Modern international trends in taxation of transnational corporations: assessment of efficiency and consequences of applying methodological approaches to the budget

Kirichenko Tatiana ORCID: 0000-0002-6408-0228 Doctor of Economics Professor, the department of Security of Digital Economy and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 119991, Russia, g. Moscow, Leninskii prospekt, 65 tvkirichenko@gmail.com Other publications by this author     Komzolov Alexey ORCID: 0000-0001-6268-854X Doctor of Economics Professor, Head of Department of Security of Digital Economy and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 119991, Russia, g. Moscow, Leninskii prospekt, 65 alexkomzolov@gmail.com Other publications by this author     Kirichenko Ol'ga ORCID: 0000-0001-6230-2280 PhD in Economics Docent, the department of Sectoral Markets, Financial University 125993, Russia, g. Moscow, Leningradskii prospekt, 49 olgaskirichenko@gmail.com Other publications by this author     Kosminova Anastasiya ORCID: 0000-0001-6722-0284 Senior Lecturer, Department of Digital Economy Security and Risk Management, Faculty of Integrated Fuel and Energy Security, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii Prospekt, 65 kosminova@yandex.ru Other publications by this author     Smolenkova Marina ORCID: 0000-0002-1319-6423 Lecturer, Department of Digital Economy Security and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii prospekt, 65 smolenkova.mari@yandex.ru Minasyan Violetta ORCID: 0000-0001-6526-6836 Assistant, Department of Digital Economy Security and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii prospekt, 65 minasyan_v@inbox.ru Mikhailova Ol'ga ORCID: 0000-0002-7511-5334 Assistant, Department of Digital Economy Security and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii prospekt, 65 mikhaylova17@yandex.ru Sarycheva Anastasiya Assistant, Department of Digital Economy Security and Risk Management, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, shosse Leninskii Prospekt, 65 assarycheva@bk.ru Akchurina Dilyara Analyst, Faculty of Integrated Fuel and Energy Security, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii prospekt, 65 dilyara-akchurina@mail.ru

Kiseleva Irina Analyst, Faculty of Integrated Fuel and Energy Security, Gubkin Russian State University of Oil and Gas (National Research University) 199911, Russia, g. Moscow, Leninskii prospekt, 65 irisskis1999@mail.ru

IntroductionThe state and the current stage of development of world trade and the economy are characterized by an increase in the scale of transnational economic activity and the strengthening of the influence of a special class of its subjects – transnational corporations (TNCs).

Multinational companies around the world employ more than 70 million people.

One of the main features of transnational corporations is their existence outside the national borders of the countries where their headquarters are based. Such a feature of their functioning allows TNCs to implement complex tax planning schemes in order to artificially move their profits from the place of real economic activity to a "convenient" jurisdiction with low taxation. Thus, according to the OECD estimates, the movement of corporate profits through the use of such schemes each year leads to a reduction in the tax base (on a global scale) in the amount of $ 100 to $ 240 billion.

The relevance of the research topic, in addition, is also confirmed by the fact that in recent years, international governmental organizations have been conducting multifaceted and active work to unify approaches to taxation of such TNCs and develop mechanisms to increase the transparency of economic relations considered for tax purposes. Of course, one of the key participants shaping such initiatives historically is the Organization for Economic Cooperation and Development (OECD). Thus, in October 2021, the OECD announced a substantially new mechanism for international taxation of such multinational corporations – the Two-Pillar Solution. This newly introduced mechanism is designed to combat aggressive optimization and tax evasion by various TNCs, evasion, the possibility of which arose due to the fact that there are significant differences in the laws of different countries.

The purpose of the research, set by the authors, is to study the key initiatives to reform the taxation of transnational corporations and assess the prospects, opportunities and consequences of the practical implementation of the proposed changes.

The set goal requires solving the following tasks:

- to consider the approaches and problems of tax administration of the economic activities of transnational corporations developed and described in the world;

- analyze some of the largest TNCs as subjects of transnational economic and financial activities;

- to study the current proposals of the OECD on the approach to tax reform of such TNCs;

- to assess the consequences of the possible implementation of the new proposed mechanism of international taxation developed by the OECD for the economy of the Russian Federation.

The object of the study is the system and approaches to tax regulation of economic activities of TNCs. The subject of the study is initiatives to introduce new approaches and rules for taxation of transnational economic and financial activities.

Despite its relative novelty, the problem of tax regulation of transnational economic activity and taxation of TNCs has already become the subject of in-depth consideration in the scientific works of a number of domestic and foreign researchers.

Thus, in the dissertation for the degree of Doctor of Economics by Polezharova L.V. ^[9], devoted to the consideration of the problems of taxation methodology, as well as tax administration of multinational companies, the methodology of taxation was proposed and methods of tax administration in terms of cross-border income of TNCs were developed. In addition, an overview of the conceptual and methodological aspects and directions of development of both the theory and practice of taxation in the context of economic and financial globalization is presented. According to the author, the formula is justified, which the author calls the basic one ^[8.10] for the proportional distribution of the total profits of TNCs between different jurisdictions of location.

