New Report: Multinationals Avoid Taxes
These corporations seek out tax havens—countries that compete to attract investors with low tax rate and lax enforcement—to be able to underreport their profits at tax time. 
The report, Having Their Cake and Eating It Too: The Big Corporate Tax Break, was produced by the International Confederation of Free Trade Unions (ICFTU), a global federation that represents 241 union organizations in 156 countries, including the AFL-CIO.
 
Unless the world’s governments stop this race to attract business with lower taxes, industrialized and developing countries will be forced to cut back on vital public services such as education and health care, the report claims.
 
Guy Ryder, ICFTU general secretary, says corporate tax avoidance jeopardizes the future of stability society:
 
Governments must stop this tax competition craze if they are serious about ensuring a sustainable future of their societies. They must also start cooperating with each other … in closing the legal loopholes that have allowed companies to get away with the kind of behavior that would land an ordinary citizen in jail for many years.
 
The jaw-dropping figures on the extent of corporate tax avoidance jump out in the report:
·           Each year, the amount of money lost to tax havens from developing countries is six times the amount that could fund universal primary education throughout the world.
·           The average corporate tax rates in industrialized countries have fallen from 45 percent to 30 percent in two decades, due to tax competition.
·           If corporate taxation keeps dropping at the current rate, corporate tax rates will hit zero percent by the middle of the century.
·            Conservative estimates show developing countries lose $50 billion annually due to tax havens.
·           Of the 275 largest corporations in the United States, 82 paid no tax or received a tax refund in at least one of the years between 2001 and 2003.
·           The number of Export Processing Zones (EPZs)—which often pay workers low wages and benefits, but offer corporate tax dodges—rose from 850 in 1998 to more than 5,000 around the world in 2004.
·           As a share of total taxation, corporate taxes have dropped by 53 percent in the U.S. since the late 1960s.
 
How do they get away with this? The report documents how companies escape their tax obligations, either through exploiting legal loopholes or by simply engaging in illegal behavior. These creative accounting practices include transfer pricing, income stripping and the parking of intellectual property.
The most extensively used form of corporate tax dodging is probably transfer pricing. Basically, multinationals that operate across borders arrange their transactions so that profits show up in jurisdictions with more lenient tax collectors. They can do that because a large part of international trade is made up of sales between subsidiaries of the same company or sales between parent and subsidiary companies.
 
Another way corporations dodge taxes is through “income stripping,” in which an offshore subsidiary loans money at an exorbitant interest rate to a parent company or another subsidiary in a country with high tax rates. Those high interest payments can then be deducted from the income at tax time. So, the income either will be taxed minimally or not at all, and the parent company has effectively transfers profits to a location where tax authorities will stay at arms length.
 
A third way corporations reduce or dodge taxes is by transferring ownership of a trade name, often a very valuable asset, to a low-tax location and then charging other parts of the company large royalty fees to use the name. The same happens with patents, with subsidiaries charging licensing fees for the use of these patents.
 
The ICFTU report suggests several strategies for ending corporate tax dodging:
·            Establish regional and global tax authorities, representing the interests of citizens, to ensure that national tax schemes do not have an adverse effect on the rest of the world.
·            Support initiatives by the International Confederation of Free Trade Unions and Development to prevent harmful tax practices, recognizing that it is currently the only multilateral agency with the capacity to deal with global tax issues.
·           Phase out export processing zones and other institutional arrangements that give certain companies, producers and employers tax advantages.
·            Develop a comprehensive and automatic information exchange systems between all tax authorities, to fight tax evasion and facilitate better assessment and collection of taxes.
·           Tax corporations where they operate, where their workers are located and where real value is added, not in artificial tax havens where they carry out paper transactions or where they file corporate registrations.
·           Make standards requiring multinational corporations to refrain from harmful tax avoidance and evasion part of official and voluntary codes of conduct for these companies.
·           Hold corporate executives, their lawyers and accountants, liable for criminal penalties for tax evasion.
 
As Ryder says:
At a time when business is taking up more share of productivity gains than ever, when companies are reporting higher profits than ever and when employer-sponsored social safety nets are being eroded, would it not be only fair to ask corporations to put something back into the public spending purse? After all, it is only due to government investment in infrastructure and education that these companies have been able to stay competitive. In the long term, this business of having their cake and eating too cannot continue.