Tax avoidance isn't black and white

How do multinationals avoid taxes? 

‘There are two strategies multinationals often use: they make use of transfer pricing or debt shifting. Multinationals exploit transfer pricing when they charge too low or too high prices for international transactions within the company. Profits are thus transferred to the country with the lowest tax rate. Debt shifting happens when an establishment in a high-tax country lends to an establishment in a low-tax country. The interest on this loan can be deducted in the country with the high tax rate.’

Shouldn't these forms of tax avoidance be fiercely opposed? 

‘When I began my research in tax evasion in 2007, my first intuition was that shifting profits within an international company is harmful and must be fought against at all times. But over time I learned from my colleagues and from my own research that the story is more nuanced. And that, when it comes to tax avoidance, there are many shades of grey. Some forms of tax avoidance are perfectly defensible, if they are properly carried out.’

When is tax avoidance defensible?

‘High taxes can lead to lower investments. The more mobile a company is, the greater the risk. For example, Philips can easily relocate an office or factory if a country introduces a tax increase. This can be seen as an argument in favour of making multinationals pay lower taxes than SMEs. However, legislation, both at national and European level, prohibits that distinction. Allowing profit shifting is an efficient way to discriminate against multinationals in a positive way. If you're not an economist, I can imagine that taxing small businesses more heavily sounds unfair. But from a government perspective, it is efficient and logical to tax companies that are more mobile less.’

What do you think needs to change in the current tax system for multinationals? 

‘We need to be even stricter on shifting profits. This can be done in several ways: increase the cost of international transactions within multinational companies, limit the amount that can be shifted and impose a minimum tax rate on tax havens. Progress has already been made in recent years: in 2015, the Organisation for Economic Cooperation and Development (OECD) adopted a package of measures to tax multinationals more fairly. Since then, they have been forced to be more transparent about their earnings and how much tax on profits is paid in each country. The measures do not go far enough, but they do prove to me that there are enough possibilities to tax multinationals more fairly.’

Some economists argue that we should strive for an internationally uniform tax system. Do you believe that's a good idea?

‘I'm not convinced of this risky solution. Harmonising tax rules takes away countries' freedom to respond to specific economic shocks. We also saw this with the introduction of the euro. My feeling tells me that harmonising tax rules will have similar effects. For example, a country will then no longer be able to offer additional investment incentives by adapting tax rules. Moreover, it is still very unclear what the agreement would look like. So far, countries have not yet managed to figure this out.’

Why is it so difficult to tackle tax avoidance?

‘There are many smart tax advisers and all tax laws are vulnerable to differences in interpretation and loopholes. There has been a race between the consultancy industry and the Tax and Customs Administration in discovering the loopholes and closing them. In my opinion, it is not necessary to close all loopholes, because some of them can be beneficial for the investment climate in a country. I see accepting that as a rational choice. It comes at a price, but so does any other solution.’