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How do multinational corporations use international tax planning to minimize their taxes?

Steward Kleingrub

Well, as far as I know, multinational corporations use a variety of strategies to reduce their tax liabilities and take advantage of international tax planning. The first thing these companies do is establish subsidiaries or branches in countries with more favorable tax laws. For example, companies often set up a subsidiary in a tax haven country such as Bermuda, the Cayman Islands, or Luxembourg, where they can benefit from low taxes or even zero tax rates.

Another strategy involves transfer pricing, which is the process of determining the prices at which goods and services are traded between different units within a corporation. By manipulating transfer pricing, companies can shift profits to subsidiaries in countries with lower tax rates. This is a complex process, but essentially it involves overvaluing or undervaluing goods or services to create artificial profits that can be shifted to lower-tax jurisdictions.

Multinational corporations also take advantage of tax treaties between countries. Tax treaties are agreements between two countries that govern how taxes are levied on cross-border transactions. By structuring their operations to take advantage of these treaties, companies can reduce their overall tax burden. For example, if a company operates in country A and sells goods in country B, it may be able to take advantage of a tax treaty between the two countries to reduce its tax liability.

One other strategy that I know multinational corporations use is to set up holding companies in countries with favorable tax treatment. These holding companies can act as a conduit for profits generated in other countries, allowing the company to avoid paying taxes on those profits. Holding companies can also be used to gain access to foreign tax credits, which can be used to reduce the taxes the company owes in other countries.

Overall, multinational corporations use a number of different strategies to reduce their tax liabilities. While some of these strategies may be legal, others may be considered aggressive or even illegal by tax authorities. Nevertheless, these companies will continue to use international tax planning to keep their tax bills as low as possible.