Question

1. Explain the problems related to each of the following incentive packages that may affect operations of a MNC
   1. Double taxation
   2. Realization event - Deferral of income repatriation
   3. Depreciation allowances
   4. Special tax credit for investment

Answer 1

( a ). Double taxation is an imposition of tax on same source of income of the MNCs in two different nations. In other words when the MNCs are forced to pay taxes on revenue earned in the home country ( where headquarter is located ), as well as in the country where income has been earned due to the operation of the business.

Most of the MNCs see their profit income reduce drastically due to prevalence of such tax regime. Many of the MNCs have been forced to exit the business due to considerable stress on the balance sheet.

Therefore, governments across the world have come up with double taxation relief measures in the form of bilateral investment treaties to provide relief to the MNCs.

However, many of the MNCs have used such relief measures for avoiding taxation in the country where the actual business takes place such as through BEPS ( Base Erosion and Profit Shifting ).

( b ) Realization event is the time of actual realization of the MNCs investment. Many times the countries where businesses are operating may make it mandatory for the firms to keep their income in the domestic economy ( the country where business was performing ) earned in the country for significant duration of time.

Such an economic policy is generally aimed to incentivize companies to remain invested for longer duration of time, thereby leading to stable economic condition.

( c ) Every year most of the companies see their assets depreciate. Firms are allowed to write off the depreciated value of the assets in a new account called depreciation account. After certain duration of time accumulated amount of money in the depreciation account can be used to purchase new machineries or assets.

Money accumulated in depreciation account is not taxed which helps the companies save more income consequently leading to relatively higher profits.

However, many times MNCs may misuse the provisions of depreciation allowance to report incorrect depreciation amount to save taxes, which is against the legal provisions in the country.

( d ) Special tax credit for investment:- Many times developing countries as well as developed countries devise policies such as tax credit for investment, tax holidays for new direct investment favoring higher investment in the country which helps in creation of more economic assets and higher employment.

However, MNCs have been using loopholes in such policies to gain extra favor from the local goverments. Governments across the countries must weigh all the options and the consequences before adopting such economic policies.