Corporate tax avoidance: 16 questions answered

Question 1

Do big companies really pay less tax than small businesses?

Accepted Answer

In effective-rate terms, often yes. Around a third of the world's largest firms face an effective tax rate below the 15% global minimum, well under what most small firms pay (World Bank / IFS, 13-country dataset, 2023). The pattern holds across all six countries. In the UK, small companies pay 19% (profit under £50,000) or up to 26.5% in the marginal band, while many large multinationals report effective rates below 15% after profit shifting and reliefs. In Canada, the 123 largest corporations had an effective rate of just 15% in 2021, equal to the small-business rate, while earning record profits (Canadians for Tax Fairness). In the US, large multinationals paid a residual US rate of about 2.1% on foreign income (Penn Wharton Budget Model, 2021). In Australia, A$3.7bn in large-corporate-group tax went uncollected in 2022-23 (ATO). It is a structural feature: large firms have access to rate-reduction mechanisms that small firms do not.

Question 2

Is tax avoidance legal?

Accepted Answer

Yes. Corporate tax avoidance is legal by definition, though it can run against the spirit of the law. Tax evasion, which means concealment or misrepresentation, is illegal. Avoidance means exploiting legal rules and mismatches to get a tax advantage that lawmakers did not intend. It is not a criminal offence in any of the six countries, but all six have General Anti-Avoidance Rules that can strike down abusive avoidance after the fact. Tax planning, using reliefs as intended, is entirely legal and appropriate. The boundary between avoidance and evasion is contested in hard cases, and HMRC, the IRS, the CRA and the ATO each apply their own tests. The UK's GAAR catches arrangements that "cannot reasonably be regarded as a reasonable course of action," a deliberately broad standard.

Question 3

What is a tax loophole?

Accepted Answer

A loophole is a gap or ambiguity in tax law that lets a company or person cut their tax bill in a way that was not intended when the law was written. Loopholes are legal to use until they are closed. The Double Irish was a loophole created by a mismatch between Irish and US residency rules; tech companies used it for years before Ireland closed it to new entrants in 2015. Patent boxes, thin-capitalisation structures and treaty shopping all turn on loopholes: specific rules that, read literally, permit outcomes far beyond their original purpose. Governments close loopholes through targeted legislation, but the gap between a loophole opening and closing can run for years. The OECD's BEPS project tried to close 15 categories of multinational loophole; critics say it only partly succeeded.

Question 4

Why does my small business pay more tax than a multinational?

Accepted Answer

Because you lack the cross-border group, the portable assets and the expensive advisers needed to use the structures multinationals use. Your profit is taxed where you earn it; theirs can be shifted to where it is taxed least. The specific reasons: you have no related party in a low-tax country to pay royalties or interest to; you hold no intellectual property to relocate to a patent box; you cannot use a hybrid mismatch because you have one entity in one country; and transfer-pricing rules only apply to connected parties, so you simply trade at genuine market prices. The World Bank / IFS study found this pattern across all 13 countries it examined: effective rates fall again for the very largest firms, precisely because of the planning tools only they can access. It is a structural feature of the system, not an accident.

Question 5

How do they pay so little?

Accepted Answer

Through a combination of transfer pricing, where they locate intellectual property, internal financing and treaty structures, all legal and none available at small-business scale. Close to 40% of all multinational profit is shifted into tax havens. The main mechanisms: transfer pricing (charging intra-group royalties and fees that strip profit from high-tax countries); IP location (holding patents and trademarks in low-tax jurisdictions and charging royalties worldwide); debt loading (loading operating subsidiaries with internal debt so interest is deductible in high-tax countries); treaty shopping (routing dividends and royalties through favourable treaty networks); and havens (holding companies in zero-tax jurisdictions that receive the diverted profit). US multinationals are the most aggressive shifters. The UK's network of dependencies provides much of the infrastructure that enables a large share of global tax abuse.

Question 6

What is transfer pricing?

Accepted Answer

Transfer pricing is the price one part of a multinational charges another part of the same group for goods, services or intellectual property. It is the main route through which taxable profit is moved between countries, and it is meant to be priced at arm's-length but is frequently contested. By country. UK: HMRC's transfer-pricing work recovered £1,786m in 2023-24 and £3,387m in 2024-25, its fastest-growing area of large-company enforcement. US: the IRS challenges transfer pricing case by case, backed by NCTI as a systemic minimum tax on foreign income. Australia: the ATO's Tax Avoidance Taskforce focuses heavily on transfer pricing, supported by the MAAL and DPT. Canada: the CRA challenges transfer pricing under the Income Tax Act with BEPS documentation. India: transfer-pricing rules apply to all international transactions between associated enterprises, using the arm's-length principle.

