How Corporate Taxes Impact Corporate Behaviour?
Corporate taxes form a significant portion of the expenses borne by multinational corporations. These corporations are almost obsessed with efficiency. They continuously try to reduce their expenses so that their profitability can be increased. This is the reason why these companies are very sensitive even to minor changes in the tax regime.
In this article, we will have a closer look at the realities which affect corporate taxation.
Tax Competition is a Reality: A few decades ago, governments could levy as much tax as they wanted. The only thing that they feared was a political rebellion. Very few governments felt that the risk of losing tax revenue to other governments was real. Before the advent of globalization, corporations did not have many options. They were forced to operate from within the country because of political restrictions. However, that has changed in the past few years. Now, tax competition is a reality.
The multinational corporations are now in the driving seat and they are forcing the governments to participate in a race to the bottom. Companies like Amazon have successfully made states bid against one another while deciding where to locate their second headquarters. This also happens on the national level. Companies are constantly looking for better deals on the tax front and hence nations are forced to be competitive. If they are not competitive, they will lose business to other nations which are.
Corporations Keep Their Assets Mobile: Corporations know that they can only obtain better tax deals if their assets are mobile. These corporations want to be flexible. They do not want to throw anchor in a certain state or even a country. This is the reason that they seldom invest in hard assets such as factories, buildings etc. These assets take time to liquidate. The modern multinational corporation wants to have the capability to exit any market within a few days. Hence, they generally use lease contracts and use these resources without actually owning them. This is an implicit threat to the governments. If the company decides to leave the country, there will be very few of the companys assets which the government can seize in order to make up for its loss.
Corporate Taxes Lead to Outsourcing: Apart from high labor costs, high rates of taxation are also known for encouraging outsourcing. For instance, if a company is charged high tax rates in America, it would want to shift to a country where the tax rate is low. This would mean that all the production units will have to move to that country as well. Now, the host government will not only lose on the corporate tax which the company was paying but it will also lose out on the personal income tax which was being generated when the company in question was paying its workers. There are many such taxes which became payable in the due course of business. Hence, an attempt to collect more taxes by raising the corporate rates could backfire and lead to lower overall taxes.
Corporate Taxes and Intangible Assets: The rising corporate taxes have brought about another fundamental change in the way business is done. Nowadays, almost all major companies have started incorporating in low tax countries offshore. Not only do they incorporate but they also move their intangible assets to these locations. Hence, a subsidiary located in a country like Bermuda or Cayman Islands is often the one holding the most important intangible assets of the company. This strategy allows companies to show transactions wherein other group companies are borrowing the intellectual asset from the company located in the offshore haven. As a result, companies also have to pay a fee to these offshore entities. This leads to what is commonly known as income shifting.
Income shifting involves placing the assets of a company strategically so that the rents on these assets can be accumulated in low tax countries. This allows the company to make money in high tax regimes and then shift it to lower tax regimes under the guise of paying for intellectual properties. This tactic is widely used by organizations all over the world. It is estimated that governments are losing $200 billion each year because of this shenanigan. Also, companies like Amazon have used this to the hilt to famously pay close to $0 taxes while simultaneously having a trillion dollar valuation.
Corporate Taxes and Supra National Organizations: Lastly, individual nations are finding it extremely difficult to fight the tax competition. Multinational companies simply have more options. Unless a government goes back on the promise of globalization, there is very little which can be done to contain the activities of the multinational.
This is the reason why countries are joining hands. For instance, countries in the Eurozone are planning to create a central body which wold collect corporate tax from all companies and then apportion it amongst the states. However, the discussion is still in the preliminary stages. For now, corporations continue to have the upper hand in this tax battle.
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- History of Corporate Taxation
- Why must corporations be taxed?
- Different Forms of Corporate Taxation
- How Corporate Taxes Impact Corporate Behaviour?
- Is Corporate Tax Progressive?
- The Rise of Flat Tax
- Understanding Tax Terminology: Tax Base
- Understanding Tax Terminology: Tax Rates
- Arguments in Favor of Tax Competition
- Arguments against Tax Competition
- Tax Co-operation: A Primer
- Elasticity of Taxes
- Strategies Used by American Companies for Tax Avoidance
- How Corporate Dividends are Taxed?
- Capital Gains Taxes
- State Corporate Taxes
- A Primer on Tax Deferral
- The Corporate Alternate Minimum Tax
- Sales Tax and Use Tax in the United States
- Why Amazon and Netflix Pay $0 in Corporate Taxes?
- How are Losses Treated in Corporate Tax?