International Tax Avoidance in a Global Society

• published: 26 Mar 2015
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Introduction to Research by Professor Ryuta Takaku, Faculty of Business and Commerce, Keio University Professor Ryuta Takaku studies international tax avoidance at the Keio University Faculty of Business and Commerce. International tax avoidance exploits differences between countries’ tax regimes and tax treaties to evade tax in a way that crosses national borders. A concern is that this can greatly reduce national income and disproportionately lure capital into tax havens. Fraught with gray areas that blur the line between the legal and illegal, this activity can also spark tension between tax authorities and companies active in the global economy. "A problem for national governments is that tax dollars they should have received end up in other countries. Recent examples from the news include Google and Starbucks, which reportedly reduced income at foreign subsidiaries in one country and transferred the difference into other countries that offer lower tax rates. This poses a major tax revenue problem for the first country." One episode involving tax havens was the 9/11 terrorist attacks in America. Terror groups funneled funds kept in regional tax havens to the terrorists. Other incidents involve the proceeds of tax evasion being laundered in tax havens and then flowing back to the country of origin. Tax evasion via such havens poses a major problem to our global society. With organizations such as the OECD and G8 now looking to combat this, research into the specifics of international tax avoidance and possible countermeasures is coming sharply into focus. "As an example take Japanese companies, which have set up subsidiaries in Europe, America and right across Asia. A prominent trend recently is that they are moving production facilities to Asia, setting up manufacturing subsidiaries in places like China, Thailand, Indonesia and Malaysia. Transactions between such manufacturing subsidiaries and the parent company often involve transfer pricing taxation. Usually, when something is either exported or imported, tax is levied on that item. For example, when a car manufactured in Japan is exported, the export price is examined from the standpoint of transfer pricing. But recently, companies are instead using intangible asset transactions known as royalties, and these intangible asset transactions can be extremely problematic and complex. To take royalties as an example, say a Japanese parent company receives royalties from its subsidiary. A very difficult question, however, is just how big a royalty to take. It’s difficult to find a common yardstick that would tell you how much would be normal. This is quite a difficult problem, and an endless number of companies are actually being taxed in this manner." The issue of transfer pricing taxation necessitates competent authority consultation between tax authorities in different countries to determine how much tax each country ends up receiving. International tax avoidance is a major topic that spans the three disciplines of law, economics and commerce. The vast array of available case studies may present an entry point toward resolving the problems involved. Ultimately from a country’s standpoint, the aim is to put forward proposals that will preserve the country’s right of taxation, or in other words, ensure it receives its national tax revenue. This issue encompasses what sort of tax system should be used and how it should be enforced. As for the corporate world, although companies should not be evading taxes, they can minimize taxes in a legal manner. Of key importance here is how to reduce your tax bill legally within the scope of current tax treaties and international tax law, so I hope to provide at least some useful advice on how companies should structure their international tax strategies.