Research Paper on Globalization & Tax Evasion: Negative Consequences for States

Introduction

Globalization has been implicative to interstate engagements in both positive and negative ways. It has resulted in the emergence of many multinational enterprises across the world. However, state governments have incurred negative consequences resulting from tax evasion strategies executed by multinational companies. The establishment of tax havens in specific nations has promoted and encouraged tax evasion vices. A tax haven is lenient on the tax obligations it imposes on individuals and firms (Emmanuel, and Evans, 2018, p. 1). Tax havens are open to friendlier deals if companies would consider expanding their operations in their countries. Examples include; Switzerland, Bermuda, Andorra, Hong Kong, and Monaco, among many. Of these companies is the pharmaceutical giant Alliance Boots UK. Unfortunately, measures to trace what is due for each of these institutions are cumbersome tasks with complex situations that are biased towards specific scenarios. Tax evaders are implementing techniques such as transfer pricing, debt shifting, and restructuring of their cooperate structure to minimize taxation by the UK government.

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Techniques Utilized by Multinational Firms to Evade Corporate Taxes

Boots UK has been notorious in collaborating corporate restructuring, debts, and profit shifting to evade tax. A revelation by Alliance Boots and The Tax Gap proves that Boots UK is liable for over a billion dollars in tax evasion since it went private (Jenniges, D., Mataloni Jr, R., Stutzman, S. and Xin, Y., 2018,p.4). The economic setback as a result of this tax dodge has been colossal to the economy of the country. Unfortunately, calls for justice against the renowned company have been unfruitful. With the determination by firms to widen their profit margins, tax havens have been a necessity in cutting down the costs of operation. According to Contractor (2016, p. 1), it is the zeal to make profits that have prompted multinational firms to implement various techniques to safeguard their revenues against taxation. To ascertain the severity of the trend, a study to show the losses incurred by nations as a result of tax evasion. According to Al Karaawy and Al Baaj (2018, p. 3), the study's findings proved that on an annual basis, at least 79 countries lost a combined total of 420 billion dollars. According to Aalbers (2018, p. 917), the three main strategies used by multinational companies to achieve tax evasion include transfer pricing, debt shifting, and safeguarding intangible assets in the form of trademarks and copyrights. Profit shifting entails the transference of profits to low-tax countries even though the firm operates in high-taxIing economies (Torjesen, 2013, p. 1).

Influence of Tax Havens on Transfer Pricing

Tax havens are crucial in cutting down the cost of production and widening profit margins. Thus, institutions such as Alliance Boots create and generate the initiative to incorporate transfer pricing. Alliance Boots emerged in 2006 when a merger between the then known Boots and Alliance Unichem was the establishment (Rugman, and Eden, 2017, p. 2). Although the latter was a pan-European pharmacy, Alliance Boots still retained its perception of being British. Unfortunately, a closer analysis of the firm reveals that its ownership is in 94 Baarerstrasse, Zug City, Switzerland (Klassen, Lisowsky, and Mescall, 2017, p. 471). However, this is just, but a mere post box address for Boots since no significant activities get undertaken in this location. Instead, it is a strategy by Boots among other firms to evade tax burdens (Akamah, Hope, and Thomas 2018, p. 60). A majority of fortune 500 companies have relocated their branches to Switzerland as a result of the tax breaks offered by the government. The benefits are numerous when institutions allow the government to own 20 percent of the shares.

Implications of Tax Avoidance on the State Government

Following the privatization of Alliance Boots over a decade ago, the British government has been incurring significant economic setbacks that could have enhanced growth and development. On the one hand, the company relocated to the tax havens of Zug, Switzerland. On the other hand, a majority of the firm's activities remained in the UK, including its apparent debt. As a result, the company has maneuvered to lessen to the least possible amount of the amount liable for taxable income. A study conducted six years after the privatization of the firm ascertained that the company was able to dodge an equivalent of 4.2 billion pounds in taxes (Saez, E. and Zucman, 2019, p. 1). Unfortunately, the company has only been able to pay 1.28 billion pounds in the same period (Saez, E. and Zucman, 2019, p. 1). The amount would be crucial in availing amenities to England; further considerations reveal that it would be sufficient to pay for the country's prescription charges for two years (Saez, E. and Zucman, 2019, p. 2). The evaded tax revenues would be sufficient to compensate for the starting salaries of at least 78,000 nurses for a whole year (Saez, E. and Zucman, 2019, p. 2). if availed the evaded tax got availed to the state, it would enable 185,000 hip replacements or ambulance calls over 5 million times (Saez, E. and Zucman, 2019, p. 2). The trend by Alliance Boots and other institutions has been deteriorating to the state's economic growth and development. The amount aimed by government agencies to meet set goals and objectives merely get achieved as crucial tax gaps are difficult to trace (Bennedsen, and Zeume, 2018, p. 1253). Besides, the law has yet to evolve to the current and emerging trends to enhance government involvement in business and state revenues.

