Tax Avoidance, Revenue Starvation and the Age of the Multinational Corporation

• Author: Sara Dillon
• Position: Sara Dillon is professor of law at Suffolk University Law School, where she is also director of international programs and co director of the international law concentration. She was previously a member of the law faculty at University College Dublin for seven years. Professor Dillon has her law degree from Columbia University Law School and a ...
• Pages: 275-327

Tax Avoidance, Revenue Starvation and the Age

of the Multinational Corporation

S

ARA

D

ILLON

*

I. Corporations, States and Global Revenue Starvation

A. T

HE

C

ONTEXT FOR

C

ORPORATE

T

AX

A

VOIDANCE AND

N

ATIONAL

A

USTERITY

P

ROGRAMS

There can be no doubt about the fact that wealthy individuals and large

corporations are feverishly, and routinely, engaged in an “offshore” quest to

avoid the obligation to pay national taxes.

1

An entire industry has grown up

to serve this desire to avoid paying taxes.

2

The fears of a suspicious global

public have been confirmed by the “LuxLeaks” and the Panama Papers, two

contrasting but related windows on the elaborate devices whereby large

corporations and wealthy individuals hide their assets and avoid the payment

of taxes.

3

It should be noted, however, that these disclosures only confirmed

* Sara Dillon is professor of law at Suffolk University Law School, where she is also director

of international programs and co director of the international law concentration. She was

previously a member of the law faculty at University College Dublin for seven years. Professor

Dillon has her law degree from Columbia University Law School and a Ph.D. in Japanese

studies from Stanford University. She teaches and writes in the areas of public international

law, international trade regulation, international children’s rights and European Union Law.

1. See Broken at the Top: How America’s Dysfunctional Tax System Costs Billions in Corporate Tax

Dodging, O

XFAM

A

MERICA

(Apr. 14, 2016), https://www.oxfamamerica.org/static/media/files/

Broken_at_the_Top_FINAL_EMBARGOED_4.12.2016.pdf (“Tax dodging by multinational

corporations costs the US approximately $111 billion each year. . . . The same tactics

corporations use to dodge US tax sap an estimated $100 billion every year from poor countries,

preventing crucial investments in education, healthcare, infrastructure and other forms of

poverty reduction.”).

2. See Stephen Long, Corporate Tax Minimization Costs Government $US1 Trillion Says

Accounting Insider, S

HANGHAI

D

AILY

(July 11, 2016, 2:56 PM), http://www.shanghaidaily.com/

AustraliaPlus/Corporate-tax-minimisation-costs-governments-US1-trillion-says-insider/

shdaily.shtml (quoting international accounting expert George Rozvany, as saying that the

major accounting firms are “masterminds of international tax avoidance” and must be broken up

into smaller companies). Rozvany also notes that these firms work with national governments

to deliver results for the largest corporations. Id.

3. Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption, I

NT

’

L

C

ONSORTIUM OF

I

NVESTIGATIVE

J

OURNALISTS

(Apr. 3, 2016), https://panamapapers.icij.org/

20160403-panama-papers-global-overview.html (describing the “Panama Papers” as a “cache of

11.5 million records [that] shows how a global industry of law firms and big banks sells financial

secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports

stars”); see also Simon Bowers, Luxembourg Tax Files: How Tiny State Rubber-Stamped Tax

Avoidance on an Industrial Scale, T

HE

G

UARDIAN

(Nov. 5, 2014), https://www.theguardian.com/

business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale (noting that

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PUBLISHED IN COOPERATION WITH

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276 THE INTERNATIONAL LAWYER [VOL. 50, NO. 2

what was already well understood: Tax avoidance by large corporations is

well-established, standard practice, and the global public has waited in vain

for effective steps to be taken to bring it to an end. The fact of tax evasion is

old news; the lack of adequate regulatory action is the story of interest.

Tax avoidance is accomplished through the manipulative attribution or

allocation of corporate profits to a low or no tax jurisdiction, instead of the

higher tax jurisdiction to which—under a more rigorously accurate

regime—these profits “should” rightly be attributed. In this sense,

corporations and their tax accountants have been permitted to draw and

redraw geographical boundaries in order to shield more corporate profit

from the tax collector. While the mechanisms of profit allocation are

complex, proper and more accurate allocation is both possible and

achievable. What prevents a reorientation of corporate profits is not the

daunting complexity of the problem, but the discretion granted by

governments to corporations—implicitly or explicitly—to determine their

own tax obligations through the operation of geographical fictions.

4

For wealthy individuals and large corporations, the payment of full or

even reasonable taxes has become a relic of the past. Globalization and

automation have together facilitated tax avoidance strategies of the most

audacious kind.

5

While wealthy individuals are as keen to avoid taxes as

multinational corporations, this article will focus on corporations in

particular, and the degree to which the very idea of a mandatory corporate

obligation to contribute to the public good has disappeared. Thus, the

important question is not how corporations are achieving radical tax

avoidance (the devices and mechanisms have been fully described elsewhere),

nor why they are (obvious to all), but rather why governments have taken so

few effective steps to stop these practices.

6

A striking fact is that knowledge

“340 companies from around the world arranged specially-designed corporate structures with

the Luxembourg authorities,” and that the deals that slashed tax bills were “signed off by the

Grand Duchy and are perfectly legal”).

