Multinational pay less tax than domestic firms - experts

FLORENCE MUGARULA

Prof Honest Ngowi

MULTINATIONAL companies have lower effective tax rate than domestic companies in developing countries.

The economists, through a book ‘Lifting the Veil Secrecy’, have attributed the trend which is also experienced in the country, to the use of trade mispricing as the primary method to achieve a lower tax rate.

The book launched recently by international economists—including Prof Honest Ngowi—showed multinational companies have been evading paying tax through various strategies including trade mispricing.

It has been revealed that a large amount of global trade is not taking place in competitive market because much of the world trade takes place between closely affiliated companies. It is in record that in 2011, trade within multinational companies, and between companies in the same value chain, amounted to 49 per cent of the global border crossing trade in goods and services.

One of the authors, Prof Odd- Helge Fjeldstad said recently that most big companies have been evading from paying actual tax and that African countries need to work hard to address the problem.

“There are evidences that many big companies are tax evaders, only ordinary people pay tax as required, this means there is need for African governments to address this problem,” he said.

Moreover, from the book, it has been revealed that another common method of profit shifting is through ‘thin capitalisation’ on which rather than financing an investment in high-tax country through equity, the investment is financed through debt to a subsidiary in a low tax country.

“By transferring interest payments, often at high rates, from the high tax country to the low tax country, profits shift and tax owed in the high tax country is reduced,” reads part of the book.

The economists state in the book that combating profit shifting has been difficult for low income countries. Prof Fjeldstad said the fight against the tax evasion and capital flight from Africa to tax havens needs vibrant media, civil societies and international community to raise alarm.

He said in some countries including South Africa, religious leaders have joined the battle to fight tax evasion, capital flight and profit-shift by big companies.