How Do Corporations Avoid Paying Taxes – A tax is an obligation that every citizen of a country has to bear if they earn income within the scope of taxation. In general, progressive taxation for many taxes, such as income tax, is implemented in all countries, the more you earn, the more tax you have to pay.
So, according to the above logic, a highly successful multinational company, Apple can be expected to pay more taxes than a middle class citizen, right? Surprisingly, the answer is no, in fact, many large companies avoid paying taxes in many cases.
How Do Corporations Avoid Paying Taxes
Is it illegal to pay them taxes? If so, how to get rid of them? Why does the government not intervene? To find the answer to all these questions, we must first answer the important question, which is exactly what tax evasion and tax evasion is.
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Although these two terms are often used interchangeably, there are many differences between them.
Tax evasion refers to the use of various loopholes and factors in the tax code to reduce or in some cases avoid taxable income. Some examples are deductions and tax credits that are identified in the tax code. In short, tax evasion is legal.
Tax evasion is the use of malpractices such as misrepresentation of income, inflationary deductions, and concealment of income to avoid taxes. Tax evasion is illegal.
Hence, large MNCs practice tax evasion, which is perfectly legal, as they take advantage of loopholes in the tax code to evade taxes. Let us take an example to better understand the various aspects of tax avoidance.
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Amazon paid $0 in federal income tax on $11 billion in revenue in 2018, and they did it legally. Under the tax laws of many countries, companies do not have to pay taxes if they make a loss in that fiscal year, and for the first six years Amazon’s business was completely unprofitable because it invested most of its income in the company. . Growth, research and development expenses are tax-free and act as a tax credit.
Income tax returns show that even though Amazon earned $11.2 billion in revenue, it paid $0 in federal taxes because federal taxes are based on profits, not revenue.
In addition, they also set up subsidiaries and factories in countries where corporate taxes are much lower than in the US (where the world’s highest corporate tax rate is 21%, up from 35%). They ship their products to duty-free zones like Bermuda to avoid other taxes. After claiming additional deductions, their net tax liability is $0.
MNCs take advantage of loopholes to avoid paying high taxes, and countries operating as tax-exempt subsidiaries have their own reasons.
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First of all, it is always welcome for a company like Apple or Amazon to set up a factory in their country because it helps them to increase their employment and growth rate and at the same time they get to know the industrial aspect of the technology in the market and after every successful business. And more and more companies are setting up factories in these countries. Bermuda is a good example of how it helps big companies get on board.
In addition to having lower taxation, these countries also have cheaper labor and raw material costs, so it is natural for large companies to turn to developing countries for support.
Although this tactic has many benefits for both parties, taxable income in source countries is maximized and completely eliminated by tax avoidance. So what are the possible solutions?
Cutting corporate taxes is the first step, and while this will lead to lower taxes initially, it also paves the way for large companies to set up factories at home rather than overseas. Let’s take an example to better understand this situation.
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Let’s say Company A is a small company that makes a profit of $20,000 a year and pays a 20% corporate tax rate of $4,000. Another company B earns $200,000 in profit per year and to avoid paying high taxes, it operates all its factories in fewer countries and therefore pays no taxes. So the total tax amount is only $4,000.
Now, if the host country lowers the tax rate to 10%, this will encourage large company B to set up more factories locally, so the total tax here would be (10% of 4,000) + (10% of 200,000), a total of $24,000. 6 times the previous amount, even though the tax rate is only half.
The second approach involves a unified tax model, according to which taxes are levied where economic activity is recorded, not where it is collected. Various tax evasion methods are used, but for now the situation remains unchanged.
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Tax regulations vary from country to country in terms of amounts and eligibility criteria. However, this is one of the main responsibilities assigned to citizens. Failure to pay taxes may result in criminal violations and charges. However, when we talk about the taxes that multinational companies have to pay, people realize that their tax rates are very different from what we imagine.
They take advantage of potential loopholes in the tax code and lower their tax bill. The above article provides information on how multinational companies avoid taxes.
There are many ways that companies can avoid paying taxes or reduce their tax liability. Some of them can open accounts abroad, use loopholes in the tax code, receive salaries in shares instead of money, etc.
A term used to describe a group of people who deliberately refuse to pay taxes is called “tax evasion”. And the term that describes this situation is called tax evasion.
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Tax-free countries are countries that have no tax regulations or very few taxes. Oman, Qatar, Panama, etc. There are few countries in the world that are tax-free.
India has long been known for its agribusiness. Therefore, any business related to agricultural work is tax free in India. For example, sales and processing of agricultural crops are tax-free.
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According to the Institute on Taxation and Economic Policy, an in-depth analysis of the financial records of Fortune 500 companies found that at least 60 of the nation’s largest companies failed to pay $2018 billion in federal income tax today
If these companies paid the statutory federal tax rate of 21%, they would owe $16.4 billion in federal income taxes. Instead, they got a $4.3 billion concession. Covering corporate tax avoidance under the new tax law, this analysis reviews corporate financial records for 2018 released to date. It provides an initial, comprehensive look at how the corporate tax deduction works
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