Multinationals & Global Taxation — Avoidance or Evasion? — Let’s Get Real.

Global Tax 50
     Taxation and trade are intricately related. More effective taxation of cross-border transactions of multinational corporations is necessary to ensure growth of global trade and national economic  development. 
   The recent Congressional hearings concerning Caterpillar and its Swiss subsidiary, once again, raises this issue of multinational corporate taxation. 
      Specifically, were these corporate actions by Caterpillar permissible tax planning or willful evasion?
      We have heard this story before.
      U.S. corporations are using foreign subsidiaries to avoid U.S. taxation of corporate income. Usually  through only paper transactions with no real economic justification. These transactions allow  Caterpillar, Google, Amazon, Apple and a host of other multinationals to accumulate billions of dollars of retained capital offshore. Their defense is always that this is allowed by the tax code.
     These tax-generated corporate transactions result from abuse of various tax rules concerning transfer-pricing, cross-licensing arrangements, overseas subsidiaries, related corporate groups among a host of other provisions. Lax Internal Revenue Service oversight, lack of litigation and prosecution by the U.S. Dept. of Justice don’t change the nature of these transactions.  They have resulted in billions of dollars lost to the United States in term of tax collection and reinvestment of profits back into the U.S.
      That costs us jobs and economic development here. 
     The usual defense is that the worldwide tax system, as opposed to a territorial one, that is employed by U.S. law is the real culprit as well as the high corporate rates. (Of course, never talking about the real or effective tax rates.)
   It is clear that an international consensus is finally building to address the unsustainable disconnect between global corporate taxation and the realities of today’s world. Recent actions by the G-8 and the OECD are encouraging. This will be a long process. But the popular support across the world has been building as well as the dire needs of national governments for revenues during this long period of economic misery and uncertainty.
      It is obvious that there is a split between multinationals over global taxation and its reform. For example, between Boeing that produces things here and Microsoft that relies upon royalty income abroad from intellectual property. Corporate coalitions are already forming in the U.S.,  such as the Alliance for Competitive Taxation (ACT) and Tax Innovation and Equality (TIE), to oppose any global tax reform, whatsoever.
      Of course, others as the editorial board of the Wall Street Journal, just simply think any tax reform, except reducing rates or doing away with all taxes on foreign source income, are part of a policy “to combat fictional plague of tax avoidance.” Just what you would expect from the Wall Street Journal on this issue.
      Today’s global tax system largely emerged prior to tax havens, bank secrecy, offshore banking, and the digital economy. More than anything else cyber space has clouded the geographical  location of global transactions. Changes brought about by online transactions, cyber space and cloud computing have created significant issues in determining where cross-border transactions take place.  
     Unilateral national regulation as it is today is detrimental to the growth of global trade. The issue of reforming the international tax system under U.S. law in order to better track real economic activity is critically important. I’m just not holding my breath.


….. “At Hearing, Caterpillar Defends Tax Practices.” New York Times (April 2, 2014).
….. “Switching Names to Save on Taxes.” New York Times (April 3, 2014).

About Stuart Malawer

Distinguished Service Professor of Law & International Trade at George Mason University (Schar School of Public Policy).
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