Question 7

Does Pillar Two, the global minimum tax, fix it?

Accepted Answer

It is the biggest reform in decades but falls well short of a full fix. It sets a 15% floor for groups above €750m in revenue, leaves carve-outs, and excludes the vast majority of businesses. The OECD projects Pillar Two will raise an extra US$155-192bn a year, about 6.5-8.1% of current global corporate tax, and cut the share of profit taxed below 15% from about 36% to about 7%. But the limits are real: the 15% rate is itself far below most headline rates, so significant under-taxation remains; a substance-based carve-out protects income tied to payroll and tangible assets; the US has not implemented Pillar Two, leaving a major gap; and Pillar One, which would reallocate profit to market countries, is still not in force. It tightens the floor without levelling the field.

Question 8

What is GILTI, NCTI, or a Diverted Profits Tax?

Accepted Answer

These are country-specific anti-avoidance tools that try to stop large multinationals sheltering profit below a minimum level or through arrangements with no real substance. None of them apply to small businesses. NCTI (US, formerly GILTI): taxes US shareholders on foreign-subsidiary income above a routine return, at an effective rate of about 12.6% from 2026 under the OBBBA. Diverted Profits Tax (UK): a 31% standalone charge on profit diverted from the UK through arrangements lacking substance; large business only, merging into corporation tax from 2026. Diverted Profits Tax (Australia): similar in intent, aimed at significant global entities, alongside the MAAL. GAARs (UK 2013, Canada 1988, Australia Part IVA, India 2017): catch-all rules that strike down abusive arrangements regardless of technical compliance. Every one of these is built for large companies.

Question 9

Can my small business use the same structures?

Accepted Answer

No. Effectively all multinational tax structures are out of reach for small firms, on both scale and cost. They need a multinational group, valuable cross-border intangibles, and large legal and advisory budgets to build and defend. Transfer-pricing rules only apply to related parties, and you have none. Patent boxes need genuinely patented IP and the turnover to make the lower rate worth it. NCTI and BEAT apply to corporations with hundreds of millions in revenue. A holding company in a zero-tax jurisdiction needs ongoing legal substance and costs real money to maintain, for no net benefit unless you have large profits to shelter. The World Bank / IFS study found effective rates fall for the very largest firms precisely because of planning unavailable to SMEs. The structures are not withheld from you by choice; they simply do not work at your scale.

Question 10

What can a small business legitimately do?

Accepted Answer

Plenty. Every one of the six countries has substantial, straightforward reliefs designed specifically for small businesses, and using them well is legitimate planning, not avoidance. UK: pension contributions, R&D tax relief (SME scheme), Patent Box where genuinely applicable, the Annual Investment Allowance, full expensing and marginal relief. US: Section 179 expensing (up to $2.5m), the QBI deduction for pass-through entities, retirement-account deductions and bonus depreciation. Canada: the Small Business Deduction (9% federal on the first C$500,000 for a CCPC) and SR&ED research credits. Australia: the instant asset write-off, small-business CGT concessions and the 25% base-rate entity rate. India: the concessional 22% rate (section 115BAA) and the 15% rate for new manufacturing companies (section 115BAB). South Africa: the small business corporation graduated scale (nil up to R99,000, then 7%, 21% and 27%) for a qualifying company, and the standard reliefs and allowances on the same return. None of these need offshore structures, related parties or treaties. You claim them on your annual return.

Question 11

How much does my country lose to avoidance?

Accepted Answer

The best comparative estimates come from the Tax Justice Network's State of Tax Justice 2024, using OECD country-by-country data for 2021. These are modelled estimates, not audited figures, but they are the best available, and they cut two ways: what each country loses, and what it inflicts on others. | Country | Corporate tax abuse it suffers (US$m/yr) | Corporate tax abuse it inflicts on others (US$m/yr) | |---|---|---| | UK | 16,899.8 | 23,451.3 | | US | 32,556.8 | 37,487.0 | | Canada | 8,880.6 | 31,196.3 | | Australia | 22,132.9 | 1,538.9 | | India | 21,375.8 | (small) | | South Africa | not separately pinned in this edition | not separately pinned in this edition | South Africa's loss is not separately pinned to a primary figure in the 2024 edition we use throughout this site. The best country-specific estimate for South Africa comes from separate UNU-WIDER research, which puts the revenue lost to multinational profit shifting at about 4% of corporate income tax receipts, roughly R7 billion a year, with the largest multinationals shifting about 78% of their profits offshore. We give that as South Africa's loss context rather than invent a State of Tax Justice number for it. The UK, US and Canada all inflict more on other countries than they lose themselves, largely through their financial-secrecy roles and, for the UK, its network of dependencies. Present these as estimates, with their method (OECD CbCR data and the Cobham-Janský / García-Bernardo-Janský methodology), never as audited government figures.

