Today is the third, and last, day of the Tax Justice Network transfer pricing conference in Finland.
I guess the first thing to note is thanks to the Finnish government for sponsoring this conference. Like all the Nordic countries they appreciate the cost to the world at large and developing countries in particular of transfer pricing abuse that, above all else, is used to shift profits out of countries where they could provide essential public services, such as education, healthcare, pensions and the provision of essential public infrastructure like schhols, hospitals, roads and more into tax havens.
But what have we learned? After many presentations, much discussion, three late nights and numerous conversations its always hard to summarise such things and yet three things stand out.
The first is that the OECD's arm's length pricing system that supposedly regulates the tranfer pricing used by multinational corporations in 180 countries simply does not work. We heard from India, China, Tanzania, Indonesia, Nigeria, South Africa, the Dominican Republic and other countries. They all said the same thing: they have systems called arm's length pricing because that's what the OECD says they must have but the reality is that none of the data needed to make such systems work exists. So the supposed use of such systems is purely notional. They have to work round the system to get whatever revenue they can.
Second, to be candid, the OECD were helpless in replying to that charge. The defence that "this is all we've got, we've invested a lot of effort into it and because we all say we use it even if there are problems in making it work that means it must be the best way forward" is not an argument; it is an act of desperation.
Third, there really are alternatives. Some arrangements, such as those in Brazil and India candidly look like blunt sticks with some get out clauses to try to recover some tax. I'm not sure they're the way forward. There is risk of double taxation in these cases, and that's not something I support any more than I support non-taxation. Alternatively, some countries are coming up with special schemes (the Dominican Republic tackling the hotel trade and package tours was one great example) and these may well have merit as they are in effect based on profit splitting arrangements, and those make economic sense.
And that, importantly, suggests the direction of travel in which we must go and which the conference signalled. This is that the time has come to tax multinational companies as if they are just one company and not the hundreds or thousands of seperate entities that the group can decide to create to undertake its trade - many of them existing solely to own "intellectual property" such as patents and copyrights, many of which have limited intellectual purpose but almost all of which are located in tax havens where they are used to divert profit to such places.
Europe has realised this: the proposed Common Consolidated Corporate Tax Base for Europe does this. It would mean a European multinational would submit all its accounts for Europe to one country who would then, using a formula, allocate the profit to the state where it was most likely that it arose. I say 'most likely' with good reason. Nothing will be precise or even 'right' in this process. What we are seeking is the best possible and fairest achievable outcome that taxes once and once only in the place that is most likely to approximate to the place where the profit the company, as a whole, has really made. That is as good as it will ever get - and we want that at low cost.
Many believe this idea - already in use between many US states - is the direction for travel on this issue. I am inclined to agree. I readily admit that country-by-country reporting - my contribution to this debate - is designed to assist tax calculations on this basis.
I don't expect over night change.
But I do think there will be change. Apple, Google, Amazon and others have proved how easy it is to abuse the rules.
And tax revenue is the scarcest and most valuable commodity to politicians in Europe now.
Put that together and I think change is likely. That's why ths has been worthwhile.
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The CCC tax base-would a multinational choose which country to submit its accounts to or would it go through an arm of the European Union?
I would feel international scrutiny would be better.
I hope we see this hopeful news reported in our media. I won’t hold my breath.
A state would handle the return of a company
But the result would be shared
The FT were at our conference – as were Bloomberg so I hope there will be coverage
Surely, the campaign for reform must develop and maintain a strategic focus on the need to build a global critical-mass agreement to the following:
1. A rising minimum rate of tax on ‘profit’ (i.e. inheritance, capital gains, unearned income, and ‘super-normal’ earned income). Implementation within each ‘developed’ tax regime should be combined with reductions in the taxes on ‘normal’ earned income and expenditure to be zero-sum in tax revenue terms. Implementation in each ‘non-developed’ tax regime should give rise to an increase in tax revenue.
2. Practical measures to allow complying regimes to exclude diversion of such income through non-complying regimes. All cashflows from a bank in a complying regime to a non-complying regime would be taxed as ‘profit by the transmitting bank. All cashflows from a non-complying regime to a bank in a complying regime would be taxed as ‘profit’ by the receiving bank.
If there was no potential to reduce taxes through financial innovation, financial inovation would be stopped ‘at source’.
All the rest is (constructive) tactical noise to keep the issues on the agenda. Campaigners must keep it up, but must not waste too much air time arguing against the ‘business will go elsewhere’ scare-mongering. It is far too easy for ‘them’ to argue back with FUD (Fear, Uncertainty and Doubt). No-one can argue back in that way against a strategic global critical-mass focus such as that defined above.
What about rent – all forms – imputed or otherwise – totally unearned?
Yes. Rent is unearned income, and is already taxed as such. Under the scheme I suggested, rent (minus expenses) would be be classified as ‘profit’, and would be subject to the global rising minimum rate of tax on ‘profit’.
The real rent is largely untaxed. That’s why the foreign owner of the most expensive flat in the world may pay less than £1200 pa total tax It seems that land is invisible once it has been built upon.
Isn’t the simplest solution — though this would take some organising — is to try to have the UN or some such body enforce a more or less uniform rate of corporation tax worldwide?
Yes
Pragmatically I also think it unlikely, as yet
But I do argue that the UN’s tax capaci should be seriously upgraded
The OECD strongly resists that
When you wrote that ‘the OECD strongly resists’ a proposal for a global rising minimum rate of tax on ‘profit’, are you intending that comment to be pro or anti (with a touch of resigned shrug in both cases)?
We really must try to identify the ‘right’ proposals, and then fight for them (as you Richard do so effectively with your own campaigns). There is no point in campaigning for reform if one slumps to resigned shrugs when ‘they’ (inevitably) ‘resist’.
I am in favour of such a plan
Maybe now is the time for it…
I’ll add it to my list
“I don’t expect over night change. But I do think there will be change.”
…but a pound to a penny the British Government will use all the diplomacy at its disposal to frustrate, delay and derail any progress towards such change.
So nothing then about putting a heavier burden on immoveables and pushing up the price for IP rights which are obviously being sold too cheaply?
Richard, let us know when the papers from the conference have been loaded on the TJN or Tax Research sites.
Thanks
Anthony
Try this link for all the papers, speeches and handouts.
http://www.amiando.com/transferpricing.html?page=795350
Thanks
I have been distracted by my wife being in hospital today
So thanks for finding this
Thank you Aidan. Sorry to hear about your wife Richard. Hope she’s better soon.
What’s overlooked above vis a vis land rent is surely that the finance sector can claim interest as cost to business and they never use their own money to buy immoveables. Credit and savings need to be steered together.