Introduction
Multinational corporations can be regarded as the glue that holds the global economy through international trade and cooperation. Multinational corporations have a significant influence on the global economy. They provide employment opportunities for individuals in the countries they operate; some multinational firms are so huge that they contribute to profound economic growth in most parts of the world (Lengenmayr, 2021). In addition, multinational firms in the tech sector help low and middle-income countries such as India and Vietnam, as well as many countries in sub-Saharan Africa, to get familiar with new pieces of technology, setting a platform for modernizing such countries.
The Significance and Roles of Multinationals in Global Trade
Multinational corporations attract a lot of policy formulation because most governments need foreign direct investments (FDI) to boost their economies (Kim and Milner, 2019). In the case of developed economies such as the U. S and Western Europe, foreign direct investment is essential to bring impetus to their slowing economies (Backer and Miroudot, 2021). Multinational corporations facilitate rapid economic growth. In addition, the firms create new job opportunities and establish new investments (Lengenmayr, 2021). More importantly, multinational corporations can share new technologies with other countries, allowing the host nations to integrate into the global value chain and improve the quality of their exports (Backer and Miroudot, 2021). The transfer of technology through international trade has resulted in East Asian countries achieving the so-called “Asian Miracle,” which was characterized by the rapid growth of most East Asian countries, consequently leaving the bracket of countries regarded as poor (Four Asian Tigers, 2022). The GDP per capita of most East Asian Nations, such as South Korea and Singapore, increased fast, leading to poverty reduction. Multinational corporations are also known for triggering global economic trends and unleashing the comparative advantages of different countries, which eventually benefit local industries.
Multinational enterprises and their international subsidiaries generate approximately 30 percent of the global gross domestic product (GDP). In general, it is responsible for nearly two-thirds of global trade (Backer and Miroudot, 2021). In 2016, multinational corporations contributed about 31 percent of global GDP 30 percent of the contribution came from international subsidiaries, while approximately 67 percent came from multinational enterprise headquarters and domestic outlets of the multinational firms in their original country (Backer and Miroudot, 2021). Thus, multinational enterprises represent massive trading activities through imports and exports. Based on research, the foreign subsidiaries of multinational corporations are very different from their domestic companies. The research reveals that foreign subsidiaries are more significant, highly productive, and employ many capital-intensive activities. In addition, foreign affiliates of multinational companies invest a lot of resources in Research and Development (R&D) (Backer and Miroudot, 2021). Moreover, foreign subsidiaries are more inclined towards the international market via exportation, buying more intermediate inputs from their host countries. As a result, there is more foreign value addition. Such steps improve the global value chain and international trade.
The differences between domestic companies and their foreign subsidiaries are attributed to variances in production technology and the particular roles given to each foreign subsidiary. Because of this, some subsidiaries are inclined toward setting up production plants close to consumers to avoid the cost of trade. Other multinational subsidiaries produce services and products utilized as production inputs in other countries. On the other hand, multinational tech companies, such as Twitter and Meta, are meant to have a sustained impact on global trade. Their net revenues grew by at least 60 percent in 2020 and 2021, a massive difference from traditional top multinational enterprises, whose revenues remained relatively stagnant (How digital multinationals are transforming, 2022). Digital multinational corporations can provide an impetus for growth in many international trade sectors. Similarly, multinational digital corporations enhance market penetration for different entrepreneurs (How digital multinationals are transforming, 2022). Thus, they enable the expansion of global value chains through the importation and exportation of goods and services
Advantages of Multinationals in Global Trade
The first advantage of multinational corporations in global trade is the inflow of capital internationally. Many multinationals are headquartered in developed economies where they depend on the resources of mature economies for financial stability. However, multinational corporations move into low and middle-income countries so they can set up new facilities and make a profit (Gaille, 2019). Multinationals provide a large percentage of foreign direct investment in the developing world through building new industries. Likewise, multinationals train personnel with qualified human resources to handle their activities. Multinational enterprises also invest in educational centers to enhance production capability in host nations. Such steps taken by multinationals to invest in developing countries enhance the quality of products in the global market, hence producing goods and services that are high in value (Gaille, 2019). For example, Apple invested approximately 275 billion dollars in China through partnerships with local tech companies and a local university (Sherr, 2021). While the move has been marred in controversy, it will benefit the Chinese economy in many years to come through increased innovation and the creation of job opportunities.
The second advantage of multinational corporations in global trade is the improvement of infrastructure in host nations. Multinational companies with millions of customers must ensure their employees are comfortable at work. Hence local investment in basic infrastructures such as roads and accessible technology is made before production begins. In most developing countries, multinational corporations improve human resources and complex infrastructure. A point in this case is Coca-Cola pledging to spend approximately 1 billion dollars in India (Coca-Cola, partners to spend $1.7 billion, 2017). The money will be directed toward building fruit processing plants and improving India’s agricultural sector.
