The Effect of Tax Avoidance by MNCs

When large multinational companies (MNCs) such as Amazon and Google avoid huge sums of tax it can have a huge effect on the rest of the public. In the past few months the tax avoidance scandals of Amazon, Google UK and Starbucks have come under the spotlight. There are also many other big international companies such as GSK and Vodafone that have avoided tax.

Below is a short summary of how tax is avoided:

C HQ in a borrows y from C HQ in b. C HQ in a then pays back y from C’s profits/revenues made in a, but with an exorbitant amount of interest on it, therefore it pays back 10y. 10y is taxed according to much lower rates and hence C saves lots of y.

C=Company, HQ= Headquarters, a= country with higher tax rates (e.g. UK), b= country with lower tax rates (e.g. Luxembourg) y= money

Tax is avoided by setting up headquarters in an another country, which has very low tax rates and then borrowing and repaying money to it. Luxembourg is an example of an European country that is a tax haven, therefore many big European businesses set up headquarters in Luxembourg. (A business may have to pay 28% corporation tax on its profits in UK, but only 0.5% corporation tax on its profits in Luxembourg. This is hugely advantageous from the business/company, but disastrous for the government of the country where the revenues have been made.)

Large firms such as PWC help big MNCs avoid tax. This is all foul practice, however it is sometimes technically legal. MNCs pay money to legal advisers and accountants that help them bend the laws so that they can legally avoid tax, even though it is an unethical practice. The laws need to be adapted  soon to stop this happening in our globalised world. The effect of Tax Avoidance is that the governments where the revenues of the company were made have less money to spend on the public and public amenities, hence the government ends up squeezing more money out of the ordinary public, who also have to suffer MNCs tax avoidance by spending cuts that are enforced by the government. Billions of pounds of damage is caused to the UK each year by MNCs avoiding tax. Governments can’t afford for large MNCs such as Starbucks to avoid tax, because 1 large MNC may pay £100,000,000 in tax and this might be the cumulative total of the amount of tax 5000 small businesses pay, hence its a big loss for the government where the revenue is originally created.

This entry was posted in Money, Multinational Issues and tagged . Bookmark the permalink.

One Response to The Effect of Tax Avoidance by MNCs

  1. Anonymous says:

    Very true, Aniket. The tax avoidance which is legal but unethical is putting a massive strain on our finances. The common man has be bear the burden ibn the form of higher taxes, lower wages and rising unemployment!

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