Tax Evasion by Corporations

Last updated on July 29, 2023

There are two general categories in which corporate tax evasion can be divided: legal and illegal. The major difference between the two is that legal tax evasion can be curbed by removing the conditions that enable it, while illegal tax evasion can directly be punished under law.

Corporations that have the resources often use legal methods to either reduce their tax liability or entirely avoid paying taxes. When legal tax evasion comes to light, the government and law enforcement agencies can only root out the means through which the evasion happens, but cannot punish the offenders.

A common method of evading taxes is to keep profits in countries with lower tax rates, especially tax havens. Many large multinationals are known to avoid paying taxes in the U.S. by holding their profits in the other country. If profits are earned overseas by a U.S. company and these earnings are brought back to the U.S., taxes have to be paid on them. As the U.S. corporate tax rate is one of the highest in the world at 35 percent, many companies use their subsidiaries in other countries to stack the profits. These countries either offer them a lower tax rate or have a lower corporate tax rate.

This type of tax evasion can only be curbed if the tax code that allows this legal evasion of taxes is changed. The government altered tax rules in the late 1990’s to limit corporate inversions, which is another method of lowering tax liability by exploiting loopholes in the tax code. It remains to be seen if the government will act to prevent tax evasion, especially by large corporations with resources.