Multinational corporations typically operate overseas through foreign subsidiaries that are mostly taxed as independent corporate entities.

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Need help with this. Multinational corporations typically operate overseas through foreign subsidiaries that are mostly taxed as independent corporate entities. How does this separate entity system give multinationals incentives to shift reported profits to their affiliates in low-tax jurisdictions by underpricing sales to them and overpricing purchases from them?For tax reporting purposes, most governments require firms to use an "arm's length" standard, setting prices for transactions within the corporate group ("transfer prices") equal to the prices that would prevail if the transactions were between independent entities. Yet ample room remains for firms to manipulate transfer prices, especially for intangible assets such as patents that are unique to the firm and for which there is no easily established market price. How may this thorny paradigm be addressed?Leading multinationals often shift the ownership of their intangibles, which generate a large share of their worldwide profits, to affiliates in very low tax jurisdictions, such as Ireland and Singapore. Typically, multinationals generate very little real economic activity—as measured by output, sales, or investments in plant and equipment—in these jurisdictions. What model may be implemented to prevent this maneuver?Multinationals can reduce their taxable income further through debt-equity swaps that strip profits from higher-tax countries where production facilities are located. US laws make it easier for US firms to strip profits from high-tax foreign countries than from the United States, which creates an incentive for firms to locate production facilities overseas. What action may be employed to end this practice?

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Multinational corporations typically operate overseas through foreign subsidiaries that are mostly taxed as independent corporate entities.

  • Written in: 17-Oct-2019
  • Paper ID: 360214
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Oct 17, 2019

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