As John Kay writes in the FT this morning:
Corporation tax is an increasing headache for policymakers around the world. They are under pressure from large companies, which demand concessions with threats to move their headquarters elsewhere. Rates of company tax have been lowered, rules amended to make life easier for companies that derive much of their income from overseas.
But as some lobby groups welcome these moves, others oppose them. Angry demonstrators besiege Vodafone and occupy Fortnum & Mason. The protesters claim it is unfair that large multinational companies based in the UK pay little corporation tax. Barclays disclosed to an unhappy Treasury committee that, although it continued to rely on UK government support to meet its financing requirements, UK tax represented a very small proportion of its worldwide profits.
The problems are aggravated by competition to secure economic activity and corporation tax revenue. Brass plates on office blocks in tax havens purport to identify the headquarters of businesses that neither make nor sell any product locally. Ireland set the pace among developed countries in attracting global companies to locate activities and report profits there with a 12.5 per cent corporation tax; but that policy is deeply resented by other European Union members. Northern Ireland would like to follow suit and, if it did, Scotland and Wales would seek to jump on the bandwagon.
He's right, of course.
And he's right in the analysis that follows on to say that the OECD's arm's length model of allocating tax profits no longer works. That's been obvious to everyone but the OECD for a long time.
On the other hand he's wrong to dismiss unitary taxation as he does - giving in the process clear indication that he does not understand the difference between source and destination accounting for sales.
What is indisputable is this:
Advocating global economic agreement is, in general, a recipe for expensive meetings with no consequences. But if corporation tax on multinationals is not to disappear into a morass of complexity and avoidance, there is really no alternative to such agreement — and some fresh thinking.
Some of us are trying to deliver just that.
We're even confident of delivering.
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The problem with the unitary basis (or global formulory apportionment) as opposed to the arms-length principle is that it it will take an amazing amount of international co-operation to implement (both political and administrative). It will require all countries in which an MNC operates to have agreed such formula. Even if their was the collective international will, I have my doubts on how the countries will ever get close to agreeing the formula to be applied (with or without the corporate taxpayer lobby).
Any formulae will have have a credibility issue as it is simply arbitrary, may bare little resemblance to the real world and true market conditions and will take little account of the MNC’s business operations and factual allocation of resources – in fact a lack of subjective assessment of critical factors such as risk, efficiency of scale. capital contributions and a proper functional analysis of operations will result in the above arbitrary formula.
Then there is realistic likelihood of double taxation/double non-taxation that could arise (how will unitary taxation deal with this?) and of course tax avoidance from the artificial shifting of formulaic production elements to best suit a particular MNCs tax profile in a particular country.
As porous as current Transfer Pricing rules may be, unitary taxation will never happen and perhaps those who would like to see it introduced would be better of pushing transfer pricing rules into more countries, particularly those that appear to have their tax bases eroded by aggressive cross border pricing.