Globalization has allowed corporations to reap the benefits of higher profits and shareholder wealth by operating in multiple countries at the same time. Naturally that comes with more taxes, the thing that we all despise but it is essential for the governments to function. Unsurprisingly, corporations have their own methods to lower, hide, and/or avoid paying taxes. This is mostly done through tax avoidance, a legal way to gain the most profit and pay the least amount of taxes. Corporations pay top dollar for accountants and lawyers to find loop holes, get creative with law, and exploit the tax avoidance methods that they love so much. Globalization has amplified and increased the amount of ways that multinational corporations practice tax avoidance primarily through the use of tax havens and transfer pricing.

A tax haven is simply a country where certain taxes are at lower rates or nonexistent than other countries. The taxes themselves as well as their secretive nature is what attracts corporations to operate in those countries. Tax havens are part of off shoring where companies move part of their operations to the tax havens while continuing to profit in the “home” country. This process alone costs governments at least $255 billion per year in lost taxes according to Tax Justice Network. The Cayman Islands always come to mind whenever tax havens are discussed as well as other locales such as Switzerland, Bermuda, and even Delaware.

Transfer pricing is the process of setting up accounts where the transaction of the multinational company is charged. The accounts themselves are offshore that handle the price of the transactions between the main company and its subsidiary for example. These accounts are set up in the tax havens mentioned earlier, allowing for even lower tax rates. The pricing policy that the company uses directly affects the amount of taxes the company will pay to the countries they operate in. This allows intra-company trade to increase dramatically instead of trading with outside companies or countries. This process causes countries to lose essential tax revenue, regardless of wealth status (Shah, globalissues.org).

Multinational corporations are not the only ones that partake in tax avoidance, in fact countries encourage it by participating in tax competition. Tax competition is when countries compete with one another by offering the lowest or nonexistent amount of taxes possible. They do this to attract the corporations to invest and operate in their country as opposed to anywhere else. The reality of globalization and the fear that companies will go elsewhere if not incentivized made them participate in tax competition in the first place. While this process sounds good for the “winning” country in the short run, it does not pay back in taxes in the long run. At the same time the “losing” countries are not getting business so they have to continue to negotiate with even lower taxes. In the end, it is a lose-lose situation for both sides because they are sacrificing essential tax revenue to a multinational corporation with no loyalty to any country. Every country that partakes in this will end up in one direction: down.

Ilan Strauss of Wits University suggests a unitary taxation system to crackdown on the tax avoidance methods. Instead of being taxed with different regulations in separate countries, they would be taxed as one whole entity. The total profit of a company would be determined by combining all of their global divisions. Of that profit, the taxes will be distributed to the countries that the company does business in based on a negotiated tax formulae. This is a more universal way of taxation, and since globalization is here to stay it should be put into place.

To summarize, Globalization did allow corporations to increase profits, but at the same time use new methods of tax avoidance. A universal tax system should exist with globalization to hinder tax avoidance and bring in tax revenue. Corporations have become people via the Citizens United v FEC Supreme Court case. However, unlike people they have the ability to be everywhere to sell, and nowhere to report their profits at the same time according to Joseph Stiglitz of CCPA Monitor. They are loyal to no country, if they find a tax haven or a more clever method of tax avoidance in another country they will use it. Their number one goal is to maximize profits for themselves and their investors. They could care less if people are left unemployed or if governments don’t collect the taxes that the corporations should be paying.