ACCA Applied Knowledge · Business and Technology · Regulation and financial crime
A multinational sets up a subsidiary in a low-tax country purely to receive royalties, with no staff or real activity there, and the arrangement is fully disclosed to tax authorities. Which description is most accurate?
It is best described as tax avoidance: the structure is disclosed and legal in form, so not evasion. But because the subsidiary lacks commercial substance and exists mainly to cut tax, it may be challenged under anti-avoidance rules and may harm the group's reputation.
- ATax evasion, because the subsidiary has no substance
- BLawful on its face and so avoidance, but possibly challenged under anti-avoidance rules and carrying reputational riskCorrect
- CTax mitigation with no risk of challenge
- DMoney laundering by definition
Explanation
Full disclosure and legal form mean it is not evasion. However, arrangements lacking commercial substance whose main purpose is tax saving may be attacked under general anti-avoidance rules and may damage reputation. It is not risk-free mitigation.
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