Summary of False Profits

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The tax foundation for companies that operate globally remains fairly similar to what it was a century ago, despite fluid tax borders created by digital technology and the growth of intangible assets such as patents and licenses. This timely report from fiscal expert Michael Keen illustrates the twin problems of “tax avoidance” and “tax competition” in a radically transforming global economy. getAbstract recommends this instructive article to corporate executives, government officials and others interested in the potentially harmful effects of tax shopping by multinationals.

In this summary, you will learn

  • How multinationals exploit loopholes in the current tax system,
  • How governments exacerbate the corporate practice of shifting taxes to favorable environments and
  • What solutions might help create a more uniform tax system for multinationals.
 

About the Author

Michael Keen is a deputy director of fiscal affairs at the International Monetary Fund.

 

Summary

Today’s international tax system dates from the 1920s, when foreign trade and investment focused on physical goods and infrastructure. The current global tax architecture presents two major problems: The first is “tax avoidance” by multinationals (MNCs) that have devised ways to transfer profits from high-tax jurisdictions to those with lower rates. The second is “tax competition,” in which countries try to outdo each other in lowering corporate taxes, hoping to attract investment and prevent MNCs from moving their money elsewhere. The system that exists now is highly fragmented, involving some 3,000 international treaties. Despite attempts to thwart the most egregious tax avoidance schemes, MNCs and governments still bend rules to their advantage in a variety of ways, often to the benefit of the more developed economies. For example, MNCs can get around “arm’s length pricing,” a system designed to apportion taxable profits in a fair and equitable manner, by having subsidiaries in high-tax locales charge prices well below market value when they sell goods or services to another part of the corporation.


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