tax rules and regulations of particular countries. Therefore it requires an effective international tax planning and global tax strategy in order to successfully engage in international business activities (Koslow, & Scarlett, 1999). Thus the effective global tax strategy facilitates the MNCs to balance both the business and financial objectives. For instance international tax planning and strategies would increase the positive cash flows, financial statement benefits and also shareholder value. By implementing international tax planning strategies especially the MNCs would be able to decrease the international tax cost by ignoring the paying double taxes to foreign jurisdictions. Thus the companies which are familiar with the international tax planning strategies would eligible to get special incentives when it dealing with the international businesses. Also there may be some risks as well. Companies those who are unfamiliar with the international tax strategies are more likely to bare high cost unnecessarily in double tax treaties and cross-broader transfer pricing requirements. For instance there can be identified tax treaties, double taxation agreements, tax information exchange agreements (TIEA) among countries in order to prevent the double taxation. However in most of the developed countries have number of tax treaty networks with other countries, such as the UK has treaties with 110 countries and US has its treaty network with 56 countries. Compared to the developed countries most of the developing countries don’t have a proper tax treaty to avoid the double taxation cost. Many methods and techniques have been identified and improved by government tax collecting agencies to assist the multinational companies to maintain their business operations at the same time imposing a competitive and effective tax rate on them. In current globalized economic environment, these methods may include efficient documentary framework and funding cash to require areas in a tax effective manner to enable minimize the cost on tax and investments, thus form an efficient tax structure while exploiting available opportunities to the multinational firms (Smith, & Krueger, 2003). The relationship between host government and the multinational companies is very important to facilitate the economic growth of the host country while reducing the number of taxes on the MNC’s it often resulting to savings of the cash in hand of multinational companies because corporate taxes are payable in terms of cash, and there are no alternatives available to this . Many tax collecting agencies of host countries are concerning to ensure maximize the tax opportunities from the corporate sector and its citizens. And also they have got the power to manage the adverse effects on the taxation outcomes. These plans are aimed to ensure the business of multinational company to operate its activities in a globally effective and integrated approach in the host country. Today due to the global economic slowdown many multinational companies are facing the difficulty of surviving in the host country and it posing many challenges and as well as opportunities to multinational companies to optimize their resources. Due to the global scenario investments velocity of multinational companies has been come down and thus reduces the profitability. Some host countries have given some tax reduction to these multinational companies to overcome the situation. Thus the complexity of rules and regulations regarding taxation of host countries towards multinational companies has been badly affected to their operations and expansion opportunities in host countries (Jones, & Catanach, 2008). The international tax planning system is central to the successful business operation because there is no guarantee that taxes could be collected with any ease if the system is overburdened with complex rules. Any tax planning ought to make both the assessment and the collection easier to the payer and the collector. Assuming that many individuals and companies that hire tax consultants to provide this service are ignorant of the procedures and above all hope to benefit from the existence of so called loopholes in the tax law, then indeed the situation is beyond the control of any particular authority or individual (Kleinfeld, & Smith, 2004). The most interesting feature of the whole exercise is the fact that both individuals and companies rely on tax consultants to provide not so much the service of becoming transparent but the opposite. In other words transparency has become a casualty in the present system. Transparency along with accountability is considered to be very essential for a successful system of taxation. On the other hand transparency isn’t one way traffic. As much as the individual taxpayer or the company has an obligation to be transparent in his declaration of income and assets, the government has an obligation to be transparent in its revenue and expenditure budgeting exercise. International tax planning considered being an important as well as complex field. Thus there can be identified benefits in implementing international tax planning strategies to the MNCs in particular and other businesses in general; it will helps to minimize legal impact of international tax liabilities and it is identified as a legitimate way to protect and develop the business activities (Fallan, Hammervold, & Gronhaug, 1995). For instance according to Singapore’s low, companies would be able to take the advantages related to taxation such as tax incentives, capital allowances and so on. In fact one of the main aspects of tax planning involves the restructuring of the company. Thus well planned and corporate structured company would be able to facilitate to their clients in an effective manner by fulfilling their needs. Also most of the MNCs have focused its attention on specific jurisdiction and signed with tax treaties in order to prevent the taxes levied twice on their income or profits as well as it ensures the company’s positive image to its third parties - customers, suppliers, investors and governments. All MNCs required implementing proactive approach to transfer pricing policy which would result in tax minimizing as well as tax planning opportunities. However it is difficult to identify the single tax planning strategy for MNCs due to its different internal and external drives. Therefore MNCs require taking necessary actions in tax planning in order to cope up with evolving tax regulations and corporate interests. Conclusion The tax rate of the government has been evolving through a series of positive and negative aspects and is associated with the economic growth of the country. It is also subject to the free flow of international investment in to the country though the extent to which the multinational companies are effectively planning their taxation liability with an objective of minimize the burden is not known. Thus it has been influenced by political and investment policy variables to determine the rate of taxes applicable to each industry and sector. This study essentially focuses on such variables as taxation policies and regulatory frameworks regarding multinational companies which have branches in host countries. The ever increasing compulsion related to tax avoidance acts as a first class factor to hide information on income transactions from the income tax authorities and make provisions for the income tax declarations by multinational companies so much less obvious. However the positive aspect of the higher level of taxation on international companies is that it encourages the domestic production and local companies and allows them to dominate the market against the foreign investors. Deductions tax compliance, conversion of income generated in host countries while remitting to the home country, indulging in charitable activities in host countries by multinational companies are some of the methods adopt to reduce the taxation and plan the liability to meet corporate objectives. References 1. Campbell, D. (1990). International Tax Planning. London: Kluwer Law International. 2. Fallan, L., Hammervold, R. & Gronhaug, K. (1995). Adoption of tax planning instruments in business organizations: A structural equation modeling approach. Scandinavian Journal of Management, 11(2), 177-190. 3. Hong, Q., & Smart, M. (2010). In praise of tax havens: International tax planning and foreign direct investment. European Economic Review, 54(1), 82-95. 4. Jones, S. & Catanach, S.R. (2008). Principles of Taxation for Business and Investment Planning (12th ed.). New York: McGraw-Hill/Irwin. 5. Kleinfeld, D. A. & Smith, E. J. (2004). Langer on Practical International Tax Planning. New York: Practising Law Institute (PLI). 6. Koslow, L. E., & Scarlett, R. H. (1999). International Tax Planning. Global Business, 128-134. 7. Lymer, A., & Hasseldine, J. (Ed.). (2002). The International Taxation System, New York: Kluwer Academic Publishers. 8. Olibe, K. O., & Rezaee, Z. (2008). Income shifting and corporate taxation: the role of cross-border intra-firm transfers. Review of Accounting and Finance, 7(1), 83 – 101. 9. Wunder, H. F. (1999). International tax reform: its effect on repatriation decisions of multinational corporations. Journal of International Accounting, Auditing and Taxation, 8(2), 337-353. 10. Wunder, H. F. (2009). Tax risk management and the multinational enterprise. Journal of International Accounting, Auditing and Taxation, 18(1) 14-28. Read More