OECD Arm Length and its Benefits

The Arm's Length Principle and regulations by the Organization for Economic Cooperation and Development (OECD) are essential in stipulating the engagement policies of related firms, as revealed in Article 9 of the OECD Model Tax Convention (Mehrara, M. and Farahani 2016, p. 47). For one, the framework is strict about treating the two organizations as separate entities (Mehrara, M. and Farahani 2016, p. 47). As much as it is determined to prevent tax evasion, it, too, is determined to eradicate double taxation. To prevention tax evasion, accommodative considerations get used for both the enterprise and tax authorities. Unfortunately, the stipulations are only applicable and not specific to given situations. As such, it is cumbersome to use the principle, regardless of the provision of (OECD) guidelines ("United Kingdom," n.d.). Commonly, scenarios involving Boots UK where transfer pricing seems incomputable, apportionment frameworks are used to split the profits to subsidiaries. If the institution considers a specific formula to calculate the amounts for each of the subsidiaries, then it would be clear to determine the losers and winners (Rugman, A.M. and Eden, L., 2017, p.240). Consequently, considering aspects such as Research and Development and Intellectual Capital would be a contentious undertaking. Therefore, (OECD) guidelines and the Arm's Length are essential in eradicating this confusion.

State Solutions to Tax Avoidance by Firms

At least 60 percent of profits earned by a majority of fortune 500 companies are from countries they have the least activities ("United Kingdom," n.d.). It is a sure suggestion that firms are capitalizing on tax havens and starving their local governments of crucial tax contributions. Besides, without the necessary finances, important government activities that create conducive environments for business would be impossible to achieve ("United Kingdom," n.d.). Specific measures must get enacted to regulate the multinational company's tax behaviors. To curb the trend of multinationals such as Boots, governments could adopt the territorial taxation system. It is one of the two main approaches available for taxing multinational firms. Under a regional plan, the local government is only interested in the profits earned within its borders (Liu, 2018, p. 3). Earnings from outside the country's border get exempted from taxation. However, the company may still be taxed on foreign-source revenues by the countries abroad. Regardless, the system ensures that the government receives compensation for a majority of the businesses conducted within its borders (Chen, N.X. and Shevlin, 2018, p. 450). However, it is unfortunate that most countries have adopted a worldwide approach. Whereby, a collective income is taxed regardless of the country of operation. Moreover, states are required to consider crediting foreign-source deductions incurred by the firms. In this case, the fabrication of information to evade taxation becomes rampant.

Conclusion

In conclusion, tax evasion is a sophisticated menace that should not get overlooked. Measures mitigating tax evasion should get enacted to clarify requirements for each of the multinational firms concerning the needs of the nation. Even though Arm's Length Principle and the OECD guidelines have provided necessary instructions on how to maneuver specific scenarios, there are still complex cases that require immediate attention. Considering Boots UK has been executing its tax-evading strategies for a decade now, leaves a lot to be contemplated regarding the taxation system. Taxable amounts tax evasive companies have denied the UK government would get channeled to more productive ventures suitable for the citizens. Unfortunately, such companies are scot-free to relocate their operations to tax havens such as Switzerland, Bermuda, and Hong Kong, where there are low to insignificant operations. To curb this implication, the government should prioritize a territorial and worldwide approach that will ensure that companies contribute accordingly to the profit-generating activities carried out within the border.It will curb tax gaps and widen government revenue collection. Through this, the set goals and objectives of nations will be attainable, thus boosting economic growth locally and globally. Additionally, it would discourage the relocation of the company's headquarters to safe havens for taxation, which encourages local growth and development.

References

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Klassen, K.J., Lisowsky, P., and Mescall, D., 2017. Transfer pricing: Strategies, practices, and tax minimization. Contemporary Accounting Research, 34(1), pp.455-493.

Liu, M.L., 2018. Where does multinational investment go with territorial taxation? Evidence from the UK. International Monetary Fund.

Mehrara, M., and Farahani, Y.G.,...