Why Do Corporations Get Away With Tax Avoidance?
Tax avoidance has been a problem for many years and around the world, large corporations are exploiting loopholes in the tax system in order to minimise their payments. Despite consistent criticism for this practice, it continues and government’s often seem powerless to stop it. In this article, we will explore why corporations seem to get away with tax avoidance and what, if anything, can be done to address this issue.
What Is Tax Avoidance?
Tax avoidance is the process of legally minimizing a company’s liabilities, through the use of various legal and accounting expertise. In theory, every company has the right to pay only what is due by law. However, there are a number of tactics and strategies the corporate world can take in order to reduce the amount of money that they actually end up paying in taxes. Tax avoidance schemes are complex and, while not illegal, they come under scrutiny when they go too far.
Why Do Corporations Get Away With It?
The main reason why corporations get away with tax avoidance is because of the complexity of the tax system. In an ideal world, taxation should be a straightforward process in which the same rules are applicable to both individuals and corporations alike. However, the reality is that tax legislation is incredibly complex and the rules for corporations are often easier to maneuver in the favor of those who wish to pay less.
In addition to this, corporations have the resources to afford teams of tax experts and lawyers that specialize in finding the loopholes in the system and exploiting these to their advantage. This places them in an incredibly advantaged position when it comes to minimizing their tax bill.
Loopholes in International Tax Laws
Another factor that enables corporations to get away with tax avoidance is that international tax laws are full of loopholes. Big companies can take advantage of the fact that they can operate in many countries at once, which allows them to shift profits between jurisdictions and pay lower taxes in each one. This is particularly common within industries such as banking and pharmaceuticals that are based in multiple countries.
The Use of Offshore Accounts
Not only do corporations take advantage of the loopholes within international tax laws, but they also use offshore accounts to mitigate their tax bills. By investing their profits into foreign accounts, companies can often avoid and pay fewer taxes on income in their home countries. This tactic is often used as a way of dodging the Domestic Corporate Tax and it is estimated that around 9 percent of world’s financial wealth is held offshore.
The Combined Effect of Intricate Tax Laws and Offshore Accounts
The combination of loopholes in tax laws and the use of offshore accounts means that corporations have found a way to get away with paying significantly less tax than they should. This, in turn, puts a strain on government coffers and limits the money that is available to deliver key public services.
What Can Be Done About Tax Avoidance?
So, what, if anything, can be done to address the problem of corporations getting away with tax avoidance? The good news is that there is a growing movement to tackle this issue, both in the corporate world and also by government’s around the world.
Corporate Responsibility
There is an argument to be made that companies have a responsibility to pay their fair share of taxes and to not exploit loopholes in the system. This can be achieved through a combination of advocacy, pressure from shareholders and consumer boycotts of companies that are perceived to be avoiding paying their fair share of taxes.
Government Action
In addition to corporate responsibility, governments also have a role to play in tackling the issue of tax avoidance. By simplifying the tax system and making it more difficult for companies to exploit loopholes, tax avoidance can be drastically reduced.
The OECD
The Organization for Economic Co-operation and Development (OECD) is a multinational organisation dedicated to preventing tax avoidance. A major part of their mission is to encourage countries to cooperate and share information, so that it is more difficult for companies to dodge their taxes.
The Role of Tax Havens
Finally, in order to address the issue of corporate tax avoidance, it is essential to tackle the role of tax havens. Tax havens are jurisdictions that offer very favourable tax rates and this can often result in companies avoiding or minimizing their tax bills. Tackling this issue requires a global approach, with a unified goal of stopping companies from exploiting the tax system.
Tax avoidance is a major issue that is costing government’s around the world billions of dollars in revenue each year. Large corporations often get away with this by exploiting loopholes in the system and using sophisticated tax strategies to reduce their liabilities. In order to tackle this issue, both corporate responsibility and government action needs to be taken. Additionally, organizations such as the OECD are playing an increasingly important role in preventing tax avoidance and this needs to continue if we are to achieve better taxation outcomes.
