Business law defines the corporation as a legal “person” with a social conscience just like a human being. In that context the multinational corporation is the quintessential “Jekyll and Hyde” with a public face and a private face symptomatic with split personality syndrome. These faces change opportunistically to suit the agenda at hand.
Publicly the good corporate citizen is humane and philanthropic fulfilling corporate social responsibility (CSR) with magnanimous contributions to charity, social welfare, and culture. CSR initiatives are embellished with hype, ostentatious trappings, and “window dressing” that promote image and reputation, all distractions to mask the true nature of the “beast”.
Privately a metamorphosis occurs and the multinational gets down to clandestine operations that suck away the economic lifeblood of the country.
This is accomplished through profit repatriation involving collusion among unscrupulous multinationals, subsidiaries, and branches to defraud governments millions by exploiting tax exchange control regulations and loopholes in tax laws.
Grenada has been hemorrhaging this massive tax revenue leakage for decades. So high accolades to Trade Minister Joseph and the Mitchell administration for moving quickly to crack down on this unethical behaviour.
Grenada attracts foreign direct investment (FDI) to stimulate growth and economic development, so there are no restrictions on profit repatriation as it would be a disincentive to foreign investments. Besides, corporations are in business to maximise shareholders “bottom line” and repatriation of dividends, capital gains, and asset transfer to homelands are allowed – providing all local tax liabilities and other financial obligations are met. And this is where profit repatriation becomes problematic.
Businesses practice tax evasion and tax avoidance to change their tax liability status. Tax evasion is a felony penalised in most countries with stiff fines and incarcerations. This crime is perpetuated in diverse ways: failure to file tax returns, submitting false declarations, fraudulent misrepresentation of material facts, and under-invoicing documents. Until 2011 tax evasion was punishable by death in the People’s Republic of China.
Tax avoidance, however, is the right of individuals and businesses to reduce their tax liability by any legitimate means available. These include “tax holidays”, claims to tax exemptions, making tax-deductible contributions to social welfare and charity, and relocating business to “tax havens”.
In recent times, however, these tax mitigation instruments have been badly abused. In between avoidance and evasion are “grey areas” and loopholes that are mercilessly exploited to avoid paying any tax whatsoever. In order to repatriate profits, leaving little for local taxation, multinational tax dodgers have “upped the ante” to a new level of sophistry called “transfer pricing”, the secret weapon used to drain the Grenada economy.
But corporate tax dodging schemes come in many guises – not just transfer pricing. The following variants are all tax dodging tricks of profit repatriation:
(i) charging subsidiaries and branches huge amounts of royalties, way above market value, for using their name, trademarks, and patents;
(ii) financing the capital investment of their foreign companies and charging them exorbitant interest rates on loan advances
(iii) setting up reinvoicing intermediaries to convert non-repatriable profits to repatriable profits
(iv) doing countertrade bartering with subsidiaries and branches by supplying them high value goods in exchange for cheap ones.
Transfer pricing, actually a misnomer for “transfer mispricing”, is an eclectic device that draws on other strategies to achieve the same ends. Transfer pricing per se is legal but abusive transfer mispricing is illegal.
The Washington-based Global Financial Integrity (GFI) institution estimates global governments lose several billion dollars annually from transfer mispricing violations. Grenada’s loss is an estimated $500 million in the last decade alone.
Transfer pricing happens in two important ways.
(i) Modern multinationals do regular business with their own subsidiaries and branches and manipulate prices to repatriate profits. It is estimated that over 60% global trade takes place between parent corporations and their foreign companies.
(ii) To avoid taxes multinationals only declare their full annual profit in low-tax jurisdictions or zero-rated tax havens paying little or nothing.
Theoretically, Grenada’s 30% corporate tax rate is high, therefore local subsidiaries and branches are instructed to transfer their profits to low-tax countries, and little profit remains for government to tax. Hence, Grenada, where all the profit is made, gets almost nothing.
Grenada “bends over backwards” to accommodate multinationals. Under Fiscal Incentive regimes companies enjoy decades of concessions, examples, 25 years for Sandals La Source and GRENLEC 79 years with 100% duty-free concessions.
Only minimum capital requirement less than $10 million is needed for start-ups. And relative to returns on investment (ROI) corporate social responsibility contribution is “chicken feed”.
Considering these generous conditions corporate tax dodging is callous and unconscionable. Multinationals owe a higher moral duty to countries they profit from, much higher than the pittance they contribute for corporate social responsibility. They also have a “corporate ECONOMIC responsibility” – not just with full tax compliance but also with profit reinvestment in countries’ economic development.