In the work devoted to the tax regulation of various aspects of the activities of transnational corporations, Zasko V.N. and Shakirova D.Yu. ^[4], the problem of tax regulation of various aspects of the activities of TNCs is reflected and various ways of solving them are proposed. The main conclusion of the authors of this work is the statement about the absence of international legal regulation of various aspects of the activities of a transnational corporation.

Research methodologyWhen considering the problem of taxation and tax administration of various aspects of the activities of transnational corporations, the authors used methods of scientific abstraction, as well as induction to identify common patterns of TNC activity, their place in the world economy and finance, and the resulting complexities of tax regulation of transnational economic and financial activities.

The analysis of the largest TNCs as subjects of transnational economic activity was carried out using methods of comparative analysis and deduction. The selected methods allowed us to identify particular patterns of activity of the TNCs under consideration.

The subsequent tasks of the study – the study of the OECD proposal to reform the taxation of TNCs and the assessment of the consequences of the implementation of this proposal for the economy of the Russian Federation – were solved using economic-statistical and economic-mathematical methods.

Research resultsOver the past few decades, multinational corporations have become the most important players in the arena of the global economy.

A study of the scientific literature on this issue has shown that the absolute majority of experts predict a further increase in the influence and share of TNCs in the global economy ^[4].

An analysis of the literature has shown that there are many approaches to the definition of the concept of TNCs. In accordance with one of them, the Convention of March 6, 1998 "On Transnational Corporations" proposed a definition ^[1], based on which a transnational corporation is a group of legal entities established and operating in various national jurisdictions ^[11].

This feature of the formation of the organizational structure of transnational corporations allows them to use all kinds of resources, such as people, finance, and markets of all countries of activity, while, in most cases, with the help of aggressive tax planning, TNCs manage to organize the flow of profits from countries where the bulk of real activities are carried out to countries with lower taxation., thereby minimizing my tax deductions ^[7]. Actually, the practice of implementing such an aggressive tax policy in order to minimize tax payments creates problems of taxation and tax administration of TNC activities.

The actual redistribution of the tax burden is carried out by transnational corporations through the creation of a closed intra-group quasi-market within one TNC ^[4]. The key mechanism of the internal quasi-market is transfer pricing.

The transfer price is the price of transactions between various structural elements of a single group of companies ^[16]. By understating or overstating such prices compared to market prices, TNCs minimize taxable profits from some of the corporation's companies and concentrate it from others registered in tax jurisdictions with more favorable conditions. This allows the group of companies as a whole, which is a TNC, to receive tax benefits ^[3].

In practice, this leads to the fact that transnational corporations conduct all real production, commercial and financial activities in those countries where favorable conditions have been created for the availability and price of labor, there are affordable and cheap sources of raw materials, there are sales markets, etc., and taxes are paid in those countries where lower tax rates.

Despite the fact that the OECD, the EU and the FATF have been actively fighting the so-called offshore zones and tax havens in recent years, there is a tendency in the world to reduce the average corporate tax rate. So, if in the early 1980s the average corporate income tax rate in the world exceeded 40%, by 2020 it has decreased to 24% ^[12].

This was largely due to the fact that now even economically developed countries have begun to join the competition for attracting TNCs to designate the country as a place of profit generation, as well as foreign capital, including by reducing corporate tax rates, that is, income tax. Among European countries, these include: in addition to the traditional Switzerland, Cyprus, Luxembourg and Malta, as well as Ireland and the Netherlands.

For example, the tax rate in Ireland for corporations is only 12.5%. Moreover, if we are talking about income related to a patent or other intellectual property, Ireland has established a corporate tax rate of only 6.25%. Such bets have caused many multinational corporations to transfer a significant part of their operations to Ireland, the number of these corporations includes Apple, Microsoft, Amazon, Pfizer, Google, Facebook, Intel and many others ^[16].

In Luxembourg, the basic corporate income tax rate of 15% applies to those companies in 2020 whose income does not exceed 175 000 euros. For companies with profits exceeding 200,000 euros, the tax rate is 17%. Another tax haven, Cyprus offers a tax rate of 12.5%.

As part of the analysis of the activities of the largest multinational corporations in the context of tax optimization, consider the three largest TNCs included in the ranking of 100 companies by revenue, compiled annually by Fortune magazine: Apple, Exxon Mobil, Alibaba Grp ^[4].

Table 1 presents the main characteristics of the analyzed TNCs.

Table 1 – Brief description of the analyzed TNCs

Source: compiled by the authors based on data ^[15]

Based on the analysis of financial statements according to international standards, Table 2 is presented, which reflects the dynamics of key financial indicators of the companies under study over the past three years.

Table 2 – Dynamics of key financial indicators of TNCs (2019-21)

Source: compiled by the authors based on data ^[19,20,21]

Let's take a closer look at the largest of the three by capitalization – Apple. To reduce taxes, Apple creates corporate structures in countries with low tax rates. For example, through its structure in Ireland, Apple legalizes about 30% of all its corporate profits. After all, Ireland has one of the lowest corporate income tax rates in Europe.