Disadvantages of Multinationals in Global Trade
One major drawback of multinational companies in international trade is the importation of human resources into host nations. It is true that multinational enterprises provide avenues for skill transfer and education of the population in host countries. However, building skilled labor takes years, and it is not a matter of months. Hence, importing human resources is the logical option when a company needs a very skilled worker to conduct a sophisticated operation. However, to the disadvantage of host nations, jobs that fetch high wages are given to foreigners who spend the money internationally when it could have had economic benefits locally.
Secondly, multinationals take advantage of weak environmental laws in developing nations. In comparison, outsourcing production lowers the cost for multinationals; sometimes, production damages the environment. For instance, India trades in waste through recycling because of the revenues generated from the business, although it damages the environment (Gaille, 2019). Thus, when environmental groups in such countries choose to file lawsuits against multinationals, it can damage global supply chains.
Critical Evaluation of Tax Avoidance and Evasion by Multinationals
There are different ways in which multinationals avoid taxation:
Exemption or Deferral of income from foreign subsidiaries
Most multinationals in developed economies tax a multinational company in the home country, but other profits that are proceeds of its affiliates from foreign nations are not taxed. However, other countries like the United States consider profits generated from foreign business as taxable. Nonetheless, the US provides a significant loophole that facilitates tax avoidance. After multinationals pay taxes to the respective country governments they operate in, the extra US tax imposed on US multinational subsidiaries can be deferred without a definite time to pay the taxes to the US government. The deferment period is infinite (Palansky, 2019). Hence, the provision enables the multinationals not to remit profits back to the US. Instead, the profits are transferred to tax havens in Panama or Cayman.
The reason for multinationals to avoid tax remittance by this means is uncalled for. Starbucks has been accused of aggressive tax avoidance by giving investors and tax authorities conflicting information. When probed by tax authorities, Starbucks claimed it was not making profits in the UK. Conversely, the company reassured investors that the business was profitable (Bergin, 2022). It indicates corporate greed plaguing many parts of the world. This provision by the US. could be regarded as having little control over the private sector. While that is an essential characteristic of a free market economy, the provision should apply to a company that is still beginning to conquer the global market. However, the company should be required to repatriate its additional profits to the US. The provision that cushions affiliates of multinationals from mandatory reparation of additional profits back to the US for taxation should be disbanded.
Such provisions provide multinationals with the luxury to avoid taxation at will, which is part of why the United States is increasingly becoming an unequal society, with the top one percent accumulating more wealth than the rest of the population. (Lipman, 2021). For instance, Amazon generated more than 35 billion dollars in revenues and paid only six percent of the profits in mandatory income tax (Gardner, 2022). Thus, the company avoided nearly five billion dollars in corporate taxation.
Royalty Remittances
Tax avoidance via royalty payments happens because of a few reasons. First, when the multinational corporations in question deal in the tech sector, the most value in their products is found in technologies or other intangible properties. Secondly, rules of international trade allow the transfer of patents and technology from a home country that charges high tax to an affiliate company in a low-tax jurisdiction like Ireland or a non-existent company in a zero-taxation country like Bermuda (Palansky, 2019). Hence the royalties charged to other affiliate companies or the home company will be based on the low-tax or zero-tax jurisdictions. Lastly, deductions subjected to royalty payments lower tax liability for the multinationals. Tech multinationals use this technique to evade taxation, especially if they have set up operations in countries that charge high taxes. For instance, if a company based in Japan has its R&D operations in the United States, the company will remit fewer profits in the US. Most of its profits are sent to Japan since the Japanese tax rate is low compared to US tax rates.
In addition, an aggressive tax avoidance move would see the Japanese multinational corporation move its technology patents to an affiliate in a low-tax nation like Ireland. Hence the corporation makes its affiliate in Ireland the licensor, and the multinational gets taxed less. Further tax avoidance would mean transferring brands and patents to the Cayman Islands via a shell company. In response to such aggressive tax avoidance, the European Union ordered Apple to pay approximately 14 billion dollars (Dillet, 2018). Such measures allow for regulating the evading of the European taxation system.
It is appalling that, while the biggest tech companies from the US are some of the richest in the world, they aggressively avoid paying taxes at all costs. Google’s valuation alone is at least one trillion dollars. Interestingly, the company evaded tax by moving 23 billion dollars to a tax haven in Bermuda in 2017 (Pegg, 2019). Such are the tactics google uses to escape taxation through royalties. The tech industry in the United States has become so big that it can even compete with the US and Western European governments. Because the US economy is highly deregulated, tech companies have garnered much power and can twist important decision-making in their favor. The tech companies use powerful lobbyists and influential lawyers and figures who can make laws that favor them. Using royalties to evade taxes denies the appropriate amount of money to be injected back into the US economy. For a country whose public health system is heavily distressed and access to higher education funds is also problematic, the money could help bolster the country’s economy. The power amassed by tech companies is used to bypass laws that benefit citizens when they are regarded as posing threats to the finances of the tech companies (NPR Cookie Consent and Choices, 2017). Thus, taxation laws allow individuals and companies to mitigate risks by bypassing the legislature.
