Corporate Tax Avoidance and Base Erosion: Legal and Ethical Implications in Developing Economies

Abstract

Corporate tax avoidance and base erosion pose significant risks to developing countries, where already fragile tax bases and limited capacity make losing critical public revenues even more damaging. Tax avoidance opportunities through legal loopholes, transfer pricing, and poor enforcement practices give Multinational Enterprises (MNEs) opportunities to reduce tax liabilities that harm fiscal sovereignty and exacerbate inequities in the tax system. The study examines the legal and ethical issues that challenge countries in response to aggressive tax planning versus legitimate tax planning that results in tax liability eroding the domestic revenue bases of countries. The study uses doctrinal legal analysis and comparative lenses to navigate and catalogue how domestic tax laws interact with international approaches, specifically the OECD's Base Erosion and Profit Shifting (BEPS) agendas. The study identifies how the local legislation of developing countries is challenged to conform to global regimes while simultaneously competing for foreign investment. The study also examines whether the corporate practice of engaging in legally permissible XMLMR practices provides ethical legitimacy that institutionalizes an erosion of state capacity to support development. The study concludes with recommendations of legal regimes, institutional capacity, and regional approaches to make tax equitable, engage corporations to admit to the issues, and build sustainable governance over tax.