Print This Post

Tax avoidance

by Salvatore Messina, LAPAS intern

In modern world, one of the key actors in global economy are the multinational companies. They are a product of globalization and capitalism and they act like giants in the “game” of competition. Small and medium local companies suffer from this competition and they often aren’t able to survive.

At this point, someone could maybe wander what’s the secret of this big companies, how can they manage to be so competitive?

Tax avoidance is an answer (not the only one, of course) to this question. When we talk about “tax avoidance”, we refer to the legal usage of the tax regime in some country in order to reduce the amount of tax that is payable without breaking the law. We should bear in mind that this practice is slightly different from “tax sheltering”. One of the differences is that tax sheltering is not necessarily legal.

In order to understand how it works, we should be aware of the existance of the so-called “tax havens”, countries with very low taxation and high financial secrecy. It was estimated that, since 1995, trillions of dollars have been transferred from developing countries and the OECD (Organization for Economic Co-Operation and Development) to tax havens.

How can, practically, an agency, or a company avoid to pay taxes?

There are several ways that can be chosen, one of these regards the country of residence. Someone could manage to avoid taxes by moving their company or subsidiaries to an offshore jurisdiction (the International Monetary Fund defines an offshore financial centre as “a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy”). Also individuals (not only companies) can avoid taxes by moving their tax residence to a tax haven.

Moving to another point, we should mention what “double taxation is”. Many countries adopted bilateral double taxation treaties with other countries in order to avoid to tax nonresidents twice (one time in the country where they have their tax residence and a second time in the country where they earn some income). This, of course, can be a damage for the country where the production happens.

Personal taxation may be also (legally) avoided by the creation of a separate legal entity to which one’s property is donated (company, trust, foundation).

Although it is often completely legal, as we saw previously, tax avoidance is a damage for governments, since it reduces their revenue. Many countries, such us Canada, Australia, United Kingdom and New Zealand have introduced a statutory “General Anti -Avoidance Rule”. In the United States, the Internal Revenue Service considers some schemes illegal. The Government of the United Kingdom has pushed the initiative led by the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting. In the 2015 Autumn Statement, Chancellor George Osborne announced that £800m would be spent on intercepting tax avoidance in order to recover £5 billion a year by 2019-20.

How is it possible to fight against tax avoidance granting revenues to governments and a fair competition for small and medium companies?

The path is narrow and not easy to be walked. All the countries should collaborate in order to fight this phenomenon. By the way, multinational companies have a lot of power and resources and they often have a big influence on governments. Therefore the role of public opinion is crucial. If we manage to make people aware of this practice, governments will not be able anymore to ignore it, it would be a push that only a conscious society can give in order to avoid that big companies keep “eating” the small ones, like the big fish eats the small fish.