Multinational Corporations Vs. Small And Medium Enterprises ( Smes )

1593 Words Nov 17th, 2015 7 Pages
The fundamental goal of every company is to maximise profit – to make money. That is the main reason people create businesses whether it be the large corporations or the small and medium enterprises (SMEs). Because of gloablisation, firms are competing in a highly competitive market where there is increasing pressure to find ways to perform better – to get that above average returns. However, there is one thing other than economies of scale that greatly disadvantage the SMEs from the large multinational corporations (MNCs) and that is profit shifting. First of all, MNCs are organisations that operate in more than one country. Profit shifting is when MNCs utilise the differences in tax laws to “shift income to low-tax affiliates and …show more content…
As mentioned previously, increasing pressures of competition and the goal of making more profits are the reasons why organisations try to find ways to minimise their costs. However, profit shifting is done because they saw the substantial disparity of corporate tax rates among countries and thus, an opportunity to minimise costs (Bartelsman & Beetsma, 2000; Holtzblatt et al., 2015). Exhibit 1 shows the corporate tax rates in developed countries (see Appendix). Australia’s corporate tax rate is 30%, which is the 4th highest (tied with Mexico) among OECD countries, where it is topped by the US at 35%, France at 34.43%, and Belgium at 33%. Holtzblatt et al. (2015) says, “Differences in corporate tax rates among countries provide corporations with a tax-planning opportunity as they decide where to locate foreign operations, including establishing corporate headquarters.”

There are various ways corporations can employ to shift their profits. Some of the more popular methods are: contribution of equity; allocation of debt; earnings stripping; tax inversion; transfer pricing; and hybrid entities.

The first three methods are simple and easily understood. An equity contribution is when an entity, in this case a firm, invests in an asset, such as
Open Document