THURSDAY, March 28, 2024
nationthailand

Govts urged to watch for widespread tax avoidance by multinational firms

Govts urged to watch for widespread tax avoidance by multinational firms

Tax-motivated profit shifting is statistically and economically significant, especially for manufacturing firms, and auditing and transfer pricing scrutiny is more effective in reducing profit shifting than documentation requirements alone, according to researchers .

 

These are among the findings in a paper on the topic of “Tax-Motivated Profit Shifting and Anti-Avoidance Stringency: Firm-Level Evidence from Developing Countries.” The report was co-authored by Athiphat Muthitacharoen, a lecturer at the Faculty of Economics at Chulalongkorn University, and Krislert Samphantharak, the executive director of Puey Ungphakorn Institute for Economic Research at the Bank of Thailand.

The study focused on tax motivations to shift reported profit among foreign subsidiaries in five middle-income Asean countries – Indonesia, Malaysia, the Philippines, Thailand and Vietnam (the Asean 5).

The paper uses firm-level data from developing countries to examine the significance of tax-motivated profit shifting from high-tax to low-tax countries by multinational enterprises and to analyse the extent to which anti-avoidance measures mitigate the profit shifting.

Tax avoidance by multinational enterprises (MNEs) has received a great deal of attention in public policy discussions as  globalization has opened up opportunities for the corporations to greatly reduce the taxes they pay. 

This practice, also known as base erosion and profit shifting, takes place when MNEs transfer profits from their subsidiaries in higher-tax rate countries to the ones with lower tax rates, hence minimising the total tax bill of the whole enterprise. Effectively, it reduces the tax collection of countries with higher tax rates.

The paper recommended that as tax-motivated profit shifting is significant, governments – especially those that rely heavily on corporate income tax – should therefore pay attention to this issue. 

Enacting laws and introducing regulations alone are not sufficiently effective in mitigating cross-country profit shifting by MNE subsidiaries, the paper found. The government should also strengthen its auditing and transfer pricing scrutiny to prevent firms from moving reported profits to other countries

While existing measures seem to mitigate profit shifting for non-manufacturing firms and smaller manufacturing firms, there remain possibilities that large manufacturing firms will shift their profit abroad and additional efforts should be focused on these firms, the paper found.

Finally, the government should be aware of changes in tax policies, especially corporate income tax reduction, of other countries since these policies could result in higher incentives for foreign subsidiaries in host countries to shift their profit to the country with lower tax rates. That would result in lower tax revenue collection of the current host countries, according to the study.

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