Corporate Tax Loopholes

Corporate Tax Loopholes

Abstract

Tax avoidance by multinationals is a great threat to the U.S. economy. The avoidance forces a government to cut on its expenses as it is unable to raise adequate funds to finance its developmental projects. It means that multinationals threaten the development of the economy and subject small businesses to a heavy burden of paying large amounts of tax to drive the economy. This dicussion looks at the effects of tax avoidance by multinationals and the measures taken by the Congress and the IRS to seal the corporate tax loopholes.

Corporate Tax Loopholes

A multinational corporation (MNC) is defined as a business that is in operation in more than one country. The MNCs have an obligation to pay tax to their home country. Unfortunately, they are taking an advantage of a number of tax loopholes to avoid paying taxes. The practice has greatly strained America’s economy (Lymer & Hasseldine, 2002). The most serious corporate tax loopholes that thwart a competitive position of America in the world are the offshore tax loopholes. They alone account for an estimated loss of $90 billion a year for the U.S. treasury. The loopholes also create an unfair competition between domestic businesses and large multinational firms. The big multinationals have had their tax attorneys and lobbyists creating some ways to enable them shift the profits that they have earned in the United States to other countries being considered to be tax haven. By doing that, the company benefits unfairly through reducing its effective corporate tax rate (Gravelle, 2013). There are documented evidences that show a great change of multinational corporations’ profits to tax havens. The amounts involved are enormous and largely out of proportion to the activities that multinationals are involved in at havens (Sheppard, 2010).With such socio-economic consequences on American citizens, the Congress and the IRS must come up with some effective strategies to address various corporate tax loopholes.

The Socio-Economic Consequences on Having Multinational Corporations Avoiding Their Fair Share of Taxes

Due to the gravity of the impact that tax evasion by multinationals have on the U.S. economy, it is prudent to say that they are a great threat to the development initiatives of the country. They go against a need to contribute fairly to the development of the U.S. economy (Reuter, 2012). It is evident that they betray the efforts made by smaller business firms that strive to aid the development of the economy. The small business enterprises are seen to be the engines of the U.S local economy. It happens in a similar way as smaller companies are seen to be the force supporting the country’s economies locally. Porter (2014) states that there are several evidences that show the trend of profit shifting as a key strategy used by multinationals to avoid taxation. Meanwhile small business enterprises and companies ensure a fair deal by providing the required goods and services. It is achieved through the provision of job opportunities and adherence to tax payments as per law.

The avoidance of taxation by multinational corporations is a great threat to the successful implementation of public investments. It is through the taxes that the government can generate funds to be used in financing several investment programs in schools. It is clear from this point of view that multinationals avoiding paying their fair share of taxes is a great threat to the educational development of the United States. They deprive the government of necessary resources that is vital for enhancing education in the country. The government has to cut its expenditure in the education sector as it is unable to finance the desired investment without adequate tax remittance by multinationals. It is interesting to note that they avoid paying taxes that would help better the situation in a way that would benefit them as well as the whole society (Mo, 2003).

Tax evasion is cited as a major threat to the enhancement of several other basic infrastructures in the United States. For example, the lack of adequate finances challenge the efforts aimed at developing the country’s road network. The government suffers a major strain in its efforts to boost the road network to facilitate ease of movement. Roads are a vital infrastructure that plays a central role for the development of any economy. The multinationals also need to operate in the countries that boast of good road networks. It enables them to move their goods without much strain. As such, it would be ethical for them to contribute to the road development through the payment of their fair share of taxes (Brunori, 2005).

Tax avoidance is considered as one of the most important ethics issues that businesses need to address. It is equated to avoiding a social obligation. It can subject a company to a soiled reputation and make it vulnerable to unnecessary accusations of greed and selfishness. Such accusations are unhealthy for any business firm as they damage the reputation of the business and erode their public trust. It clearly shows that tax evasion does not only impact on the economy. It also has negative implications on multinationals in terms of a difficulty to sustain their reputation and maintain a good public image. Starbucks and Amazon are the clear examples of firms that have suffered from a damaged public reputation. The firms were boycotted due to their tax policies, hence, having a great impact on their sales. Multinationals should consider tax payment within various host countries to be a part of their corporate social responsibility obligation. When they abide by their tax obligations and pay their fair tax, multinationals provide funds to be used for provision of essential public services like healthcare, education, and infrastructure. In exchange, the companies will benefit from the public services either directly or indirectly. Some countries have branded tax avoidance as immoral and highly unethical practice by multinationals that undermine the integrity of the tax system (Dunning & Lundan, 2008).

When small business enterprises and small companies strive to pay their fair share of taxes, their counterparts, at large, the U.S. multinationals take advantage of the tax code to avoid the humble obligation (Herrmann& Lipsey, 2003). It at times appears as though the tax code assumes that there is no infrastructure to support as may be the case with a third world country. It is very strenuous for any business enterprise to operate in a remote part of the third world country that lacks an adequate infrastructure to support business activities. It is interesting to assume that by avoiding taxation, the multinationals are contributing to such a situation that will threaten their own business operations. The tax code should be fair to the point of encouraging individuals, groups, small companies, and multinationals to invest in the shared future. When all firms and individuals invest together, a virtuous circle of growth is started. In situations where business owners and individuals perceive the system to be rigged in favor of a given group or another, they start feeling that they are subjected to the payment of tax being higher than their fair share. As such, they end up losing faith in the system (Hines, 2001).

