Multinationals – The Ultimate Globalizers
While individual persons have to live somewhere, and therefore in almost all cases have to be taxed somewhere (they are dealt with below), the same is not so true of corporations. A corporation with distributed ownership, with its holding company in a suitable jurisdiction (eg Denmark), and with a carefully formed international structure, can reduce its tax bill to single figures, or even to zero. Press reports abound of such – usually privately-controlled – companies which have miraculously, so it seems, managed to escape taxation.
Of course national tax authorities have fought back against aggressive corporate tax planning, by banning or penalizing the use of out-and-out tax havens, and by the use of transfer pricing rules (regulation which prevents a company from making its profits in a low-tax jurisdiction when the commercial activity took place in a high-tax jurisdiction).
In planning international corporate structures, there are two major sets of legislative measures which need to be taken into account in addition to transfer pricing rules as such: Double Tax Avoidance Agreements and Controlled Foreign Company (or Corporation) laws. DTAAs and CFC laws have come about for almost opposite reasons – DTAAs are the result of bi-lateral national attempts to create an investment-friendly tax canvas, while CFCs are aimed at preventing tax avoidance by international corporations – but both impact heavily on transnational taxation. In addition, both are intricately involved with 'offshore'.
Personal tax planning using 'offshore' has come to be seen as somehow reprehensible, or at least attackable, but corporate tax planning is still more or less respectable, for now, within the increasingly complex regulatory framework of DTAAs, transfer pricing rules and CFC laws, although the last few years have seen intensifying international attempts to corral free-ranging multinationals, particularly through the OECD. The regulatory structure as it exists is described in more detail in Appendix Four.
Corporate Taxation: The Future
The Internet has introduced a permanent shift in the balance of power between the taxman and his tax-paying corporate targets: countries are anchored in the physical reality of their territory, while companies are increasingly free to locate large parts of their economic activity in low-tax areas. On the corporation tax level E-commerce and e-business, especially the offshore variety, offer multiple possibilities for companies to structure themselves so that a larger and larger proportion of their profits ends up in a low-tax area.
Corporate activity, much of it Internet-related, is therefore thriving in most of the important offshore jurisdictions, which will continue to offer strong tax competition in the corporate sector to the world's largest economies.
Eventually, one of two things will happen: either corporation tax will disappear altogether; or a global harmonized rate will be agreed. In either case the massive paraphernalia of DTAAs, CFCs, transfer pricing, and the gigantic corporate tax optimization industry will shrivel up. Perhaps the first result is more likely. Two steps on the road to the simplification of corporation tax are the harmonization of accounting standards, which is far advanced, as described in later sections, and harmonized calculation of the corporate tax base, which is an explicit goal of the European Union, currently being resisted by the UK and Ireland, but which will surely come into force within the next ten years over much of the globe. It is not yet clear which international organization will have the supervision of a globalized tax base – perhaps a glorified OECD, given its work on permanent establishments and Internet taxation.