One of the compelling reasons for giant corporations to declare zero tax or pay low tax in countries where tax rates are more is the presence of offshore Tax Havens. Here shell companies or mailbox companies are established for the purpose of aggressive tax evasion. In an elaborate charade called transfer pricing, corporations, with their army of accountants and lawyers, create a maze of shell companies (i.e. companies which have no real business activity) in Tax Havens which have secrecy laws concealing the ownership and the source of the funds. The tax strategy is fairly simple: book the profits in shell companies located in tax havens having low or nil rates of tax and show reduced or better still zero earnings in countries which have higher rates of tax. The technique? Misinvoicing the trade transactions. In other words, under invoice the value of exports to the entity located in a tax haven which in turn exports at the full value. The difference is deposited in an offshore account. A variation to the theme would be to over invoice goods sold to the exporter. The difference between inflated value of imports and the true value of imports is deposited in an offshore account for the importer. Keeping in mind that approximately 60% of global trade is conducted within multinational corporations (MNCs), between subsidiaries of a parent company, the transfer pricing route is the most popular vehicle for tax evasion for MNC's. [vi]
Take the case of Google- the giant tech company- which established a subsidiary in Ireland and with which the parent company entered into an agreement in 2003 giving the subsidiary the right to income arising out of search engines. From 2003 to 2009 the Irish subsidiary of Google earned $11 billion and the rate of tax in Ireland is 12.5%. Not content to pay taxes of 12.5% in Ireland, it siphoned off its earnings as royalty payments to another offshore entity in Bermuda at zero rate of tax. Needless to say if Google had booked its profits in USA it would have to pay (after available deductions) tax at 35%. The success of the strategy is borne out by the fact that Google pays around 2% as taxes on its overseas income. If the offshore tax havens were to be knocked off, then Google loses a quarter of its earnings and a cool $100 dollars could be knocked off per share. [vii]
Or take the case of Starbucks --the coffee company -which is in Seattle (US). If the trademark of- let us say- Frappucinno vests with an entity registered in Netherlands which has 1-2% tax on intellectual property rights, then part of the income on its sales of the coffee drink is booked in Netherlands at low tax while lower earnings are booked in the higher taxed country like the US.
Perhaps, a daring tax heist which shot to prominence was Vodafone (India) which was accused of transfer price tax fraud with respect to issuance of shares to its parent company located in Mauritius for around $138 per share. The Indian tax authorities determined the true value of the share price to be in the region of $876 and made a demand of $617 million on Vodafone. At the moment of writing this article Vodafone obtained a quashing of the order by the Bombay High Court.
A much favored Tax Haven for the Indian Corporate elites is Mauritius. For rich business families and wealthy corporations there is another game to be played called capital round tripping. The mechanics of the tax dodge is simple and elegant. First the untaxed/ illicit capital flows into a shell company established in Mauritius. The money comes back to Indian stock market from the shell company (Mauritius). The capital gain from sale of shares by the shell company (Mauritius) is tax free as per the tax treaty with India. The Indian business elites go laughing to the offshore banks to enjoy their tax free income which is doubly untaxed.
The under reporting of profits by Multinational enterprises and the transfer of illicit capital to tax havens has a tsunami like effect on the balance sheet of the developing world. One study by Christian Aid estimates that the loss of corporate taxes comes to $160 billion annually on account of tax frauds by mispricing and false invoices by multinational corporations. The other route is 10 year tax holidays given to MNC in Special Economic Zones (SEZ) set up by the local elites of developing nations which end up in loss of natural resources for the developing country without any gain in its public revenue.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
3
2
2
