I-Introduction
This paper is based on an evaluation of the challenges facing at a global level for taxing the multinational companies operating in the globalized world. The challenges for taxing multinational companies are facing at a global level because of the difference in the tax policies of different countries. There are different sections of this paper. Most multinational companies are relocating their businesses to other countries with the objective of taking advantage of lower tax in comparison to the parent country. There are some other factors due to which challenges for taxing these multinational companies have been created. The first section of the paper is based on introducing taxing and multinational companies. The tax system is also discussed in the first section. The next section of the paper is based on evaluating the international tax codes and the associated challenges. The third section of the paper is based on the evaluation of the implementation of taxes on multinational companies and the foreign profits. The capital movement and the change of capital ownership are also discussed in this section along with the associated challenges. The last section of the paper is based on a conclusion in which the pros and cons and globalization impacts have been discussed (JarleKind, HeleneMidelfart and Schjelderup, 2005).
II-Description of Taxing, Multinational Companies, and Taxing System
Taxing
By defining tax, it is noted that it is the sum of that amount paid by the individual and companies to the government. The government charge tax on individuals and companies to be able to pay for the public services that the government provides to the public. In this sense, the process and the criteria of charging the tax on individuals and companies are known as taxes.
Multinational companies
By defining the multinational companies, it is noted that this multinational world is a combination of the word Multi and national that gives a meaning to many countries. So, in this sense, those business companies that operate in many companies are known as multinational companies. The basic point is that multinational companies operate with head office in one specific country and their operations are under operation in several countries around the world. Multinational companies are also known as international companies because they manage production and deliver their services at an international level (Arel-Bundock and Vincent, 2017).
Taxing system
It is noted that certain changes have been made in the international taxing system because taxes are slashed on corporate income both at the foreign and domestic level. It is the reason that multinational companies are attracted to shift their tangible property, profits and jobs abroad. It has been seen that there is certain tax avoidance made by multinational companies like Starbucks and Amazon due to which corporate taxation is brought to be the most important part of the international policy agenda. The taxing system for multinational companies is important because it is accepted that taxing the multinational companies is one of the complex and challenging issues. The most important aspect of the taxing system is how the domestic multinational countries are taxed on their foreign profits. There are two forms of the tax system that are faced by multinational companies. One of these is the territorial system, and the other is known as a worldwide system. By the main context of the territorial tax system, it has been seen that the profits of the multinational companies are taxed based on where these profits are earned by the companies regardless of the country of the parent company. In comparison to worldwide taxation, it is noted that multinational companies are taxed according to the parent’s home country. It means that under worldwide taxation all the profits of a multinational company are subject to the taxation system of the home country where the head office of the company is established (Monshipouri, Welch and Kennedy, 2003).
III-Background on the Taxation of Multinational Companies
International Tax Codes
It has been seen that there is a rapid expansion of the complexity, velocity, and quantity of international businesses so this is the reason that the focus of the multinational businesses is to have a tax system with the help of which these multinational companies can resolve the disputes. The key point regarding the taxing system for multinational companies is that they are dealing with ever-changing, inconsistent and ambiguous tax rules. Consider the examples of the U.S. companies with their operations in the other countries of the world:
- It is noted that the profitability and the income of these companies from their overseas groups are impacting and changing because of the foreign tax regulations both at the local and national level.
- Most of the multinational companies of the U.S. have entered in the global markets due to which these companies are facing higher intensity and level of competition.
- There is regular variation in the economic situation by region and country, so this is the reason that different multinational companies are facing a different level of impact, for example, some of the companies are entering a downturn, and some have not experienced the level of weakness.
- The need for tax reforms on a regular basis has increased because of the higher sense of fiscal urgency and a chronic deficit of budget and because of temporary extensions of the tax system (Vollmer, 2012).
It is noted that the new laws are developed by the governments of different countries around the world with the national and local jurisdictions in respect of increasing the direct certain spending and tax revenue. It eventually created a need for regular review and revision of the provisions of the multinational companies and related tax positions to ensure accurate tax filings and financial reporting. An international taxing system for the multinational companies is laden with a higher level of the complexity. The understanding of the tax rules, foreign tax rules, and an understanding of the possible outcomes of their interaction are very important to understand the level of the effects of taxes on multinational companies. There are certain levels of the challenges are facing by the countries for taxing the multinational companies.
