A Model of Aggressive Tax Optimization with the Use of Royalties

Abstract

Aim/purpose - Today, international capital flows play a leading role in shaping global economic relations and directly impact the budgets of many states. What is of major importance in this process are the differences and legal loopholes in tax systems of individual states, which allow profits to be taxed at the minimum percentage rate. Tax avoidance is particularly popular among corporations operating in global markets, which use various mechanisms for this purpose. The main aim of this article is to present a model of aggressive tax optimization based on the flow of royalties in supranational groups. Design/methodology/approach - The description of the model was preceded by a detailed analysis of transactions concluded between companies in connection with the current tax regulations effective in particular countries. The key tool was an analysis of case studies of tax optimization mechanisms used by the largest multinational corporations, mainly Google, Apple, Facebook and Microsoft. The main source of data consisted in the reports of OECD on this topic, the annual 10-K financial statements filed with the SEC by Google Inc. (Alphabet Inc.) and detailed legal regulations on taxing international transactions. Findings - The popular mechanisms of tax avoidance include the skillful use of transfer pricing, fees for intangible services, royalty transfers, establishing offshore companies, the flow of loans and dividends. The most important of them are royalty transfers, which have been used by every company analyzed. The most effective model in this regard was established by Google. It is based on a network of subsidiaries registered mainly in Ireland and the Netherlands which apply preferential rules to tax such transactions. Research implications/limitations - The exact identification of tax avoidance mechanisms used in practice allows gaps in tax law to be identified and hence charts the directions of the necessary legislation changes. It also allows the losses of the budgets of individual states to be assessed. However, one must be aware that the complete elimination of aggressive tax optimization is impossible. This is because it represents one of the basic areas of effective financial management at enterprises. Originality/value/contribution - The scope of this article fills, to some extent, the research gap that exists in connection with publicizing tax avoidance mechanisms, the detailed presentation of transactions and the tax benefits resulting from them.

Keywords

• Taxation
• Tax optimization
• Tax avoidance