Tax avoidance practices in corporate entity management have sparked a public outcry as concerns mount over the fairness and equity of tax policies that disproportionately benefit citizens with higher incomes. Several tax policies have come under scrutiny, such as the abolition of federal estate taxes on estates valued below $12.92 million and the lower taxation rate for capital gains compared to earned income. Plus, tax deductions on mortgage interest for first and second homes have raised ethical concerns.
Profit Shifting has become a rampant practice among multinational corporations, where profits earned in one country are pushed to sister concerns in low-tax jurisdictions, reducing taxable profits in higher-tax countries. On the other hand, tax base erosion involves models that enable multinational corporations to escape taxation on their profits in a specific country.
IP Structuring centralizes valuable patents and technical know-how in a subsidiary located in a low-tax jurisdiction. Group companies then pay royalties to this subsidiary, reducing their own profits and tax incidence while increasing profits in the low-tax jurisdiction.
In Thin Capitalization, capital is concentrated in tax havens, and operational companies in high-tax jurisdictions fund their activities through debt from tax haven companies. The infamous “Double Irish Dutch Sandwich” is another, enabling multinationals to shift profits from high-tax jurisdictions to tax havens without paying taxes in Ireland. While the European Union has taken action against some companies using these schemes, tax abusers have found alternatives like the Single Malt and Green Jersey tools.
Base erosion is also a concern, allowing entities to conduct business in a country without establishing a physical presence.
While such tax avoidance schemes have been an open secret in the tax consultancy field, governments worldwide are taking measures to counter these practices. Introducing anti-abuse provisions and cooperating under organizations like the Organisation for Economic Cooperation and Development (OECD) and the United Nations, governments are striving to develop global jurisprudence to address base erosion and profit shifting.
The growing public outcry and increased scrutiny from authorities have put pressure on companies using tax avoidance strategies, creating litigation and reputation risks. As globalization continues, the need for fair and effective tax policies has become more critical, urging sovereign governments to collaborate on international solutions to combat tax avoidance in corporate entity management.