The Russian structure – Apple Rus LLC has submitted reports for 2021. At the end of the year, the company managed to increase revenue by 45% to 386 billion rubles, according to its report. At the same time, the profit from Apple Rus sales increased by only 10.6% and reached 14.4 billion rubles. And the company's net profit amounted to 11.5 billion rubles. Apple Rus LLC was registered in 2011. The company is 99.5% owned by Irish Apple Distribution International, the remaining 0.5% by Apple Operations Europe Ltd.

Table 3 Revenue dynamics of Apple Rus LLC for 2019-21

Source: compiled by the authors based on ^[18]

In October 2021, 136 participating countries of the Inclusive Group of the BEPS Action Plan approved the principal provisions of the new mechanism of international taxation - Two-Pillar Solution. The BEPS (Base Erosion and Profit Shifting) action Plan focuses on efforts to create obstacles to the erosion of the tax base and to counteract the artificial shift of the corporate profit center ^[14].

Now the new mechanism of international rules of taxation of transnational corporations contains two elements ^[13]:

1) Pillar 1 – rules for the redistribution of profits for the purposes of taxation of multinational corporations between tax jurisdictions where sales markets are located;

2) Pillar 2 – requirements for the minimum rate for taxation of profits of multinational corporations.

The official goal of the innovation is to achieve tax neutrality. Tax neutrality is understood as ^[22] such a taxation system in which taxation should not affect the decision on investment, which means, from our point of view, in particular, the place of choice of jurisdiction of a member of a transnational corporation should not be affected by the taxation system of the jurisdiction. In this regard, the problem of scientific interest is whether this principle of neutrality is essentially new or it is a particular formulation of the classical principles of taxation, which continue to be interpreted by new generations of authors (for example, ^[23]). From our point of view, this principle of neutrality in the context of taxation of multinational corporations is a private interpretation of the principle of fairness. After all, the classical (Adam Smith) principle of justice states that everyone is obliged to pay tax on their income received under the protection of the state, in accordance with this income. Most often ^[23], this is interpreted as equality of taxpayers. In addition, this understanding implies the individual gratuitousness of taxes, as reflected in the definition of tax in the Tax Code, and not just their gratuitousness. In our opinion, this principle of justice should be interpreted more broadly – including as the right of the one who provides such protection (that state) to collect part of the corresponding income. Thus, from our point of view, the purpose of the new mechanism is both a more equitable redistribution of profits of the largest international groups of companies to the countries that are sources of income, and the introduction of a global minimum tax rate for such groups of companies.

Pillar 1 component involves the redistribution of profits for tax purposes of international groups of companies with revenues of more than 20 billion. euros to the countries where they receive income ^[5], and this will be done regardless of whether these companies are physically present there.

In turn, Pillar 2 assumes the establishment of a minimum tax rate of profit of international groups of companies in the amount of 15% for companies with revenues of more than 750 million euros ^[2]. In addition, if the tax service in the host country of the parent company finds that in some country the level of corporate taxation is below 15%, it gets the right to bring the real effective rate to 15%.

At the same time, there is currently no complete certainty of the mechanisms for the practical implementation of these mechanisms. Work in this direction is still only underway ^[10]. So Polezharova L.V. suggests a transition to a non-alternative definition of the tax base of TNCs, in proportion to the share of the main indicators of the economic activity of TNC structures located in the tax jurisdiction of the country in question, in the total volume of similar indicators of the entire TNC globally. Namely by:

- revenue;

- the number of employed workers;

- the value of assets.

We will carry out practical calculations for the analyzed multinational corporation Apple Inc to demonstrate the efficiency of the approach. Table 2 presented the key financial performance indicators of this company. The calculation also requires information about the assets of the enterprise. Thus, assets in TNCs in 2021 amounted to $351,002 million, which is $ 27,114 million higher than in the previous year.

Table 4 shows the shares of the main indicators of the subsidiary of the organization located in the jurisdiction of the Russian Federation.

Table 4. - Apple Rus LLC's share in Apple

Source: compiled by the authors based on ^[18]

The statements of Apple Rus LLC reflect the income tax paid to the budget in the amount of $ 50 million in 2021 and $46 million in 2020. Table 5 shows the calculation of income tax, according to the methodology of L.V. Polezharova, and the difference in income tax in the context of 2020-21 is determined.

Table 5 – Calculation of income tax according to the method of Polezharova L.V.

Source: compiled by the authors based on calculations

Thus, according to Table 5, it can be observed that the transition to corporate frictional taxation according to Polezhaeva would allow an additional $53 million and $128 million to be added to the budget of the jurisdiction of the Russian Federation in 2020 and 2021, respectively.

ConclusionThe conducted research allowed us to formulate the following conclusions:

1.                 The total profit of each multinational corporation, it is reasonable to distribute "fairly" between countries. The understanding of this "justice" should be unified and consolidated at the international level.

2.                 Currently, not a single understanding of what "fairness" should be in the taxation of multinational corporations, not a single methodology capable of implementing it in practice has yet been developed.

3. The principal operability of one of these methods was demonstrated by the example of calculating indicators for Apple Rus LLC, the use of such a technique would allow to receive an additional $ 53 million and $ 128 million to the budget of the Russian Federation in 2020 and 2021, respectively.