International corporations avoiding the responsibility to pay taxes is not a problem which is faced only by select countries but a problem plaguing most nations right now. The African country Zambia reportedly was losing roughly $2 billion USD every year. These were figures reported in 2013. Zambia’s government took an apparently unilateral move when it decided to take measures to stop mining companies from transferring countries beyond national borders to protect them from taxation(England, Andrew, ‘Zambia cracks down on miners over tax’). The measures included the introduction of laws to force the companies to submit export proceeds to the government so that the government can trace them and tax everything properly. The OECD warned the government of Zambia against taking such a move. It was wanted by the body that the move would encourage other countries to take similar measures and violate international tax treaties creating utter chaos. It seemed like it had already started to happen when Mongolia followed Zambia’s suit implementing similar measures.

Other countries joined in to criticise the Zambian and Mongolian government which resulted in them withdrawing those measures. A resolve was taken to adopt reforms in the international tax structures. This resolve, however, was not followed by any material steps and as a consequence of which, numerous developing countries have been losing billions of dollars to corporate tax avoidance. It is true that the Zambian government resorted to desperate measures but it had to do because the government had run out of patience dealing with transnational corporations draining the country out of billions and billions of dollars in the form of avoided tax. They tried to break away from the international tax regime to finally make drastic changes. The tax regime allows transnational corporations to avoid paying taxes to governments and take advantage of loopholes in the transfer pricing rules and use offshore tax havens. The international taxation regime has its foundations on two broad principles; ‘Separate Legal Entity Principle’ and the ‘Arm’s Length Principle’. These two principles are disconnected from the realities of corporate operations. According to the ‘Separate Legal Principle’, a transnational corporation is not considered to be one whole entity and instead, it is considered as a group of several units which are to be taxed according to their respective geographical jurisdictions. Therefore, regardless of where the parent company is located, each subsidiary becomes a ‘Permanent Establishment’ of its own country and is taxed accordingly.

The Arm’s Length Principle was introduced for the first time in 1933 in the Caroll Report, after which it turned into an internationally recognised rule to deal with the problem of transfer pricing. Transfer pricing is a phenomenon where different units of a transnational company transact with each other. The principle states that the price that is involved in the transactions among different units of the transnational corporation should be the same as if it were between unrelated parties.