There is a difference between tax avoidance and tax evasion. Tax avoidance is considered legal, while tax evasion is an offense. However, the difference is blurred, and a grey area exists between the two. Using aggressive and dubious means, unexpected by the government, to gain tax advantage borders on tax evasion, which is not morally acceptable (Back, 2022). Many people benefit from schemes such as pensions, which are sheltered from taxation. Similarly, many businesses take advantage of investment scheme reliefs, which are government-approved loopholes for avoiding taxation or the amount payable. However, some schemes go beyond tax avoidance and extend to tax evasion. For example, many people in Britain are using inheritance tax planning schemes. While they are regarded to be legal, some of the schemes are deemed illegal.
If the property is passed to a person with an inheritance tax problem, the individual might choose to transfer the asset to their children or grandchildren. Hence, by transferring the ownership of the property from one beneficiary to another, more exemptions are used, and any returns accumulated on sales subject to the exemptions will result in zero capita, leading to tax avoidance (Back, 2022). Similarly, schemes such as offshore bonds mean people transfer much money to tax havens such as Switzerland and the Cayman Islands. These are legitimate schemes sanctioned by insurance companies and used by thousands of people worldwide. However, in so doing, they imitate aggressive tax avoidance, which might classify them as tax evasion, again revealing the grey area between tax avoidance and tax evasion.
Roles of Government and other Relevant Organizations in regulating Tax Evasion Multinationals
Many countries have companies and wealthy individuals avoiding their obligation to pay taxes, mainly using various tax havens such as Panama and the Cayman Islands. The first measure a government can take to reduce tax avoidance is lowering a country’s tax rates. It is worth noting that high tax rates do not necessarily translate to high tax collection. It leads to more tax avoidance. Individuals and multinational companies hide their returns due to high tax rates. Moreover, based on the Laffer curve, increased tax rates amount to lower tax collection beyond a certain point. Hence, governments need to develop an optimal tax rate that does not discourage economic activity but encourages people to file tax returns because they are not discouraged by excessive taxation from the proceeds of their businesses. When the government lowers taxation rates, tax compliance tends to increase. For example, Donald Trump lowered tax rates to increase tax compliance (How countries can reduce tax evasion, 2022). Thus, the manipulations with taxation lead to the lack of corporations’ responsibility.
Consequently, governments should hold some countries accountable by providing information about tax avoidance. Countries such as Switzerland and Luxemburg are tax havens because they allow multinational corporations to hide revenue, escaping taxation from domestic nations where they were initially founded. Thus, other countries and relevant organizations such as the WTO (world trade organization) should probe the tax haven countries and even blacklist them. As a result, multinational companies incorporated in tax havens should be denied the chance to operate in the local market. The primary intent is never to violate the sovereignty of countries like Switzerland. However, the measure would ensure multinational corporations pay taxes to their home country instead of escaping taxation with impunity (How countries can reduce tax evasion, 2022). Governments and other influential bodies such as the WTO are aware of tax havens but have chosen not to confront the situation with much vigor.
Also, governments should enforce mandatory territorial taxation. It is worth realizing that most instances of tax avoidance are related to shifting the incorporation of a company to countries with low tax rates. For example, if a company like Starbucks sells coffee in the United Kingdom, it can avoid taxation by incorporating Ireland, which has low tax rates. This unfair tax law encourages many multinationals to be incorporated in tax havens and countries with low tax rates. On the other hand, countries like Ireland are causing losses to their national treasury. Multinational corporations take advantage of the low tax rates to enrich themselves. New laws should be formulated, requiring goods and services produced in a particular country to be taxed based on the local taxation rates. The OECD’s BEPS initiative includes improving transparency via revealing the nature of transfer pricing and requiring multinational corporations to give tax officials information about profits, revenues, and the taxes that have been settled (Bitesize BEPS – OECD BEPS, 2020). The OECD, which has many members of the European Union, should employ new ways to reduce tax avoidance because several European countries act as tax havens.
Similarly, reducing the tendency of intercompany charges can reduce the vigorous nature of tax avoidance. Multinational companies in the United States use intercompany charges to evade taxation by transferring profits to their affiliates in countries with low tax rates. Intercompany charges give multinational companies the leverage to decide the appropriate value of a good or service (How Countries Can Reduce Tax Evasion, 2022). However, countries should formulate pricing laws that apply to all multinational companies.
Conclusion
In summary, multinational corporations have many positive effects on global trade, such as improving research and development in the home nation and different host countries. Such effects lead to high-quality products circulating the global supply chain due to enhanced know-how in production. On the other hand, multinational corporations are also infamous for avoiding taxation payments, hence undermining the foundation of international trade. Worse, multinational corporations are big culprits of tax avoidance and tax evasion, as described above.
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