Taxation of multinational enterprises: opportunities and threats to developing economies

Abstract

Tax revenue is a major source of the gross national income in many developing countries. While tax revenues in OECD-countries amount to almost 36 per cent of gross national income in 2007, the share in selected developing regions amounts around 23% in Africa (in 2007) and 17.5% Latin America (in 2004). The low percentage of tax revenue attributed to developing economies is indicative of inefficient tax collection mechanisms in these countries. The current study seeks to analyse the influence of legislative and administrative capacity of tax administrators in developing economies to the tax compliance behaviour of the Multinational Enterprises, MNEs. The study focuses on corporation tax revenue payable from MNE‟s. The specific objectives of the study include: To examine the extent to which corporation tax revenue from MNE‟s is affected by the legislative framework of the host country in selected developing countries; To examine the extent to which corporation tax revenue from MNE‟s is affected by the administrative capacity of the tax administrator of the host country in selected developing countries and to assess the impact of various legitimate and illegitimate means through which tax revenue is lost from developing countries through MNE taxation regime. The present study utilizes the dependency theory of international relations for analysis. The dependency theory is a Marxist analytical theory that postulates that resources flow from a “periphery” of poor and less developed states to a "core" of wealthy states, enriching the latter at the expense of the former. It is a central contention of dependency theory that poor states are impoverished and rich ones enriched by the way poor states are integrated into the “world system.” The present study adopts the research design of a survey. Surveys are concerned with describing, recording, analyzing and interpreting conditions that either exist or existed. The researcher does not manipulate the variable or arrange for events to happen. Surveys are only concerned with conditions or relationships as they exist, opinions as they are held, processes as they are going on, effects as they are evident and trends as they develop. An empirical study was conducted whereby 20 KRA auditors were asked to give their views on certain issues related to MNE tax compliance in Kenya. According to the study, the MNEs were considered generally to be non-compliant, scoring a mean index of 1.93 in a scale of 1 to 5. Administrative and legislative factors that predispose the MNEs to non-compliance were investigated as well. The study recommends that there is need to investigate the impact of tax planning and corruption on the corporation tax revenues collected by developing countries