Identifying the optimum ownership structure as a tax avoidance strategy of multinational entities: a JSE top 40 perspective

Abstract

Due to the rapid growth of cross border trading and communication, the need for multinational entities (MNEs) has increased over recent decades. MNEs operate in an extremely competitive environment and have, through years of trading experience, developed reliable strategies to achieve high profits, minimise tax liabilities and maximise shareholder wealth. MNEs achieve tax minimisation by means of strategic tax planning, including tax avoidance strategies, which in turn generate higher profitability and ultimate shareholder wealth. In order to maximise shareholder wealth and profits, an MNE has to establish an optimum ownership structure. To achieve this, specific factors need to be considered such as the location of the MNE headquarters, whether the MNE utilises wholly owned subsidiaries in countries of operation, and capital structure. Past research indicates that MNEs make use of carefully constructed strategies taking into account these factors when planning investment decisions. Many researchers have investigated tax avoidance and tax planning strategies globally, yet research on the utilisation of tax avoidance strategies to achieve an optimum ownership structure in an MNE is limited. The current study aimed to address this gap by establishing the trends followed by MNEs in using tax avoidance strategies, as well as ownership structure strategies, through which the optimum ownership structure is achieved. For these purposes, the study applied a sequential mixed research methodology. As part of the qualitative methodology, the most popular tax avoidance strategies and ownership structure strategies used by these MNEs were compared to identify the theoretical trends. For the quantitative methodology, the top 40 MNEs listed on the Johannesburg Stock Exchange (JSE) were selected as a population. A Du Pont analysis was performed on the MNEs to measure the return on equity. This was done to

determine which variable in the analysis had the largest impact on the return on equity, and therefore indicates the overall profitability of an entity. The study revealed that tax avoidance strategies and tax planning have a significant impact on the operating structure of an MNE. A correlation of the variables used in the Du Pont analysis proved that MNEs considered tax benefits arising from prospective investments when planning investment decisions. The findings clearly indicated that MNEs listed on the JSE used the same tax avoidance strategies, including profit shifting to tax havens, treaty relations, transfer pricing manipulation and derivative instruments. The study also confirmed that the MNEs listed on the JSE made use of wholly owned subsidiaries in countries of foreign operations and debt financing structures as part of implementing their optimum ownership structure.