Many multinational Companies is used various schemes to shift profit from high-tax country to low-tax country. Bermuda is the prime Example of lower tax Jurisdiction, where corporate income tax is equal is 0%.

In a survey, it was found that around US$420 Billion in Corporate profit is shifted by Multinational companies to 79 country every year, which is equates to approx US$125 Billion in loss of revenue of tax in these countries.

Channel of Profit shifting to lower tax countries.

There are generally three main channels i.e register a Intangible assets such as trademark/patents/ copyright in tax heaven, Debt shifting and Transfer pricing to shifting profit to lower tax countries.

Lets take any example how these Channel work? And how companies uses to avoid paying hefty amount tax on income.

There is a multinational companies Composed of two companies, one is established in Higher tax Country such as Austraila where rate of corporate tax is 30% on income (ABC limited) and another one is located in Bermuda, where rate of Corporate tax is 0% on income ( XYZ Limited). Both Companies should tax on Income in respective Countries.

1) Register an Intangible Assets

In this case, ABC Limited Register an Intangible asset in XYZ Limited which is located in Bermuda and then ABC limited pay royalties to XYZ Limited to use these Intangible assets. Paying of royalties will result in Decrease in profit.

2) Debt Shifting

Debt shifting is another way, which is used by multinational entities to shifting a profit. For Example, ABC Limited (Australia) borrows loan (whether is no need for taking the loan) from XYZ Limited (Bermuda). And the amount of loan which has taken by ABC Limited, on which they need interest. Now, when the interest is paid by ABC Limited to XYZ Limited, which will result in decrease in profit of ABC Limited whatever they have reported in Australia. On the other hand, will see growth in profit of XYZ Limited.

3) Transfer pricing

Transfer is the third Channel that can be used by multinational Companies, When there is trade between two associated enterprise. to Set a price which is known as arms length Price, which means price should be same between two associated Enterprises as they would be if two non-associated entities traded with each other for same services / Goods.

Suppose, ABC Limited Manufacture Jeans for cost of US$80 and willing to sell pair of Jeans to Unrelated party (Company PQR) a US$20. Now ABC Limited have to pay tax at US$20 in Australia which will come around US$6.

But there is another way to lower tax on same profit, Now in this case, ABC Limited will make to sell to his subsidiary XYZ limited ( Bermuda ) at US$81, and report profit in Australia US$1, amount tax will be make approx US$.03 ( at 30% Tax Rate ). On the Other hand XYZ Limited sale Jeans to Unrelated party (Company PQR ) at US $100, and earn profit US$20 without paying taxes.

Using this scheme ABC Limited saved $5.6% of tax on every pair of Jeans.


Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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Qualification: Student - CA/CS/CMA
Company: Taxlegit
Location: GAUTAM BUDDHA NAGAR, Uttar Pradesh, India
Member Since: 30 Apr 2021 | Total Posts: 1

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October 2021