If for example, an MNC gets revenue from a client who is a citizen of a particular country, does that mean the MNC have to pay tax on that share of income to that particular country? Or can an MNC pick and choose which country they have operations in to pay taxes to?
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They pay the taxes in the country they operate in, they will position their “headquarters” in the most tax friendly area to avoid paying their fair share ( in the US it’s Delaware ) but they have to pay the taxes
In reality, this is a very complicated and difficult subject to go through in any detail. Many highly paid tax lawyers, accountants and consultants are paid large sums of money to structure taxes for large corporations. Tax laws, corporate law, international tax agreements all come into play on a country by country basis.
In theory, a company has to pay income taxes in every country it operates in. ELI5, if it sells a product in country A, then it owes taxes on the profits of that sales to country A. Very broadly, in order to sell product in a country, most countries require that there be some form of domestic corporation (like a subsidiary) established in that country and therefore taxes will be incurred in that country. The alternative is for the company to work with a local importer and distributor and essentially not officially sell their product in-country. In that case, the importer/distributor will be paying income taxes on their profits.
Thanks all for the detailed and easy to understand explanations
The country they are incorporated in. Often times they incorporate in countries with extremely low or non-existent tax rates like Ireland or the Cayman Islands. Even more often times that company doesn’t do anything but own all the intellectual property that it’s subsidiaries use, those subsidiaries “pay” licensing fees to their parent companies so they have much lower profits to report.
Ireland!
But seriously, it’s complicated.
In theory, companies are generally supposed to pay tax on income to the country they make that income in. So if a Dutch person buys a French product in Belgium, the tax gets paid to Belgium.
But companies are tricksy and they like to try and find ways to “make money” in places with low corporate tax rates.
One method, properly called base erosion and profit shifting (BEPS), or more colloquially known as the “Double Irish” because Ireland used to have low corporate tax rates and a lot of bilateral tax treaties. Anyway, the system works like this: that Dutch person who buys a French product in Belgium? It turns out they weren’t actually buying a product from FrenchCo; instead, they were buying a product from FrenchCo Belgium, a related but legally completely separate entity. FrenchCo Belgium then pays a licensing fee to FrenchCo for the right to sell that product, and generally FrenchCo Belgium never makes any profits.
Did I say that FrenchCo Belgium pays FrenchCo? I misspoke. In fact, FrenchCo Belgium pays FrenchCo Ireland, who it turns out licensed the right to sell that product from FrenchCo Bermuda, who bought the full rights from FrenchCo for $1.
Ultimately, all of the money accumulates to FrenchCo Bermuda, which then returns the money to FrenchCo in the form of interest-free loans that will never be called in.
Sadly, this is just the most basic form. The system is called “Double Irish” because US companies needed to make a second company in Ireland (companies from other countries did not necessarily). My favorite is the “Double Irish with a Dutch Sandwich”, which adds another method (the Dutch Sandwich) on top to help deal with EU regulations intended to stop this sort of thing.
A lot of countries are moving to stop this sort of thing (because they don’t like losing tax money), but being a corporate tax haven is incredibly attractive to small countries because even the negligible corporate taxes they collect represent a significant sum to them. And so while the traditional Double Irish has been eliminated by EU rules in the past couple years, we see the rise of the “Single Malt” and CAIA. Another example is that EU rules basically requiring that profit-shifting happen only within the EU saw Malta replacing Bermuda. *Et cetera*.
They pay taxes in each country they do business in. The trick is, they only pay taxes on the profit. So they can *show profit* in countries with low taxes.
For example, Acme Inc has a business. In multiple countries.
Acme of America buys anvils from Acme of Ireland, which sources them from China. Acme of Ireland buys them for $5 and sells them to Acme America for $9.98.
Acme of America then sells those anvils to consumers for $10.
On paper Acme America only makes $0.02 per anvil, so it pays almost no taxes. Acme of Ireland makes $4.98 per anvil, and pays taxes in Ireland, where corporate income taxes are very low.
It is extremely complicated and prone to abuse. The top-level company pays taxes where its headquarters is located, so of course thr multinational locates the headquarters in a low-tax country.
Subsidiaries in other countries are supposed to act as separate companies, paying local taxes on their profits. So for example a parts factory in country A sells its parts to an assembly factory in country B and pay taxes on its profits. But by selling those parts at a super high or super low price, the multinational can make sure its profits are zero in whichever country has the highest tax rate.
And if that’s not enough, they can have their subsidiaries in low-tax countries sell empty fake “services” to subsidiaries in high-tax countries to make sure they don’t make any profit on the balance sheet.
This article summarizes some of the shenanigans.
https://www.piie.com/research/piie-charts/some-ways-multinational-companies-reduce-their-tax-bills
There’s a movement to set a global minimum tax rate, but since countries that refuse to go along can earn a fortune as tax havens, making it work is a problem.
Then there’s always the option of enormous write offs?? So called donations to so called charitable companies they own?? Stuff like that??
Just guessing what my lawyer would advise for hiding my trillions.
All kinds of skunky ways to not pay. Many of the major players don’t, or am I reading the wrong people? Exxon is usually mentioned.
The short answer is, many don’t.
https://www.investopedia.com/news/how-fortune-500-companies-avoid-paying-income-tax/
https://itep.org/55-profitable-corporations-zero-corporate-tax/
Apr 2, 2021The tax-avoiding companies represent various industries and collectively enjoyed almost $40.5 billion in U.S. pretax income in 2020, according to their annual financial reports. The statutory federal tax rate for corporate profits is 21 percent. The 55 corporations would have paid a collective total of $8.5 billion for the year had they paid …
https://theconversation.com/how-multinationals-continue-to-avoid-paying-hundreds-of-billions-of-dollars-in-tax-new-research-124323
“To where…” – nice! Proper prepositional leading phrase to avoid ending in a prep-“…taxes to?”
Son of a…. So close.
This is the subject of Transfer Pricing. Most countries in the world follow the guidelines from OECD that shall help allocate fair taxation to each country involved. Countries enter double tab treaties where they agree the specific way to split between them. And then multinational enterprises have to document how they did their allocation and prove that they were using arms length prices in their internal transactions.
Many countries take this seriously, mne’s can’t freely use tax havens anymore. Most mne’s actually just want to pay their fair bit of tax everywhere.
Special rules apply to the top 100 or so groups in the world. That’s where the real struggle is right now.
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