The Issues of Tax Avoidance
A problematic issue that more and more countries are facing is tax avoidance on the corporate level. Tax avoidance is performed by arranging a company’s financial affairs and ownership structure to avoid taxes (“Fighting Corporate Abuse”). Although it is not considered illegal, the amount of tax that gets avoided and the way it is done is on the hinge of tax evasion. Max Bearak of the Washington post points out that tax revenue is one of the strongest indicators of an economy’s health. With the avoidance of taxes, it hinders the victim country’s economic health and overall state.
According to the Citizens for Tax Justice, America’s fortune 500 companies stashed a record $2.5 trillion in overseas tax havens (“How Fortune 500 Companies Avoided Paying Taxes on $2.5 Trillion”). This astronomical amount is possible by the corporate restructure that is designed to take advantage of the national tax rules. The most common way to do so is manipulate where the company is a resident, and what the sources of income are (“Fighting Corporate Abuse”). For example, Walmart, IBM, and Apple have been caught stashing billions of dollars in different subsidiaries that are based in tax havens. These tax havens are common in places like the British Virgin Islands and the Cayman Islands. By storing the money there, companies are taxed at the rate of where the offshore account is located (theatlantic.com). This technique of using offshore accounts ended up costing the U.S government alone about $111 billion a year in lost revenue (Campbell).
Companies avoiding taxes has lasting negative effects on the victim countries and often makes poor countries poorer. For example, an African oil company called Tullow Oil generated 84% of their sales revenue from Africa, yet only four out of its 81 subsidiaries were registered in African countries. In contrary, 47 out of the 81 were registered in tax havens (Bearak). This is just a small example of how poor countries get exploited. The tax money that was avoided could have been used by the African countries to develop the area, but instead, the revenues were mainly avoided by offshore accounts and the money was kept in the corporation’s pocket. Tax revenue is said to be one of the strongest indicators of an economy’s health, but is hard to have a thriving economy when there is nothing to tax. A report by ActionAid showed nearly half of all the investments in developing countries is funneled through tax havens (Bearak).
Not only does tax avoidance have a negative impact on the victim governments, but it also creates an unfair advantage to bigger corporations. The main purpose of a business is to produce income. A way of doing so is keeping costs as low as possible, and taxes are a big cost to corporations. Deborah Field, a former tax accountant, told an audience “I’ve seen how much time and effort companies put into avoiding paying their taxes and it makes me mad” (Campbell). This time, effort, and resources to avoid taxes can only be done by the bigger corporations. Smaller businesses that do not have the necessary resources to construct a tax avoidance scheme are stuck paying the American corporate tax rate, which is one of the highest rates compared to any other countries. This negatively impacts the financials of a smaller company by creating a higher cost of business. This also means that small companies end up paying a much larger share of the government bill for services such as roads, healthcare, and education (Campbell).
With billions and billions of dollars being hidden offshore each year, it is negatively impacting the government’s economic health and something should be done about it. Unfortunately for developing countries, collecting taxes is expensive and they do not have the resources it takes to catch corporations abusing the tax laws. Even for wealthy countries like the U.S, it is nearly impossible to trace all the money that is avoided. In order to do so, the country would need cooperation from the foreign governments of the offshore accounts. More times than not, those foreign governments choose not to cooperate because those offshore accounts are a dependable source of revenue for their country (Campbell).
President Trump’s main change in his tax plan is reducing the corporate tax rate dramatically, for the reason of tax avoidance. If the U.S has a much lower corporate tax rate, there won’t be as much time and money spent on developing offshore accounts and moving to different countries. By lowering the corporate rate, it will be less of a cost to the corporation, thus making them more profitable and more likely to stay within the country.
Bearak, Max. “How Global Tax Evasion Keeps Poor Countries Poor.” The Washington Post, WP Company, 8 Apr. 2016, www.washingtonpost.com/news/worldviews/wp/2016/04/08/how-global-tax-evasion-keeps-poor-countries-poor/?utm_term=.42b52a289fac.
Campbell, Alexia Fernández. “The Cost of Corporate Tax Avoidance.” The Atlantic, Atlantic Media Company, 14 Apr. 2016, www.theatlantic.com/business/archive/2016/04/corporate-tax-avoidance/478293/.
“Fighting Corporate Abuse.” Jstor.org, 2015, doi:10.2307/j.ctt183p66h.
“How Fortune 500 Companies Avoided Paying Taxes on $2.5 Trillion.” Fortune, fortune.com/2016/10/06/fortune-500-tax-haven/.