In situations where tax revenues are realized to be lower than the way they should be without loopholes, policymakers are obliged to improvise some ways to cut government spending. This practice is unhealthy for any economy as it starts a vicious cycle of ever-shrinking the economic activities of the given country and constantly reducing the tax revenue. In such a situation, the country continues to realize an economic deterioration that can hardly be healed. It is evident that the systematic tax avoidance by multinationals and rich people presents an ugly scenario in the strained economic times (Mankiw, 2009).

The Actions that the Congress and the IRS Are Currently Taking to Stop or Better the Issue of Corporate Tax Loopholes

The tax loopholes are presenting a major threat to the U.S. economy that calls for an urgent intervention by the Congress and the IRS. It is vital to note that the main threat is the tax code that needs to be fixed. Fixing it is a good starting point that would ensure that the unfair oversees loopholes that threaten the people’s faith in the tax system is solved. The tax code should not be seen to damage the domestic job creators but should encourage a fair play by all business ventures (Chattopadhyay, Batra, & Ozsomer, 2012).

The treasury has taken some actions to rein in corporate tax inversions. The actions taken under sections 304(b),(5)(B), 367, 956(e), 7701(l), and 7874 of the inversions Code will ensure that theinverted company becomes subjected to serious tax consequences (“Fact sheet,” 2014). That is if it is realized that less than 25 percent of the multinationals’ business practices are in the home country of the new parent home. The second situation that would call for a harsh tax consequence is if the U.S. parent shareholders finally get to own more than 60 percent of the foreign parent’s shares. Meeting these situations makes the inverted company to be subjected to tax consequences that are based on the ongoing ownership capacity of shareholders from the former United States’ parent (“Fact sheet,” 2014).

The treasury has taken significant actions aimed at reducing and, if possible, stopping the tax benefits of corporate tax inversions. The actions were formulated to specifically prevent a possibility of escaping the U.S. taxation by inverted companies (“Fact sheet,” 2014). The actions taken by the treasury eliminate the techniques that inverted companies used to access the foreign earnings of subsidiaries of the United States. They are discussed below.

First, the Treasury and the IRS has presented a notice in the Treasury fact sheet that serves to fix the tax loopholes in a number of ways. The notice uses creative loans to limit an ability of inverted companies to access the foreign subsidiary’s earnings as they defer the U.S. tax. The creative loan used to achieve this objective is known as the as hopscotch loans. This action, taken to seal the tax loopholes, is found under section 956(e) ofthe Action Code(“Fact sheet,” 2014).

Secondly, the notice given by the Treasury and the IRS also aimed at discouraging the trend of restructuring a foreign subsidiary by the inverted companies. Thus, they can access the subsidiary’s earnings without any tax payment. This action has been taken under the section 7701(l) of the tax code. The notice also closes the corporate tax loopholes to make it difficult for multinationals to transfer money and other property from a CFC to the new parent so as to fully avoid the U.S. tax. This action is grounded under the section304(b), (5 ) (B) of the code. It also reduces the possibilities of the U.S. entities to invert as it enhances the expectations for the former owners of the U.S. entity to own below 80 percent of the new combined entity(“Fact sheet,” 2014).

It has been noted that multinationals highly use an inversion technique. There they restructure themselves to the point that the U.S. parent gets replaced by another foreign corporation so as to evade the payment of U.S. taxes. The transactions conducted by the multinationals in an unethical way were realized to have potential erosion on the U.S. tax base. For a long time, the multinationals tax avoidance placed a great burden on other loyal tax payers like small business enterprises and other hard working Americans (Hungerford, 2014). However, the initiatives taken by the Congress to seal the loopholes through provision of harsh conditions given by the Treasury department make corporate inversions less lucrative. The new regulations present an obstacle for the multinationals that intend to undertake inversions to use the funds obtained without taking taxes on them. It ensures that there is the adequate transparency on business deals (Shephard, 2010).

According to Lew Jacob, who was the Secretary to the Treasury, the first steps that the treasury took were meant to help realize significant improvements in controlling the techniques employed by multinationals in their avoidance of the U.S. tax. The steps would be effective in limiting the economic advantages of inversions and stopping them altogether. The Secretary acknowledged the fact that a comprehensive business tax reform would be the best way out of the scourge. He stated that the comprehensive tax reform should encompass the particular anti-inversion provisions that would significantly tackle the surge of inversions (“Fact sheet,” 2014). In future, the treasury will need to raise its game by reviewing a wide range of authorities so as to give some room for further anti-aversion measures to be taken moving to close the loopholes.

Conclusion

It is evident that tax remittance is an obligation of all people, small business enterprises, and multinationals. It is a social-economic obligation that needs to be adhered to in order to facilitate the provision of essential services by the government. Tax avoidance by the multinationals is mainly done through offshore tax loopholes. The multinationals take an advantage of the tax code. The situation presents much burden to small businesses as they have to take the lion’s share in the tax payment. At long last, the U.S. economy suffers a backlash as the government cuts on its expenditure.