Challenges
The key challenges for taxing multinational companies in a globalized world are discussed below:
- It has been seen that the key challenge for taxing the multinational position is based on identifying, evaluating, measuring and reporting of the uncertain tax positions of multinational companies. Identification of the uncertain tax position is a challenge because it is considered one of the complex processes because it requires a detailed and extensive analysis of changed existing and new tax positions.
- Another important challenge for taxing the multinational companies in the globalized world is the erosion that is made by the multinational companies in the corporate income tax base. It has been seen that aggressive tax planning is used by most of the multinational companies for shifting profits from the parent country to tax havens. It is the main reason that in tax havens there has been dramatic build-up of earnings over the past few years. This challenge is creating a higher level of the difficulty for taxing the multinational companies because multinational companies are paying low or even no federal income taxes, which is creating a result of fall of total federal revenue (World Health Organization, 2015).
- The third important challenge is that the current tax code for the multinational companies is considered very complex. This complexity makes it difficult for taxing multinational companies. The complicated tax rules for the domestic tax and foreign tax credit have made it difficult for the multinational companies to comply with the tax rules. There is a technical level of the techniques are used by the accountants and tax lawyers of multinational companies for exploiting the rules of the international tax system eventually for reducing the tax liability.
- Another important challenge for taxing the multinational companies in the globalized world is linked the transfer pricing. This transfer pricing is considered as one of the most serious challenges in international tax. This transfer pricing is a great challenge for taxing the multinational companies because it is noted that it is used by the multinational companies a vehicle for shifting the profits from a lower tax country to high tax, country based on an overall objective to reduce and minimize the overall tax liability of the organization (Contractor, 2016).
IV-Implementation
How should multinational companies be taxed?
The main aspect to be considered in the international tax system is how the foreign profits of domestic multinational companies are taxed by the countries. One of the approaches to tax multinational companies is to use the foreign tax credit system. By following this system, a multinational company for example operating in the UK can aid, credit taxes against the taxes due in the U.S. the benefit of this tax system for the multinational companies is that it helps in mitigation the potential for double taxation. This credit or in other words the reduction of tax is a suitable option for taxing the multinational companies because it works for similar income tax is paid by the multinational companies to other countries. The important point to be noted regarding the credit for foreign income taxes is that the amounts that are more than income taxes are considered as nonrefundable. There are certain aspects that must be considered for using this approach of taxing multinational companies. These include that it is very important that the nature of the taxing system is similar, similar credit needs to be allowed by the foreign country, and political consideration is also important for using this approach of taxing the multinational companies.
Another approach that can be used is to exempt foreign profits from the country’s domestic taxation. According to this approach so taxing the multinational companies the company, for example operating in the U.S. would be taxed for the profits that are generated by the company in the U.S. it has been seen that the governments of both the UK and US are using the foreign tax credit systems in the countries for taxing the multinational companies. France and Germany are two examples of those countries that are using the exempt foreign source income for taxing the multinational companies (Hungerford, 2014).
How should foreign profits be taxed in the presence of different forms of foreign investment?
It is a common finding that different levels of investments is made by multinational companies in foreign markets. The foreign profits of multinational companies are taxed using two different types of instruments. The first is the statutory tax rate on foreign profits of the multinational companies and the second is the allowance in respect of the foreign and domestic purchase of assets. In the context of taxing the foreign profits, it is very important that regarding the foreign investment the domestic tax rate is set to ensure optimal level of allocation of mobile factors between the foreign and domestic assets. To tax foreign profits in the presence of different forms of foreign investment, it is important to follow the classical rules for setting the tax rate. The second way of taxing the foreign profit is based on setting a tax base for ensuring that the foreign and domestic level purchase of assets is accurate by the tax system. It is very important to note that cash flow and tax is required in domestic investment when using this method of taxing foreign profits in the presence of different forms of foreign investment (Institue on Taxation and Economic Policy, 2018).
