What Is Tax Avoidance vs. Tax Evasion?
Tax avoidance refers to the use of various strategies to minimize a company’s or an individual’s tax responsibilities by exploiting legal loopholes. While tax avoidance is within the bounds of the law, it can sometimes appear deceptive. On the other hand, tax evasion occurs when a company or an individual tries to reduce their tax liability through illegal methods, such as hiding income.
In recent years, efforts have been made to curb the most egregious forms of tax avoidance. However, individual countries and international organizations continue to work on finding fair ways to tax multinational companies, especially those operating in the digital realm. One example of such efforts is the implementation of a Google tax, which targets companies that divert their profits from high-tax countries to low-tax or tax-free jurisdictions.
As the global landscape evolves, it is important for countries to collaborate and establish effective measures to ensure that companies and individuals pay their fair share of taxes. This includes addressing tax avoidance practices and creating a level playing field for all participants in the global economy.
The Organization for Economic Co-Operation and Development (OECD) has recently released an international tax framework that, if approved, would result in a redistribution of taxing rights to market jurisdictions. This would have significant implications for how American tech giants are taxed. The framework, known as the Multilateral Convention (MLC), is part of the OECD’s ongoing efforts to address tax challenges in the digital economy. It aims to coordinate taxation across the global digital economy and would impact multinational businesses, granting taxing rights to the countries where these companies operate, regardless of their base location. The OECD estimates that this reallocation of taxing rights, particularly under Pillar One, could lead to annual global tax revenue gains ranging from $17 billion to $32 billion, with a greater impact on low and middle-income countries. Additionally, if ratified, the treaty would require countries to repeal existing digital services tax policies and discourage the introduction of new ones. Investment hubs, defined by the OECD as jurisdictions with a high inward foreign direct investment position, would be particularly affected by this treaty, potentially resulting in losses in corporate income tax revenue. This reform in the digital tax system could have implications for major American companies such as Amazon, Meta, Apple, and Google parent Alphabet, according to the International.