4. Michael Motala, The New Global Politics of Sovereign International Tax: Space, Time and Why

BEPS Is Not the Final Frontier, A

CADEMIA

(2016), https://www.academia.edu/23971258/The_

New_Global_Politics_of_sovereign_international_tax_space_time_and_why_BEPS_is_not_the

_final_frontier (describing the recent shift in thinking about multinational corporations and

their relationship to particular nations for purposes of assessing tax liability. Also, noting that

“the spatial concept of the sovereign state has led to the legal deconstruction of MNEs into

fictive national units, facilitating tax arbitrage and avoidance through intra-party exchange that

is real and virtual”).

5. See Wolfgang Schauble, Here’s the Fix to International Chaos: A Global Tax System, W

ASH

.

P

OST

(Nov. 3, 2014), https://www.washingtonpost.com/posteverything/wp/2014/11/03/out

dated-tax-policies-are-hurting-nations-budgets-we-need-a-global-approach-to-corporate-taxa

tion/ (noting that due to the growing pace and intensity of globalization and digitization,

international businesses have adapted their structures to work around outmodes tax laws, and

that existing tax-allocation laws date back a hundred years).

6. See, e.g., Aurore Chardonnet, Luxleaks and Tax Avoidance at EU level: Talk less, Act more,

E

URACTIV

(Nov. 5, 2015), http://www.euractiv.com/section/eu-priorities-2020/opinion/lux

leaks-and-tax-avoidance-at-eu-level-talk-less-act-more; Press Release, Oxfam International, EU

Anti-tax Avoidance package will fail to end the era of tax havens, warns Oxfam (Jan. 28, 2016),

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PUBLISHED IN COOPERATION WITH

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2017] TAX AVOIDANCE 277

alone has not led to the creation of remedies. Since national governments

have shown themselves to be reluctant to police such tax avoiding behavior,

unenforceable “information sharing” programs, automatic or otherwise, may

not have any appreciable effect.

7

Many studies on the subject of tax avoidance have parsed the details of

corporate tax behavior so minutely that the fact of governmental non-

response has often been passed over. Reasonable people might differ as to

what categories of corporate profit should be included for taxation purposes

within any given jurisdiction. But the overarching, pervasive problem is that

we now have a culture of tax avoidance under which corporate tax lawyers

and tax planners simply choose a method of tax avoidance to suit themselves,

familiarly known as “aggressive tax planning.”

8

Whether the U.S. public

loses out today and the Nigerian, Russian or Argentine public loses out

tomorrow, all global citizens are losing out in the most fundamental way

when it comes to necessary public investments.

9

It is not surprising that a

new term has arisen to indicate the low and/or no-tax phenomenon: “tax

abuse.”

10

available at https://www.oxfam.org/en/pressroom/reactions/eu-anti-tax-avoidance-package-will-

fail-end-era-tax-havens-warns-oxfam.

7. See Press Release, Organisation for Economic Co-operation and Development (OECD),

OECD Releases Full Version of Global Standard for Automatic Exchange of Information (July

21, 2014), available at http://www.oecd.org/newsroom/oecd-releases-full-version-of-global-

standard-for-automatic-exchange-of-information.htm (announcing “an important step towards

greater transparency and putting an end to making secrecy in tax matters . . .”).

8. Aggressive tax planning is a term used by the OECD to indicate devices used by tax

planners to save large amounts of otherwise payable tax. See P

ETER

B

ICKERS

, T

RACEY

L

LOYD

,

B

HASKARAN

N

AIR

& M

ICHAEL

S

LYUZBERG

, I

NLAND

R

EVENUE

, N

EW

Z

EALAND

, D

EMAND FOR

A

GGRESSIVE

T

AX

P

LANNING

, 95-112 (2013), available at https://www.irs.gov/pub/irs-soi/

13rescontaxplanning.pdf. The authors note:

[a]n ATP scheme is generally understood to mean any scheme where the purpose or

benefit of the scheme appears to be the reduction of taxable income or inflation of

deductible expenditure, and the tax advantage sought is not clearly sanctioned by

the tax laws. In other words, ATP involves those schemes that may follow the letter

of the law but not its sprit.

Id.; see also Henrik Meldgaard et. al., Study on Structures of Aggressive Tax Planning and Indicators,

Final Report 3-165 (European Comm’n Working Paper No. 61-2015, 2015).

9. See I

NDEP

. C

OMM

’

N FOR THE

R

EFORM OF

I

NT

’

L

C

ORP

. T

AXATION

, D

ECLARATION OF

THE

I

NDEPENDENT

C

OMMISSION FOR THE

R

EFORM OF

I

NTERNATIONAL

C

ORPORATE

T

AXATION

, 1-16 (2015), available at http://www.un.org/esa/ffd/wp-content/uploads/sites/2/

2015/03/ICRICT_FINAL.pdf. The Commission notes in their Statement of Principles that

“[t]ax abuse by multinational corporations increases the tax burden on other taxpayers, violates

the corporations’ civic obligations, robes developed and developing countries of critical

resources to fight poverty and fund public services, exacerbates income inequality, and increases

developing country reliance on foreign assistance.” Id. at 1.

10. The term “tax abuses” was famously used in a report by the International Bar Association

in 2013. SeeI

NTERNATIONAL

B

AR

A

SSOCIATION

, T

AX

A

BUSES

, P

OVERTY AND

H

UMAN

R

IGHTS

1-268, 1 (Oct. 2013), available at http://www.ibanet.org/Article/Detail.aspx?ArticleUid=4A0C

F930-A0D1-4784-8D09-F588DCDDFEA4. The International Bar Association questioned

“why tax abuses [are] becoming so important” and suggested that this is because of “the

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW