To End Multinational Tax Dodging, Global Coordination Is Key

When a country cracks down on corporate taxes, domestic companies pay more, but multinationals pay less

Based on the research of Lisa De Simone

For decades, multinational corporations (MNCs) have avoided taxes by shifting profits into tax havens: countries like the Cayman Islands and Bermuda, with no corporate tax, or Ireland, with a rate of 12.5%. By comparison, the corporate tax rate is currently 21% in the U.S.

While stockholders benefit from tax dodging, other people don’t, especially in times of spiraling deficits. That’s why individual countries often step up tax enforcement on businesses — both domestic and multinational.

How well such crackdowns work has not been clear, particularly regarding MNCs. In a new study, Lisa De Simone, accounting professor at Texas McCombs, renders a split decision: Sterner enforcement reduces tax avoidance at domestic businesses but not at multinational ones.

In fact, MNCs end up funneling more profits overseas. The effect is even stronger for those that have a higher proportion of subsidiaries in low-tax countries.

“You clamp down on them in the home country, and they just go find other countries to avoid taxes in,” De Simone says.

Along with Bridget Stomberg of Indiana University and Brian Williams of Texas A&M University, De Simone analyzed 2005–2019 data from the Organization for Economic Co-operation and Development (OECD) on tax administration spending by 50 countries. They compared those figures with taxes paid by companies over the same period.

They found a strong differential between domestic businesses — ones with headquarters and affiliates all in the same country — and those with multiple operations abroad. In the U.S., for example, for a 13% increase in the tax enforcement budget at the Internal Revenue Service:

• U.S. domestic corporations paid 1.7% more in taxes than U.S. multinationals, adding up to $1.8 billion more per year.
• Multinationals paid 2% less in taxes in foreign countries, helping them offset any costs of increased U.S. tax enforcement.
• Globally, MNCs avoided 2.7% more in taxes than domestic companies.

The findings have implications for policymakers, De Simone says. Single-country efforts to strengthen tax enforcement may have unintended consequences, disadvantaging both domestic corporations and other countries that aren’t tax havens.

“What we need is a more coordinated effort, for countries to say we’ll work together to stop these companies from taking advantage of differences in tax laws and jurisdictions,” she says.

She points to the recently proposed Global Minimum Tax. Since 2021, more than 140 countries have signed the OECD-led agreement that imposes a minimum effective tax rate globally on corporate profits.

The agreement would require companies that earn at least $812 million a year to pay at least 15% in the countries in which they operate. The OECD estimates that if all signatories enact the agreement, it will reduce tax avoidance 80% worldwide.

“In the U.S., some people think this is an overreach of authority, but it’s the solution that makes the most sense,” says De Simone. “Coordinating is the only way governments can win.”

“Does Tax Enforcement Disparately Affect Domestic Versus Multinational Corporations Around the World?” is published in Contemporary Accounting Research.

Story by Deborah Lynn Blumberg