The foreign tax credit is another approach that can be used for taxing foreign profits in the presence of different forms of foreign investment. It is the fact that when there is a direct foreign investment of the multinational company than a company pay tax in the country where the investments have been made so double taxation could be avoided by taking advantage of foreign tax credit. The most important thing regarding the foreign tax credit is that it is either taken as a tax deduction or tax credit on the foreign profits in the presence of different forms of foreign investment. The recommended approach is the tax credit because with the help of tax credit the tax amount of multinational company owed on a dollar-for-dollar basis. By using the tax credit, the tax liability of the multinational companies is reduced by an amount that is equal to the foreign taxes paid by the company for the foreign investments (Park and Vanhonacker, 2007).
Capital movement vs. Change of capital ownership
It was argued by the study conducted by Desai and Hines (2003, 2004), that mergers and acquisitions had taken the form of international investments. According to the study, it was revealed that when investment is made for merger and acquisition than it does not consider as a change in the location or place of physical capital, but it is considered as the change in the ownership. But the most important point to note is that when different potential owners are taxed differently because of the reason that they are located in different countries of the world than it results in the distortion of ownership of assets. In this way, it was argued that in the context of capital ownership it is important that a similar tax burden is faced by all potential owners of the company whether they are located in the same country or different countries. Another important aspect argued regarding capital ownership was that exemption of foreign income is required by it. It is important to note that in the context of international tax theory the consideration of mergers and acquisitions of ownership is considered an important step, but on a real basis, it has been seen that relocation of capital and purchases of existing assets or even existing companies is typically included in the foreign investments made by the multinational companies (Becker and Fuest, 2010).
Challenges
- It is important to note that the profits generated by the multinational companies ought to be reported as to the place where these profits are created by the company. One of the challenges facing in implementing the approaches to tax the multinational companies is that as the multinational companies are generating profits from different places around the world due to which there is always confusion regarding the origin of the company’s profits. The challenge is that the current tax law is not keeping pace according to the changing business environment in modern times due to which contemporary tax problems are arising (Desai and Hines, 2003).
- The second challenge of implementing an effective tax system is associated with the international tax treaties between different countries around the world. It has been seen that the problem of tax loopholes started because of these tax treaties among the countries. As there are thousands of bilateral tax treaties are included in the international tax system which made the tax system a complex regime. These are the reasons that these agreements between the countries avoid double taxation. Double taxation is caused by the multilateral tax treaty which is a great challenge in implementing a tax system ineffective way.
- Technology is one of the most important factors because it is developing on a rapid Another important challenge for successfully implementing the tax system is that the current international law is not up to speed with which the advancement in technology is making. Digitalization is considered one of the most important factors in economic development, but it has been seen that the development of digitization is creating a certain level of challenge for implementing international tax law. The challenge is created because of the reason that there is a difference between the traditional tax laws and international tax law in context that new ways of governing the business are considered by the traditional laws, but the changes in the global business practices are not kept in place by the current international tax law (Morgan and Jamie., 2016).
V-Concluding Remarks
Pros and Cons
It is concluded that there are wide ranges of challenges facing multinational companies in the globalized world. Therefore, there is a need to make reforms in the international tax system for multinational companies. The most important aspect that is concluded is that the tax system is made more vulnerable because of the exemption on foreign income because of the reason that certain numbers of the multinational companies are committing the tax avoidance. In this way, it is important to note that if anti-tax avoidance measures are not effective, then there is a need to reverse the tax exemption system for the multinational companies. It is concluded that the most fundamental way is adopting from most of the countries in respect of changing the tax systems of the countries by the reason for the growing flexibility and mobility of multinational companies. One of the options that are considered by the tax system policymaker is to levy the corporate tax by the location-based system which means that profits should be taxed according to the tax policies of that particular country in which the profit by the multinational company is generated. In this way, it is concluded that there are different levels of issues that have been created regarding the tax system about multinational companies.
Globalization Impact
It has been concluded that there is a certain level of globalization impact due to challenges and difficulty of taxing multinational companies. For example, it is concluded that most of the multinational companies invest a certain amount of money, but they do not reinvest the earnings due to which the money is trapped that eventually creates a global impact on the world economy. Another important global impact is the erosion of the corporate income tax by the multinational companies, and the shifting of profits to other countries eventually creates an impact on the economic situation of the country.
VI-References
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