Tax Minimization Practices in Multinational Corporations

Introduction
Most multinational corporations have been exposed to be evading tax payments in a variety of ways. This has been investigated on and verified by various governmental bodies dealing with tax. The decline in tax reception with relevance to corporate profit, has catapulted the scholarly, public and the political domain to push corporations that evade taxpaying through dubious practices (Weber et al, 2011).  The tax minimization strategies have become so aggressive to an extent that is very alarming. These strategies include transfer of pricing transactions, intra-company loans, management fee structures, and location of intangible assets (Ockenden, 2014). According to Morgan (2014) most almost a third of top Australian multinational corporations pay less than the recommended 10% tax, this
reflects a loss of about $8 billion annually. The global arena is fueling regulators to do something about this. The aim of this paper is to look into strategies used by Apple and other multinational corporations to minimize tax and evaluate whether the strategies (behavior) is justified.
Apple’s Tax Minimizing Strategies
Recent inquiry into tax practices of apple revealed that there is a discrepancy in the tax it pays correlated to the profits it makes annually. Ockenden (2014) states that a recent investigation into the company revealed that there are millions and billions of dollars shifted in profits globally by the company to reduce taxation (Ockenden, 2014).  Australian Financial Review analyzed the company’s operations and stated that out of almost $27 billion made in sales of the company’s products, only $193 million was paid to Australian Tax office as per the regulations (Morgan, 2014). This in percentage is only 0.7% of the company’s whole turnover. Ockenden (2014) further asserts that the company has been shifting profits offshore to countries where there are favorable taxation rates so as to minimize taxation (Ockenden, 2014).
The company also contracts out much of the assembly and manufacture of its products to other companies as one way of reducing taxes however, designers, employees, marketers still remain in US and UK. The other way it does this is through its long term assets (Ockenden, 2014). Almost 70% of its retail stores and 40% of its sales are located in US alone. The company’s accountants locate the profits made overseas, the so called tax havens where tax rates are favorably low (Ockenden, 2014). The practice is allowable by the current tax laws and is not at all a breach of the regulations in place (Ockenden, 2014).
Google’s Tax Minimizing Strategies
This is also one of the largest multinational corporations with global coverage.  According to Drucker (2010) the company recorded a reduction in tax by about $3.2 billion using a technique that is similar to that of Apple Company. For this company most of the profits are shifted to Bermuda through Ireland, and Netherlands. The income shifting approach is known in law jargon as Double Irish and Dutch Sandwich. These two strategies have encapsulated the company making it to reduce tax rates in offshore countries by at least 2.4% (Drucker, 2010). This percentage is very little compared to the top five multinationals in the US considering market capitalization.
 The company does transfer pricing where the paper transactions among corporate subsidiaries enable the company to allocate income tax to low tax havens while pointing the expenses to the higher taxation countries (Drucker, 2010). To expound on the double Irish method of tax minimization, it is a strategy where companies are allowed to shift activities and all income to low tax rate countries. Drucker (2010) further states that the practice facilitates the strategies of the organizations that are to reduce taxation as well as all costs in all legal means. This practice is beneficial to the company that practices it in that the profits are well shared all over the world (Drucker, 2010). It also ensures that the company participates in international taxation. The sum total of the effect of this strategy is boosted earnings. The practice of passing its profits through Netherlands gave rise to the Dutch Sandwich (Drucker, 2010). The favorable tax regulations in Ireland are meant to lure multinational corporations.
Is the Strategy Justifiable?
The practice of transfer pricing is very rampant in most multinational corporations. In the face of tax regulations the practice is allowed. However, researchers have pointed out that there are differences in the regulations in different countries (Weber et al, 2011). While it is a move by some countries to attract multinational companies, some countries view it as a threat to competition principles. This is because the domestic companies are compromised on behalf of the multinationals (Weber et al, 2011). The practice is justifiable except in situations where the corporation in question plans to transfer its main profits to its affiliate branches so as to leverage on low taxation than the one in the origin country. In this circumstance, the practice is rendered as a financial fraud and may call for legal consequences.
Conclusion
Tax minimization practice is not a new concept in the domain of corporations. In fact most companies legally do this so as to reduce the taxation and maximize profits. Such corporations include Google and Apple whose strategies have been laid open in this paper. The strategy of transfer pricing has various names including the aforementioned jargons; Dutch Sandwich and Double Irish method. The practice is allowed by tax regulations. However, as mentioned above there are situations when overdoing the transfer pricing could be considered a tax regulation breach amounting to fiscal fraud that is punishable by law. It should be understood at this point that there are other methods used in tax minimization. The scope of this paper being based on two corporations critically sticks to the method that yields the corporations much gain in terms of tax minimization.


References
Drucker, J. (2010, October 21). Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes - Bloomberg Business. Retrieved from http://www.Drucker.com/news/articles/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes
Morgan, E. (2014, September 29). One third of top Australian companies pay less than 10pc tax; Government missing out on at least $8b per year - ABC News (Australian Broadcasting Corporation). Retrieved from http://www.abc.net.au/news/2014-09-29/a-third-of-top-australian-companies-pay-less-than-10pc-tax/5775870
Ockenden, W. (2014, March 6). Apple pays $193m tax in Australia on $27b revenue as Federal Government vows to capture lost taxes - ABC News (Australian Broadcasting Corporation). Retrieved from http://www.abc.net.au/news/2014-03-06/tax-expert-explains-how-apple-pays-193m-tax-on-27b-revenue/5303426
Weber, D. M., Weeghel, & S. (2011). The 2010 OECD updates: Model tax convention & transfer pricing guidelines : a critical review. Alphen aan den Rijn: Kluwer Law International.