The British press is awash with stories about corporate tax avoidance, involving Google, Starbucks, Microsoft, Amazon and many others. Much of the avoidance takes place through European tax havens – notably Luxembourg, Ireland and the Netherlands – or through British dependencies such as Bermuda and (to a lesser extent) the Cayman Islands. Parliamentarians have grilled corporate executives and the tax authorities, and protesters have taken to the streets in a number of British towns and cities. There has been similar concern, even if not at quite such a high level, in other European countries, as well as in the United States, Australia and elsewhere.
The essence of the problem is that the international tax rules, originally framed about a century ago, have failed to keep up with massive changes in the global economy. A system overseen by the OECD is no longer fit for purpose. Countries will never be able to tackle corporate tax avoidance seriously under the rules jealously guarded by the OECD and by vested interests in favour of the current status quo.
There is a clear, radical, and tried-and-tested alternative available: unitary tax
The UK’s Observer newspaper on the weekend carried an article about a new report on taxing transnational companies, in which Professor Sol Picciotto, Senior Adviser to the Tax Justice Network, makes the case for shifting to Unitary Taxation, with profits being apportioned to the various countries in which the TNCs have a genuine economic presence.
The European Union is already pushing ahead with a version of this proposal – the Common Consolidated Corporate Tax Base (CCCTB) but its scope needs to be expanded.
The report is briefly summarised below.
Towards Unitary Taxation of Transnational Corporations – a 21st Century blueprint for taxing multinationals
Today’s international tax rules, which were drawn up nearly a century ago, have not kept pace with the massive changes in the world economy.
Separate Entities and the Arm’s Length ‘Principle’
The system is governed by two broad principles. First, it treats transnational corporations (TNCs) as if they were loose collections of separate entities operating in different countries. Because there is only weak co-ordination between tax authorities, however, this ‘separate entity’ approach allows TNCs scope to shift profits around the globe to escape tax.
Second, entities within a multinational trade with each other across borders at prices governed by the so-called Arm’s Length Principle (ALP) – as if they were independent actors trading with each other in the open market.
Yet TNCs enjoy unique global synergies and advantages that come from combining economic activities on a large scale and in different locations. These advantages cannot be attributed to a single location, but to the whole global entity. So treating each affiliate as a separate entity for tax purposes is impractical and does not reflect economic reality; and their internal cross-border trades typically bear no relation to any supposed “arm’s length” trade between independent actors in an open market. It is, as a top U.S. tax expert puts it, “delusional” to think this principle can be applied effectively.
This international tax system is dominated by the Organisation of Economic Cooperation and Development (OECD). The OECD’s Fiscal Committee, consisting of unelected state officials, presides over an increasingly complex set of rules which they are also responsible for applying. Its often arbitrary decisions involve billions of dollars of taxes – yet it is effectively unaccountable.
This press release introduces a new report, Towards Unitary Taxation of Transnational Corporations by Sol Picciotto, emeritus professor at Lancaster University, senior adviser with Tax Justice Network and author of International Business Taxation (1992), and Regulating Global Corporate Capitalism (2011).
A historical section charts howthe international tax rules, despite significant opposition and viable alternatives, were established in the early 20th century, at a time when TNCs were in their infancy and loans were the main form of international investment. As TNCs became more dominant in the second half of the century, however, they increasingly took advantage of the ‘separate entity’ principle to set up affiliates in convenient low-tax jurisdictions (tax havens,) to cut their taxes.
In response, increasingly diverse and complex and rules have been elaborated to patch up the system, which has consequently become ever more arbitrary and opaque.
Many experts now argue that a fresh approach is needed, starting from a recognition that TNCs are not loose collections of separate entities but operate as integrated businesses under central direction. This approach, which a majority of U.S. states (and many others) already use successfully, is known as Unitary Taxation.
It is time for a system fit for the 21st Century to be rolled out internationally. The paper outlines how the change could be phased in quite quickly.
Unitary Taxation and Profit Apportionment
Instead of the current system where multinationals are taxed according to the legal forms that their tax advisers conjure up for them, unitary taxation would see TNCs being taxed according to the genuine economic substance of what they do and where they do it. This not only fits economic reality and is a far more legitimate basis for international tax, but it is much simpler to administer, a particular benefit for developing countries. It would massively reduce tax abuse and dramatically curb TNCs’ use of tax havens, thus removing much of the political cover protecting these secretive jurisdictions, and consequently making them easier to deal with on secrecy and a wide range of other issues.
- Demands for global tax reform intensify as Starbucks ‘volunteers’ to pay £20m (guardian.co.uk)
- Tax Justice Network’s call for unitary taxation in the Financial Times (taxresearch.org.uk)
- John Kay supports unitary taxation in the FT: this is the solution to the current corporate tax crisis (taxresearch.org.uk)
- UK and Germany agree tax crackdown on multinational companies (guardian.co.uk)
- Thomas Pippos: Corporate taxation a thorny issue (nzherald.co.nz)
- Special Report – How the UK tax authority got cosy with big business – Reuters UK (uk.reuters.com)