Multinational Corporations or Multinational Enterprises

Multinational corporations or Multinational enterprises are business entities operate in different countries. Mostly multinational corporations have their headquarters in one country while other parts located in other countries (Tatum, 2003).The main reasons of increasing number of MNC s are cheap labour and raw materials which are located in other countries. Therefore, companies started to invest their subsidiaries in other countries. But these investments while providing them cheap labour and raw materials on the other side caused them to face with a lot of tax problems such as overlapping and under lapping. After that, multinational corporations started to tax planning to minimize the global tax bill while maximising global after-tax profits. (Perlmutter , 1969)

Multinational Corporations

Multinational corporations may have holding company in the country also have the subsidiaries in the other countries. Although multinationals are formed of numerous legally separate entities, reveal that their companies make most intercompany pricing decisions as though the organization is one economic unit. Because even they are subject to tax separately, the profit earned by subsidiary will be profit of holding company. Therefore, the entities inside of multinationals seems like separate, the decisions are taken still affect each other.

Depend on current tax rules for business profits , taxing entities divided three rules which are the company is resident or non-resident, permanent establishment and computation profits(separate entity and arm's length pricing).Residency rule is defined as the tax payer that derives his income in a country is taxed depend on resident or Non-resident of that country. And the general rule for permanent establishment (fixed place of business which generally increases the income in a jurisdiction.) is the non-resident's business profits may be taxed by country which are attributable to permanent establishment. The last rule to tax entities is computation profits for business profits are taxed by source country depend on separate accounting and arm's length principle. Every person and permanent establishment are acted as a separate tax payer without considering relationship with other entities.

Although they are an economic unit, depend on arm's length pricing rule they were considered as an individual company more than as a group. In other words, domestic subsidiaries and foreign branches are combined with the parent firm for tax purposes but subsidiaries of multinational corporations are treated as separate tax payers. This ALS model was made sense although multinational corporations existed, the central management between these corporations did not work well because of the transportation and communications technology was not enough. Therefore, these problems caused them to function as an independent corporation. But this situation with Second World War has changed. Because it is easy to control multinational groups' management with improving communication system and technology. (Reuven S.,2009).

Tax planning

Tax planning is important for multinational corporations because by decreasing their tax burdens they will increase their after tax profits. But behind this, there are a lot of motivations for tax planning such as different definition of tax payer related to countries, different taxation systems, different tax bases and rates and different legislations on double taxations. Definition of tax payer is separated two parts, the first one is the principle of personality which means all taxable income from the world is subject to tax and the second one is principle of territoriality which is based on all incomes from the country is subject to tax. And tax bases differs from country to country like in some countries while the rate is 50% in others the rate is only 30%.At the same time different methods for double taxation regulations causes chances of decreasing taxes are various. So, Multinational corporations use variety of methods for effective tax planning.

Types of Tax Planning

Multinational corporations still face with various tax system and that varieties may affect the major investment and financing decision. Therefore the main aims of these corporations are decreasing the tax burden. And this leads to them to search ways to eliminate this burden.

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