To where do multinational corporations pay their income taxes to?

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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?

In: 11

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.

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.

Thanks all for the detailed and easy to understand explanations

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*.