How do countries differ in terms of taxation? In regards to taxation, why do some MNEs turn to offshore financial centers? Why are offshore financial centers a concern to the OECD?
Countries differ in terms of taxation systems depending on the income vs excise. Different countries have different types of tax rates applied to different amount of earnings. Some of the countries may have a flat rate of taxation while other countries may be charging taxes differently for different amount of earnings. For example a country may charge 5% tax for earning of 3000 per month and 7% for earnings of 300 to 5000 per month. It all depends on the taxation system that the country adopts to.
There are many reasons an MNE may turn to an offshore financial center. The exchange rate may be one factors that would help the MNE to make more profits. The taxation system may be another reason that could enable MNEs to pay less taxes or even Zero tax on their profits. This is why offshore financial centers are also called tax heavens (Hampton & Abbott, 1999). They help corporations of different sizes hide taxes that they would have to pay in any other country that they actually earn the money.
OECD try to work closely with countries regarded as offshore financial center to ensure that the companies that are involved in benefiting the taxation systems of these countries are not involved in hiding ill gotten money there. Also these companies may have to pay taxes in their own countries and getting an offshore country involved may compromise the taxation system of the countries that the companies are actually operating. This has been a huge issue of concern for many countries but the offshore financial centers may not be willing to help them in many cases as they benefit from the huge amount of money deposited in their countries in its banks. It works as a foreign reserve in these countries and they can use this money for different purposes. The banks themselves may be liable to pay taxes and hence generating a huge amount of financial resource for the country.