4. Corporate Tax and transfer pricing

As a business management student, I believe that many businesses emphasise that expense is the most important factor they will consider with, such as spending more time and focus on how to reduce cost in all areas of their business, because all industries are very competitive and all businesses try to cut costs to get a competitive advantage in order to survive and maintain their position in the market. From last decade, many companies are seeking a strategic way to minimise their taxation, and there are many multinational enterprises that strategically avoid taxation legally, this will be explained further in later sections.

Few days ago, I attended a finance lecture and heard about a case study, a company based UK called Shire, the company wanted to pay less tax and used a method to minimise tax strategically, the company would usually need to pay corporation tax in UK of 28%, and Shire knew that the tax in Ireland is less than UK by 15.5%, the tax in Ireland is 12.5%. Therefore, Shire management team decided to allocate an office in Ireland and gather their monthly board meetings in Ireland. Through this action, Shire show that they have followed through legally and have also helped the company save lots of expenses. From this case, it reminds me that many foreign enterprises register offices in Hong Kong, it is because they know Hong Kong corporate tax rate is lower than their home countries, and thus they are using this method to minimise their tax expenses.

There is also a common method to minimise tax expense through transfer pricing. Take, for example, a enterprise based in Europe and manufactures products in Asia (e.g. Malaysia) and ships the products back to Europe to sell. Through using transfer pricing the enterprise can gain more profit as Asian countries has lower taxation, compare to European countries. The enterprise could make use of higher transfer prices, from Asian manufacture to Europe retailer division. As a result, Europe division will report high cost and low profit and Asian manufacture division will report higher profit, and thus the company could minimise their tax expense and generate more profit. However, as transfer pricing is very common, and now many countries now set a law to control transfer pricing, such as China's tax authorities are now focusing inspection and execution  of rules to prevent companies who are using transfer pricing to avoid tax liabilities, a news reported that China retrieved $398milion tax after investigations of using transfer pricing on 178 companies.

Moreover, a famous company Apple inc. is one of a company that keeps their taxes expense low by stashing cash offshore. The strategy that Apple used is to set up subsidiaries and subsidiaries of subsidiaries in countries with low corporate taxes and transfer funds between them in order to minimise its liabilities. As a result,  this makes Apple that pay less tax compare to  35 % rate in U.S.

Also, Google CEO announced that they are proud of avoiding tax, saving 1.5 billion euro by transferring 7.6 billion euro in revenues to a Bermudian tax-haven.  This makes me very struggle with a question. Do a company need to think of their ethical behaviour? Or just play a rule of the game, and maximise shareholder wealth  and company profit?