Rich MNCs May Evade, But Tax is too Important for the Common Man

Tax is too important to leave it just to the taxman and the accountant.

Arun is running a moderately successful retail business, and one of his biggest competitor is a multinational company (MNC), let’s call it XYZ. However, he is perplexed at how MNC XYZ can offer goods at a much cheaper price than him. He is told that its because of XYZ’s business of scale, its advanced inventory management, etc. He is made to believe that XYZ wins because of its better management capabilities and deeper pockets. It is a lost war.

But the real story lies elsewhere.

When Arun earns a profit of Rs 100 in India, he pays an Income Tax of Rs 35. Thus, leaving him with Rs 65. XYZ on the other hand pays a tax of Rs 1.20 (on its global income) for every Rs 100 it earns. It, thus, has Rs 98.80 vis-a-vis Arun’s Rs 65 left in its pocket. Surely, XYZ can afford to sell things at a cheaper price. This is not to say other factors do not play a part in XYZ’s success, but certainly one of the biggest factors is Tax.

It is not XYZ alone. An article published in investopedia listed 18 MNCs that paid ZERO income tax between 2008-2015. The likes include companies like Pepsico, General Electricals, etc.

Apple, Google and UBER have also been accused of paying taxes at ultra low rates. The conclusion is in-escapable. If you are rich enough to employ an army of accountants and have companies incorporated in far flung exotic islands, you can avoid taxes with ease. But if you are not ultra rich, you bear the brunt of taxes.

How an MNC Avoids Tax Bill

To understand how MNCs avoid the tax bill, let us start with the very basics.

Tax is charged on profits, and profit is the ‘turnover’, less cost and expenses. So, if you can somehow increase your expenses (even if the expenses you book is “stage managed”), you decrease your tax bill. If you are an Indian businessman, you may try booking a “bogus bill”.

Pay to your friend for goods or services (or pay a shell company, i.e., a company with no real business) that you never intend to receive. You pay him through banking channels only so that they can return the money back to you later, in cash or some other form.

Problem will be the taxman would sooner or later detect it. It would audit for the fraudulent goods or services.

Since the shell companies are in India, they will get caught and your ruse will be exposed. All kinds of penalties and prosecutions will follow. To top it all, the shell company, which had given you the bogus bill, will also have to pay tax on it’s turnover.

But suppose you can afford your bogus service provider to be in Bermuda, which has zero corporate tax rates. You can now book expenses against something hard to value (say an intellectual property right ,or brand value). Voila, your profit is decreased. You have avoided paying your taxes in India. Since Bermuda has zero corporate taxes, even the shell company in Bermuda pays no taxes. Better still, the Indian IRS’s arms cannot easily reach the shores of Bermudan, and thus, it finds it hard to expose your ruse.

You can make your own shell company to book the expense. If the tax authorities insist that since the Bermudian company is your company, and hence, you have to pay taxes on it’s income, then you can simply obscure its ownership by making another shell company that is the owner of the shell company that holds the shell company giving you the expensive services. The charade can be made as complex as you need.

If you need to hide some of your ill-gotten wealth (or wealth you don’t want your spouse to know about), you can just shift it to these companies and they hold it in a bank account opened in the name of the company.

Since it’s you who ultimately owns the company, you are in full control of your wealth. If you want to bring it back, you may bring it as an FDI or a loan that the shell company gives to your Indian company. You may fund your favourite political party (and persuade them to turn the policies in your favour) or any group that catches your fancy. In fact, do whatever you want and no body would actually know who is doing all that’s being done.

Why Tax Is Important

But you can do this only if you are rich. Rich enough to own companies in Bermuda (or some other tax heaven), to pay the lawyers to get the job done. It is not for the ordinary man. No wonder the American business woman Leona Mindy Roberts had quipped, “We don't pay taxes; only the little people pay taxes”, as told to the TIME.

The Panama papers, Paradise papers, ICIJ leaks, FINCEN, all bring out the stories of how MNCs and rich individuals have used shell companies in tax heavens to bring down their tax bills or stash away their wealth in obscure accounts. The number are mind boggling.

The tax Justice network puts the value of wealth in tax heavens to be in the range of $24 to $36 trillion (India’s total GDP is less than 3 trillion).

And it all started with tax evasion. Tax is, thus, too important to leave it just to the taxman and the accountant. Tax can impact your business, the politics of the country, the laws, democracy, basically anything that makes human life civilised and beautiful.

(Rajarshi Dasgupta, IRS, is Deputy Commissioner of Income Tax. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)