Multinational Corporations Eyeing Tax Revenue Shortfall Due to COVID-19... The Challenging Path to Tax Imposition

[Image source=AP Yonhap News]

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As major governments face revenue shortfalls due to large-scale economic stimulus measures in response to the novel coronavirus disease (COVID-19), attention is turning to multinational corporations that have long been embroiled in tax avoidance controversies. In the midst of economic difficulties caused by successive lockdowns, multinational corporations are increasingly seen as the last bastion for securing tax revenues. However, with strong resistance from these corporations, especially in the United States where many multinationals are concentrated, countries are facing deep dilemmas.

◆ Controversy Over Multinational Corporations Avoiding Taxes = Recently, the General Court of the European Union (EU) delivered a corporate tax ruling on multinational corporation Apple, which is seen as a challenge for governments. According to Bloomberg and other sources on the 15th (local time), the EU General Court ruled to annul the EU's decision ordering Apple to pay 13 billion euros (approximately 15.6 trillion KRW) in back taxes. In 2016, the European Commission ordered the Irish tax authorities to collect 14.3 billion euros, including back taxes and interest, stating that the tax benefits Apple received in Ireland violated EU state aid rules. However, Ireland, which uses low corporate tax rates as a means to attract businesses, opposed the EU's order and appealed against the European Commission. The EU General Court explained that the decision to collect taxes imposed by the European Commission on the Irish government lacked clear grounds, thus annulling the ruling.

This ruling in favor of Apple is widely regarded as a symbolic case illustrating the challenges countries face in taxing multinational corporations. When corporate tax rates are high, businesses can easily relocate to countries with lower rates. This means that taxation by governments has become more burdensome. One foreign media outlet described it as a "monumental ruling."

According to the Organisation for Economic Co-operation and Development (OECD), cases where the location of economic activity differs from the location where profits are earned have become more prominent recently. In a recent report examining multinational corporations' tax payments in 2016, the OECD stated, "The regions where profits and actual economic activities occur were different," and "The profit scale relative to employees and tangible assets reported in investment hubs was relatively higher compared to other regions." This is interpreted as multinational corporations exploiting the characteristics of investment hubs that apply low tax rates to attract businesses.

As a result, the likelihood of companies shifting profits to other countries through loopholes has increased. Last year, the EU General Court annulled the European Commission's decision to collect additional taxes from Starbucks, ruling that the economic benefits provided by the Dutch government were illegal. At that time, Starbucks in the Netherlands shifted profits by paying royalties to its UK subsidiary, and the Dutch authorities recognized this as legal.

◆ Governments in Need of Funds Eye Multinational Corporations = The reason countries are targeting multinational corporations for taxation is related to the astronomical funds being injected for economic stimulus following the COVID-19 crisis. Facing an expected economic downturn, some governments struggling with expanding fiscal deficits and declining tax revenues have targeted multinational corporations to secure resources. The capacity to raise corporate tax rates is also cited as a reason. According to the OECD, corporate tax accounts for about 15% of total tax revenues among member countries (as of 2017), and the statutory corporate tax rate in these countries fell from 32.2% in 2000 to 23.2% in 2020. Economists at the International Monetary Fund (IMF) estimate that the global scale of corporate tax avoidance reaches $650 billion annually.

The challenge is that the size of fixed business establishments is gradually decreasing due to digitalization and other factors. Companies can now generate significant profits in countries without physical offline bases such as offices. The controversy over digital taxes is a representative example. Particularly, resistance from the United States, where many multinational headquarters are located, as well as from Ireland and Luxembourg, which have actively attracted multinationals with low tax rates, poses obstacles.

Tove Maria Ryding of the European Network on Debt and Development emphasized the need to establish a system for multinational corporations, stating, "If there is an appropriate corporate tax system, there would be no need for prolonged legal disputes over multinational corporations paying less than 1% in taxes."

This content was produced with the assistance of AI translation services.