Question 12

Who's to blame, the companies or the government?

Accepted Answer

Both. Companies for using structures that, while legal, drain public revenue; and governments for writing, and being lobbied into keeping, the rules that create and preserve the gaps. Multinationals interpret their duty to shareholders as a mandate to minimise tax aggressively. But governments write the rules, sign the treaties and decide whether to close loopholes. The Corporate Tax Haven Index found that OECD countries and their dependencies are responsible for the large majority of global corporate-tax-abuse risk. The eight countries that voted against the UN tax convention, including the UK, US, Canada and Australia, are collectively responsible for about 43% of global tax losses (Tax Justice Network, State of Tax Justice 2024). The system persists partly through industry lobbying of the rule-making process, and partly because governments compete to attract investment by offering preferential terms.

Question 13

What's being done?

Accepted Answer

The biggest live reforms are Pillar Two (the global minimum tax, operating in around 55 jurisdictions since 2024), the UK's escalating transfer-pricing enforcement, and Australia's transparency reporting. A UN framework convention on international tax cooperation, backed by 110-plus countries, began formal negotiations in 2025. By front. Pillar Two: operative from 2024 in the UK, EU, Canada and Australia; the US has not implemented it. UK: transfer-pricing and DPT yield rising sharply (£3.4bn in 2024-25) and the DST raising £808m in 2024-25. Australia: the ATO Tax Avoidance Taskforce received extra funding in 2024, with public CbCR under development. India: equalisation levies repealed (2024-25), awaiting Pillar One. US: NCTI and BEAT operating post-OBBBA. Global: UN Framework Convention negotiations are scheduled through to 2027, with 110 countries in support.

Question 14

How do I check a company's tax?

Accepted Answer

In each country, large companies must file public accounts and/or transparency reports, though the detail varies a lot. Start with the public registry, then read the tax note. UK: large-company accounts at Companies House (free to search) carry a corporation tax note showing current and deferred tax; UK qualifying groups also file country-by-country reports with HMRC, which are not yet public. US: public companies file 10-K reports with the SEC (EDGAR), including an income-tax footnote and effective-rate reconciliation. Canada: public companies file on SEDAR+; private CCPCs do not publish. Australia: the ATO publishes an annual Corporate Tax Transparency Report naming large entities, their total income, taxable income and tax paid. India: listed companies file with the stock exchanges and MCA. Read the effective-rate reconciliation in the tax note: it shows the gap between the headline rate and what was actually paid, and why.

Question 15

What is a diverted profits tax, in one line?

Accepted Answer

A diverted profits tax is a standalone charge, set above the normal corporate rate, on profit a large company has artificially routed out of the country, and it does not apply to small businesses. The UK's version applies at 31%, six points above the 25% main rate, and is being folded into corporation tax from 2026. Australia has its own, aimed at significant global entities. Both exist for one reason: ordinary rules could not stop the largest groups stripping profit out of the country, so governments built a separate, higher charge that targets only them. The fact that it carves out SMEs is the clearest possible sign that there are two tax systems running side by side, one for giants and one for everyone else.

Question 16

Is it true the largest digital firms pay almost no tax where I live?

Accepted Answer

Often, on the profit side, yes, which is exactly why countries resorted to revenue-based Digital Services Taxes as a stopgap. The UK's 2% DST is paid by just 18 companies. Ordinary corporate tax is charged on profit, and large digital groups can book very little taxable profit in the countries where their users actually are, by locating IP and routing revenue elsewhere. Because the OECD's Pillar One, which would reallocate profit to market countries, is still not in force, the UK and others tax digital revenue directly instead: the UK DST charges 2% on UK-user revenue of groups above £500m globally, and raised £808m in 2024-25 from 18 taxpayers. It is a blunt tool, and it can be passed to consumers, but it exists precisely because the normal profit-based system fails to reach these firms where you live and trade.

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